Don’t Be So Negative! Just Change Your Perspective

If you’re left brained (logical), we probably already lost you at the headline.  But this isn’t a blog on positive thinking (not that we have anything against that).  We’re talking about negative equity and how it gets measured.  More importantly, where are the opportunities?

Just before Thanksgiving, the Wall Street Journal ran a headline that “One in Four Homeowners are Underwater.”  This isn’t because California slid into the ocean, but is one of the lingering effects of the mortgage meltdown that began over three years ago.

The article says that 10.7 million households had negative equity (about 23% of all households) according to research firm First American Core Logic.  Nearly half of those, or 5.3 million households, owe at least 20% more than the current value.  And nearly 10% of those (520,000) had already received Notices of Default.  An even more telling statistic came up later in the article, when the Mortgage Bankers Association was cited as stating that 7.5 million households are 30 days or more late on their mortgage payments.

What we think is interesting is that 24 million households, which would be about 50% of all households, have NO mortgage.  Therefore, they have equity!  But just because they aren’t in imminent danger of losing their property doesn’t mean they didn’t suffer loss.  If your property went from a fair market value of $500,000 down to $250,000, then you lost $250,000 of net worth.   Last time we looked, that’s bad.  Especially if you were counting on using that equity, through a reverse mortgage or moving to a less expensive area, to help fund a chunk of your retirement.

Of greater interest is one line buried in the middle of the article which said that First American Core Logic had changed its methodology for calculating these numbers and “using the old methodology, the portion of underwater borrowers would have increased to 33.8%”.  Wow!  That’s 1 in 3.   Think about that.  Go outside and look up and down your street and count every third house.  Underwater!

Of course, it doesn’t really work that way.  There are certain areas that are more underwater than others.  We’ve been talking a lot about Dallas lately.  This is a market that didn’t lose value anywhere near as much as say, Phoenix or Las Vegas.  In fact, according to the Wall Street Journal, citing First American, homeowners in Nevada, Arizona, Florida and California are more likely to be underwater.  Funny, but weren’t those once the hottest appreciating markets?

So what does all this mean?

Well, our headline had double meaning.  Obviously, changing the methodology for generating the statistics resulted in a report of 23% of households underwater, instead of the nearly 34% under the old methodology.  If you’re watching trends, this might mislead you.   Lesson: Always be sure to dig a little deeper when relying upon statistics.

The bigger lesson is that one person’s problem is another person’s opportunity – and not necessarily in an opportunistic way.   In other words, someone doesn’t have to lose (worse than they would anyway) for you to win.

If you’re a regular listener of the show, maybe you’re already picking up on where this is going.  Obviously, we see a lot of opportunity in a landscape covered with problems.  Problems are every entrepreneurs dream!

With 7.5 million people behind on their mortgages and millions of those with negative equity, they can’t refinance or execute a traditional sale to get relief.   Millions have negative equity of over 20%, so they don’t qualify for the government sponsored loan modifications.  And according to this same Wall Street Journal article we’ve been discussing, Sanjiv Das, head of TARP recipient Citigroup’s mortgage unit, mortgage companies are reluctant to reduce mortgage principal over worries about “moral contagion, with people not paying their mortgage or re-defaulting because they believe the bank would reduce their principal.”

So banks won’t modify.   Homeowners can’t refinance or sell for enough to pay off the loan.  Problem, problem, problem!

But what would it look like if an astute investor were able to buy the home on a short sale, taking advantage of today’s fabulously low interest rates, and then rented the house to the former homeowner for a payment that the now tenant could afford?

You could even go one step further and provide a lease option to the former homeowner, with a price point designed to make you (the investor) a nice profit, even through the re-purchase price would look like a bargain to the former homeowner.  It’s still less than their original mortgage (which was paid short when you bought the property).  Do you think the former homeowner turned tenant would be willing to pay a little bit more than market rent to stay in their home knowing they have an option to get it back?  Do you think they would take better care of the property than the average tenant?  Do you think they are more likely to stay long term, thus reducing your exposure to vacancy and turnover expense?

Put yourself in the position of every party in such a transaction.  Are there positives for everyone?  Eveyone’s situation is improved.  Win-win-win.  We  like it!

This blog is already too long, so we’ll leave you a homework assignment.  Especially, it you’re sitting there thinking to yourself, “Great, but I can’t afford to do anything.”  Go listen to our show on reverse mortgages.  Then look for the stats in this blog.  Then go outside and count the houses.  Do the math.

We get giddy when we think of all the opportunity in today’s market.  But of course, it’s all a matter of perspective.

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11/8/09: What the HECM? The Realities and Risks of Reverse Mortgages

No, that’s not a typo.  HECM stands for Home Equity Conversion Mortgage, the FHA brand of reverse mortgages.

“What the HECM is a reverse mortgage and what the HECM does a real estate investor care about them?” you may ask.  Well, that’s what today’s show is all about!

Sitting backwards in their chairs for today’s episode:

  • Host, Robert Helms
  • Co-Host and Financial Strategist, Russell Gray
  • The Godfather of Real Estate, Bob Helms
  • Certified Mortgage Planner and Reverse Mortgage Expert, Mark Soto

Consistent with The Real Estate Guys’ policy of “No Listener Left Behind”, we open the show explaining the basics of what a reverse mortgage actually is and how it works.  They sound simple, but when you have bankers, lawyers and politicians involved, simple goes out the window!  Plus, today’s products aren’t your parents’ reverse mortgages – well, actually they may be (depending on how old your parents are), but the point is that the product has changed a lot since it was first introduced.  Mark Soto brings us up to speed on the state of the art.

Mark explains who qualifies and the various options for getting cash, cash flow or credit. One very important discussion topic is the role of FHA insurance. We also take the time to deal with several of the many misconceptions about reverse mortgages and how this product fits into our “new” economic landscape.

The Real Estate Guys really enjoyed the real life stories Mark shares about how his clients have used reverse mortgages creatively.  As real estate investors, we’re most interested in how to use any tool in our toolbox to make a profit, improve cash flow, avoid taxes and protect assets. We wrap the show up by delving into these hot topics.

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Hey, FHA! Your Fannie is Showing

Today,  The New York Times ran a story headlined Concerns Are Growing About FHA’s Stability.  Hmmm…that’s interesting.  Especially since a major chunk of the loans funding the fledgling housing recovery is coming from FHA.

Caution: This is a long post.  BUT, if you stick with it, it’s not just food for thought.  There are some practical tips, so power on!

Back when sub-prime collapsed, we were hanging out with a lot of the top dogs in the mortgage business and the mantra was “FHA is the new sub-prime!”  Wow. Be careful what you wish for.

So the mortgage industry re-tooled.  It took some time, but eventually the industry got good at FHA and went out and sold it silly.  Only 3% down!  Cheap rates!  Go! Go! Go!  And there’s NOTHING wrong with that.  It’s their job.  Just like it was when the private sector made cheap and easy money available.  Wonder if the evil mortgage brokers will get blamed if FHA goes down?  But we digress….

What? Me Worry?

The NY Times article says that FHA Commissioner David H. Stevens “assured” lawmakers that FHA would NOT need a bailout and was “taking steps” to manage its risks.

Two things.  First, let’s take a trip down memory lane.  For old times’ sake, we cracked open The Real Estate Archives and found a Wall Street Journal article dated 6/7/08 in which they reported that Freddie Mac’s then CEO Richard Syron said Freddie’s financial results for 2008 will be better than last year’s.  This was part of a conference call to investors where he assured stockholders, “We are quite confident that the positive changes will offset the negative.”  What fire?

A month later, a 7/8/08  CNBC.com article quoted James Lockhart, the Director of OFHEO (not a cookie – Office of Fair Housing Enterprise Oversight – you know, the folks that watch your Fannie Mae and Freddie Mac).   CNBC interviewed Lockhart and he said, “Both of these companies [Fannie and Freddie] are adequately capitalized.”

Just in case you didn’t believe Mr. Lockhart, MarketWatch reported on 7/10/08 (2 days later for those keeping track) that then Treasury Secretary Mr. Henry Paulson “moved swiftly…to defend Fannie Mae and Freddie Mac from critics who have called them insolvent” while testilying to the House Finance Committee.

Sorry, we know this is a blog post, not an encyclopedia, but there’s so much good stuff here.

On 7/22/09 (yes, that would be 12 days later), the Associated Press ran a headline “Congressional Analysts Peg Cost of Propping Up Fannie Mae and Freddie Mac as high as $25 Billion”.  That’s a lot of money, but as we’ll soon find out, if it was ONLY $25 billion, it would be cause to party (not that we need much of an excuse). 😉

In an interesting aside, the same AP article said Republican Senator Jim Bunning (KY) criticized Republican administration official Henry Paulson (yep, the same Henry Paulson) for “trying to ‘ram down’ his proposal to shore up Fannie Mae and Freddie Mac, which Bunning said ‘smacks of socialism'”.  We tossed this side note in just in case you thought the Obama Administration were the only ones being called Socialists.

Anyway, back to Fannie and Freddie….

On July 27, 2009 (we were in Belize that day…it was fun), CNN Money reported “Efforts to use the troubled mortgage finance firms to fix housing market problems are likely to push the taxpayer bill for Fannie & Freddie above $100 billion.”  That’s slightly more than the originally projected $25 billion, in case you were getting dizzy.

The same CNN Money article went on to say that Fannie has actually received $34.2 billion and Freddie $51.7 billion.  Also, considerably more than $25 billion, but who’s counting?

Okay, so that was a long trip down memory lane.  But the points are:

a) when the head guys say “don’t worry”, worry – or at least take a peak behind the curtain;

b) the politicians will pay almost ANY price to save housing. Why? Because voters live in houses. This pressure, like it or not, helps protect real estate values;

c) history provides perspectives you don’t get if you only live in the current headlines.  That’s why The Real Estate Guys keep archives.

That concludes “thing #1”. Wait!  Don’t quit yet. Thing #2 will be much shorter!

Thing #2:  When the head FHA guys says, “We’re taking steps to manage risks”, it could mean tighter money: things like stiffer guidelines, lower limits – you know, the things that slow down a recovery.

For example, the FHA’s very popular Home Equity Conversion Mortgage (HECM) – the only insured reverse mortgage – has been widely reported as getting a “haircut”.   That means lower loan limits.  We’ll talk more about that on another day, but it makes you wonder what else FHA might do to “manage” its risks.  We’ll be watching….

So, what’s the takeway from today’s post?

Track what happens with FHA.   Like an over extended teenage shopper, who runs up one credit card and then moves onto the next, our policymakers have run up the tab on Fannie, Freddie, and now possibly FHA.  When all the cards are maxed, they call Mom and Dad.  In this metaphor, that’s you – the American taxpayer.  But you don’t have any money either, so they’ll get it by taking out new credit cards (in your name) from the Chinese or whoever has money, and then pledge the fruits of your future labors (and those of children and grandchildren) to make the payments.

We’re not saying Uncle Sam and his minions shouldn’t help housing, nor are we saying they should.  But it’s safe to say they will.  And when they do, HOW they do it will affect the values of YOUR properties, the interest rates and availability of YOUR loans, the jobs and salaries available to YOUR tenants, the size of YOUR taxes, and the value of YOUR dollar.

In all of this change, are many problems and many opportunities.  But don’t worry!  Work. Study. Learn. Watch. And when you see the opportunity, take action while others hesitate.

And keep listening to The Real Estate Guys – we’ll help keep you thinking!