Norada Real Estate Investments

The Second Wave of Mortgage Defaults Ahead

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I'm sure you know by now that it was the first wave of defaults in “subprime” mortgages that helped spark today's economic meltdown.  What you might NOT know is that there's a whole second wave of mortgages in the pipeline that are just as toxic and just as large as the first.  This second wave may be just as far reaching.

You can see that the first peak in subprime loan “resets” arrived smack dab in the middle of 2008. And many billions in bank write-downs, along with trillions of dollars in market losses, immediately followed.

This second wave of toxic property loans, made up of so-called “option ARM” or “Alt-A” loans, won't hit peak resets until 2011.

What are these toxic loans? They are the fancy mortgages snapped up by middle Americans to buy homes nobody imagined would be worth only a fraction of their selling price  just two years later.

And just like in the subprime wave, these loan contracts also carry a “reset” risk in the fine print, when already high monthly mortgage payments could as much as double — right at the height of the second biggest market meltdown since the Great Depression.

Millions of additional consumers will freeze up as their finances go over a cliff.  More bank losses will drag down even more so-called “blue chip” retirement portfolios, and the impact of the consumer bust will get “multiplied” yet again. Millions of additional Americans could lose everything.

Will this present us with new ?  Very likely.  In addition to the large number of foreclosures and bank REOs, most real estate markets around the country will continue to offer investors with low-priced real estate due to an ongoing buyer's market sustained by excess inventory.

What do you think the upcoming second wave of mortgage “resets” will bring us?

FHA Likely To Be The Next Shoe To Drop

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The FHA is a big reason that home prices haven't fallen even further. The FHA's aggressive lending programs have continued throughout the housing downturn, causing its market share of the mortgage industry to grow from 2% in 2005 to 23% today. The FHA is an even larger percentage of the new home mortgage industry – nearly 25% according to HUD.

The FHA insurance fund, however, is likely running dry. According to a report from mortgage finance experts, the FHA will not meet its minimum requirement as of its fiscal year-end, which is only 26 days from now. For months, we have been investigating this and reporting our findings to our clients.

While almost all of the experts believe that Congress would support the FHA if necessary (it's currently self-funded), we wonder if FHA officials will be under pressure to continue tightening their lending policies, which currently allow 96.5% mortgages to people with 600 FICO scores. Already, FHA has contracted its own standards to require a 10% down payment for those with credit scores below 500.

Claims against the insurance fund have climbed, with roughly 7% of all FHA-insured loans now delinquent.

Given the FHA's September 30 fiscal year-end, this financial reality will come to light about the same time that other market forces run out of steam:

  • Just as the $8,000 tax credit expires.
  • Just as more of the stalled REO currently held on banks' balance sheets will be coming to market.

The culmination of all these factors means housing could see another leg down by early next year. 

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HUD Properties, FHA & Title Seasoning for Real Estate Investors

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With HUD properties, title seasoning, FHA loans, and short sales, have had some confusion regarding the rules.  This article will clarify all of these issues for you.

HUD is the United States Department of Housing and Urban Development, a government agency whose goal is to increase homeownership and support community development .  The Federal Housing Administration (FHA), which is part of HUD, provides mortgage insurance on loans made by FHA-approved lenders throughout the United States.

HUD and FHA come into play in three different scenarios in the investor/foreclosure arena.

HUD Foreclosed Properties

When a person gets an FHA loan, it is funded through a private lender and the loan is insured or backed by the Federal Housing Administration.  When the loan is in default, FHA pays out the lender and take an assignment of the loan.  When the property is foreclosed, it is owned by HUD.  HUD then offers these properties for sale to both owner-occupants and investors.  The properties are offered on the local MLS computer database, but you have to submit an offer through a HUD-approved real estate broker.  The offer is made under a bid process, under which the HUD will either accept or reject your offer depending on what other offers are submitted.  An investor can buy, hold, or flip these properties if their offer is accepted.

FHA Loans and Title Seasoning

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Three NEW FICO Credit Scores Hit the Market

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The Fair Isaac Company have announced that they will be releasing three new credit scores based on their new FICO 08 model.

1. The FICO Mortgage Score
The FICO Mortgage Industry Score is designed to help mortgage lenders improve credit decisions for both current and future homeowners. Introduced by FICO and Equifax, the score delivers significantly greater assessment of mortgage repayment risk — up to 25% or more for key population segments, compared to the base BEACON score. The score aids servicers in earlier identification of borrowers at risk, mitigating the incidence and high cost of foreclosure.

2. The FICO Auto Score
FICO have also introduced another industry-specific credit score for the auto industry. According to Tom Quinn, vice-president of scoring at FICO, the new scoring model "will identify 5 to 15 percent more potential delinquencies… For the overwhelming majority of consumers, the auto industry score will be relatively close to the [generalized] FICO score," says Quinn. "There is a percentage of the population that will be different. And that's why lenders have opted to use the other [auto industry] score."

TransUnion has already made this score available immediately to lenders, while Experian and Equifax are planning to follow suit later in the summer.

3. The FICO Bankcard Score
The third scoring model is specifically for the credit card industry, officially named the FICO Bankcard Industry Option. This does the same kind of things are the Mortgage and Auto industry versions, by taking your credit file and first scoring it by the "broad-based" risk scorecard system, and then by one of two industry-specific overlay scorecards — one for files with derogatory information on any type of account, one for files without.  This overlay adjusts the credit bureau scores up or down. The resulting score is scaled to match the same "good versus bad" odds as the broad-based risk scores.

These three options are generally greeted with positive comments from consumer experts. The tweaking of the current "classic" FICO score can only help lenders make more informed decisions when underwriting loans.

Existing Homes Sales Rise, While Mortgage Applications Fall

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According to the National Association of Realtors, the number of sales of previously owned homes in the U.S. rose by 2.9% in April to an annualized pace of 4.68 million. The gain, the second in three months, was spurred by foreclosure auctions and cheaper prices which attracted bargain hunters. Distressed properties accounted for 45% of all existing home sales and the median price of a home fell 15% from a year earlier. The number of houses on the market climbed 8.8% to 3.97 million in April, and at the current rate of sales, it would take 10.2 months to sell all those homes, Bloomberg reports.

At the same time, the Mortgage Bankers Association's index of mortgage applications decreased 14.2% in the week ended May 22. The share of applicants seeking to refinance existing loans fell to 69.3%, from 73.6% in the prior week, as the average rate on a 30-year fixed-rate loan rose by 12 basis points (bps) to 4.81%, the highest level in more than two months. The average rate on 15-year fixed-rate and one-year adjustable mortgages rose by one basis point to 4.44% and 17 bps to 6.55%, respectively, Bloomberg reports.

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