In the insurance markets, like most others, 2008 has been a challenging year to say the least. Shrinking premiums and soft market conditions have left many wondering if there is any hope on the horizon.
Quite the opposite is true for the agencies that have found a few booming markets associated with a bust cycle in the economy. One such market is the failing mortgage market, more specifically the distressed and foreclosed asset market. Insuring this market comes as a breath of fresh air to many agencies who have found it more by mistake than through any deliberate marketing efforts.
It is an echoing story that repeats itself each and every day in the National Programs division of All Risks, Ltd. It starts out with a phone call and the bewildered agent on the other end of the phone, frantic to help a client. "I have a bank that we write a lot of the P&C insurance for..." the voice says with a short pause, "they are getting quite a few foreclosures and asked me if I could find them insurance." The voice continues. "I don't even know where to begin and we saw that you had a program for this, can you help?" Usually as we progress into the phone call and determine that our REO/Lender Placed Insurance Program is a perfect fit, you can hear the light bulb go off over the phone. "Do you have marketing materials that our agency can use to promote this program to other banks?" The voice says on the other end of the phone.
It is exciting to be a part of this discovery process with our agency partnerships. It is also very stisfying to know that another agency has successfully found a market in which the current economic conditions will provide for rapid premium growth. Seeing this opportunity and seizing it now is the difference that it takes to succeed in a soft market.
Leading economists have predicted that the current market is only the first uptick of a foreclosure storm that will be unprecedented in the history of our country. Many lenders have been on mandatory foreclosure moratoriums in order to prevent the markets from being saturated by undervalued "fire sale" properties. In the last half of 2009 and beginning of 2010, these foreclosures will be hitting the market , swelling the number of foreclosures dramatically. Then comes phase two. The commercial real estate market, that is now near record high default levels, will start a foreclosure cycle that will rival or exceed that of what we have seen in the residential markets. The combination of these factors will create the perfect storm to capitalize on the market to provide insurance programs for these properties.
It will be the agencies that position themselves to offer a good insurance program, designed with the lending institution's needs in mind, that will be able to take advantage of this upswing in business and enjoy a new level of success in 2010.
Although foreclosures slowed pace slightly in May, it more than likely will be a short lived leveling of the market. With interest rates trying to creep up and refinance options dwindling more and more, homeowners are "stuck" with payments they can't afford and no where to turn. Add to this the increased pressure for lenders to get their balance sheets cleared of toxic assets (non-performing loans and foreclosures), and you have a perfect storm that is going to cause great turmoil ahead in the housing market.
Despite every effort to keep rates low, they are still creeping up and eventually will go WAY up. Some are predicting mortgage interest rates in the double digits coming out of this super imposed low rate era. Very simply, as we continue to print money and create stimulus, we decrease the value of our dollar. With this decreased value in the dollar, the cost of borrowing money will have to increase. In fact, the cost of everything will have to increase. It is called inflation (created in part by increasing the amount of currency in circulation). This will close down the refi market, bring to a crawl the already slow paced existing homes purchase market and dry up what little builder (new homes) market is left. Keep in mind, however, people did buy houses when interest rates were 19%, just not as many.
The sky is not falling, but the economic laws do still apply here, so ignoring the facts in evidence won't change what has to happen. What goes up will correct. In a stable real estate market we go up 7% and correct 2% and we still gain 5% appreciation on our homes. In the markets of 2001 to 2005 property appreciation was insanely high. Some areas were seeing 37% property appreciation per year for 3 years in a row. When you have this type of sharp rise in the market you have to be prepared for an equally big correction. That correction is what we are seeing now.
So, if you bought a house in 2005 for $400,000, it might only be worth $292,000 in your market. This is the problem most people are seeing in their markets. It is making it easier for people to just throw their hands in the air and walk away from the property. That is what is being seen in record numbers, and yet another contributing factor to the rise in foreclosures. This trend should be expected to continue to gain momentum through the better part of 2010 as home prices continue to fall, struggling to find a bottom to this out of control spiral.
What is the bank's answer? Modification of the loan terms to create affordable payments and keep people in their homes. In theory it is a great idea and a great option for some consumers. The only problem is that it is not working. The lending industry is seeing a 50% re-default rate on these modifications and this rate is expected to soar to as much as 75% re-default. The unfortunate reality is that there are more factors coming into play than just bad loan terms. The U.S is about to hit a 10% unemployment rate. This is alarming and also one of the major contributors to the sharp increase in the default rate of mortgages and ultimately the sharp rise in the number of foreclosures.
Within this crisis, the new boom markets arise. Many agents now specializing in foreclosures, short sales, and distressed sales are reporting income levels better than many years in "the boom". There are many new markets that will arise out of this transforming economy. To be truly GREAT at anything, you have to be able to look a bleak situation and be able to find the opportunity within to arise victorious. Stay focused on opportunity, educate yourself with the facts, and formulate a strategy.
A record 342,038 U.S. foreclosure filings, default notices, auction sale notices, and bank repossessions were reported for the month of April according to RealtyTrac, the leading on-line marketplace for foreclosures. This report comes right on the heels of March's record number. The report further shows that 1 in every 345 U.S. housing units received a foreclosure filing in April. RealtyTrac says that this is the highest number of filings since they began reporting in January of 2005.
The States leading the foreclosure charge are Nevada, Florida, and California in that order. Nevada boasts that 1 in every 68 housing units received a foreclosure filing in April, while Florida comes in at 1 in every 135 units and California at 1 in every 138 units. While Nevada residents might be rejoicing that they saw an 18% decrease from last month NV foreclosures are still at a 111% increase from April 2008. Meanwhile, Florida got smeared with a 37% month over month rise and a 75% rise over April of 2008. California might be seeing some stability return with a 10% decrease in April and only a 42% increase over April 2008.
What does all of this mean for the market? As they say on Groundhog Day, six more weeks of winter. In recent month's as much as 50% of home sales nationally have been from distressed proerties. We will see this trend continue and housing prices will continue to fall for 2009. Banks that were slow in the foreclosure process, waiting to see where all of the current legislation and stimulus plans fell into place, are coming off the fence and moving forward aggressively with the foreclosure process. We will see this trend continue through 2009 and the current sharp spike in foreclosure volume will continue through the next quarter or two at minimum as banks become more aggressive to "clean" their balance sheets and prepare to start anew on the other side of the current recession.
Tom Elder has joined the All Risks National Specialty Programs unit as the lead financial institutions underwriter for the new nationwide REO/Foreclosure and Lender Placed Property Insurance Program. At All Risks, he will target commercial banks, credit unions, savings and loans, mortgage banks, and financial institutions that service and/or invest in mortgage loans.
Previously, Elder worked for MetLife Bank as a regional reverse mortgage consultant. Prior to that, he owned a mortgage company for six years.
The REO/Foreclosure and Lender Placed Property Program is available nationwide on an admitted and non-admitted basis with an A.M. Best "A XIII" rated carrier. Features include simple Web site administration, monthly itemized billing for all coverages and transactions, premium earned on a daily prorated basis, special coverage and retro rating plans. All Risks offers a customized program with a variety of limits, deductibles and coverage options.
It was a good time in the boom for rehabbers and hard money lenders alike. There were plenty of properties to find and an easy profit to be made. This combination of things made it very appealing to some to make hard money loans or private money loans. I would class the folks who moved into this market as either amateurs or seasoned pros.
Being in a sector of the market that directly observes the fall out from the bust real estate cycle that we are currently in, I get to see first hand the mistakes of the amateurs that decided to embark on the private lending adventure.
Although there are many things that could be pointed to as potentially avoidable mistakes if planned properly from the beginning, I am going to focus on the foreclosure process and avoiding areas of exposure that are left if not properly planned out.
Above all else, whenever you start a new business venture, of any sort, you should always imagine the worse case scenario and plan backward from there. There should also be an exit strategy planned long before an entrance strategy is ever executed. With private money lending the worse case scenario is a default on the loan and potentially having to foreclose on the property. One of the biggest mistakes made by people getting into private money lending is to lend the money personally and not forming a legally incorporated entity whose only line of business is to loan commercial money.
Why on earth could it matter (other than the obvious liability exposure). One of the first things to happen when the loan goes into default is that the taxes and homeowner's insurance is probably not getting paid either. When the insurance lapses on the property, you, the lender, no longer have your interest protected in the property. Should the home burn down or whatever, the buyer walks and you are pretty much out the money. Especially if the buyer goes bankrupt.
What has to happen at the time of lapse is that a force placed or lender placed insurance policy has to be placed by you to protect your interest in the property. The problem? You will have a VERY difficult time finding this type of policy through personal lines. This is typically a commercial lines product, which means very simply that an individual would typically not qualify for coverage. The alternative? You could get a standard homeowner's policy, right. Wrong! It will be difficult to get homeowner's insurance on a property that you don't technically own. You won't be able to do that until the foreclosure process is complete. In most states that is a very lengthy process. That is a very long time to have no coverage on the property and hope that nothing happens.
A little planning up front can save a lot of agony in the long run. Set up a legal entity and only lend through it. This makes the whole process much easier, if the dreaded worse case scenario happens. It may not be impossible to find coverage as an individual for this, but it will just seem like it is.
With and ever increasing number of foreclosures in the market place, lenders are trying to contain costs that they incur in the whole foreclosure process. Most people fail to realize the numerous costs involved with maintaining a portfolio of foreclosed properties. One of these costs, that can be significant with a large portfolio of properties, is Real Estate Owned property and liability insurance.
Real Estate Owned (REO) Property Insurance provides lenders with physical damage for any portion of their portfolio of owned properties, foreclosed properties, and properties in the process of foreclosure. Coverage may also extend to properties held in trust for others.
You will find that most REO Property Insurance programs offer a wide variety of limits, deductibles and coverage options. and are generally customized to meet the specific coverage needs of the lending institution. REO Property Insurance may be purchased on either a stated value or total insurable value and also may be purchased on either a replacement cost or actual cash value basis; with or without co-insurance penalties.
REO Property Insurance coverage may be term, annual, monthly with various billing options.
Some other common optional coverage to basic REO products include:
Broad Form or All Risk Commercial Perils
Flood and Earthquake
Demolition Expense
Pollution Extraction and Removal
Ordinance or Law
Mine Subsidence
Freeze, Discharge and Leakage
Builders Risk
Real Estate Owned Contents
There are many ways for lenders to keep the cost of this coverage down, through the diligent monitoring of their coverage amounts and the timely deletion of properties when they are sold. Working with the right insurance agent and carrier who deal specifically with these products and understand the importance of good portfolio management, could reduce a lender's insurance costs by 20% and in some cases as much as 50%.
After a brief leave of abscense here on AR, it is good to be back. In August of last year I was asked by my then employer to stop blogging, as is common with many fortune 50 size companies. I have taken a different direction with my career and have been presented an opportunity to enter into an entirely different sector of the market.
I am proud to announce my recent appointment as Underwriter of Financial Institutions in the National Specialty Programs unit of All Risks, LTD.
All Risks, Ltd. was formed as an excess and surplus lines facility in 1964 in Baltimore, Maryland. They have since expanded into additional territories and product lines over the past 40 years. All Risks business is written exclusively through retail agents and brokers. They are independent. All Risks has been the fastest growing, and one of the largest privately held wholesale brokers in the country for over 10 years.
As Underwriter, I am responsible for developing the Financial Institution programs such as the REO and Lender Placed Insurance services as well as developing new markets.
More exciting than my new career path, though, is being able to be part of such a wonderful and embracing community such as Active Rain once again. I have missed those countless hours of commenting and blogging. Sharing information that is useful to other's careers is extremely rwarding time spent.
I look forward to the differnce that my contributions make as well as the difference that all of this community's contributions will make in my career.
If you are 62 years of age or older and have been considering downsizing, shortly you will be able to downsize without cleaning out the bank, or having to have a mortgage payment every month.
As part of the Housing and Economic Recovery Act of 2008, Reverse Mortgage will now be acceptable for purchases. The guidelines are unclear and a Mortgagee Letter from HUD (this is a letter that spells out the guidleines) is anticipated before the end of the year and possibly as early as September.
What does this mean for seniors? Simply stated, you will now be able to purchase a new primary home without having to use all of the proceeds of your sale, or clean out your bank account and retirment funds to pay cash, or have to take out a mortgage with an expensive monthly payment.
Many seniors have already found the benefits of reverse mortgages by utilizing them to stay in their family homes and rid themselves of the costly monthly mortgage payments, but for some taking care of that big old house with 3 flights of stairs is no longer an option. This new financial vehicle will open the doors for these seniors to be able to purchase the new smaller home and maintain a respectable quality of life.
For more information on these great new products stay tuned for more details, or contact me directly anytime. Thanks again and may you enjoy retirement to it's fullest.
The baby boomer generation is headed for a shock as it nears the finish line known as retirement. As the day of reckoning grows near, boomers will discover that they are long on life expectancy and short on cash. They are more likely to be asking if "you would like fries with that" than traveling the world and enjoying their retirement.
How can this be you ask? It has been a culmination of economic issues that has brought an entire generation into this financial crisis. In addition to social security benefits, the foundation for retirement income has traditionally been corporate funded pensions and/or employee managed 401k or similar plans.
Boomers have found that they can not depend on the pension being there for them when they need it most (during retirement). With pension cuts, corporate bankruptcies and corporate downsizing, most major companies have foregone the pension plans for the much more cost effective employee managed 401k plans. This has allowed them to push as much as 50% or better of the cost of the plans off onto the employee themselves.
What's wrong with that? Well, to start off let's look at what the average employee knows about managing stocks, mutual funds and the like. NOTHING. I was watching a special regarding this issue and the reporter ask a CEO of a large company if he would let the company janitor manage his retirement portfolio. He said absolutely not. As I am sure we would all reply. So why then do we expect the average employee to be able to properly manage their own retirement funds?
This has proven disastrous for much of the boomer generation. Most of them just went forth with the "set it and forget it" attitude and kept putting money in like the loyal employees that they are, fully expecting for the funds to be there when they retired. The market crash of 2001-2002 took a hefty toll on many of these accounts, nearly wiping some of them out completely. Without the years left for recovery of the funds before retirement, many boomers were left with the tough decision of whether to retire or not. Many felt jaded and disappointed by the not knowing or understanding what was going on with their money. Most people do not have a degree in finance to be able to keep up with the markets and manage their own funds.
The sad reality is that many baby boomers have to sideline their retirement dreams, due to their harsh financial picture headed into retirement. You will see more and more seniors working part time and even full time well into their golden years slowly letting their retirement plans melt away and fade into the distant past.
If you or someone you know falls into this category, then I urge you to get financial advice from reputable, proven professionals. You should be talking with a reverse mortgage consultant, elder law attorney, financial planners and a CPA to determine if there is a way to restructure things no, before it is too late and retirement is upon you or your loved one. Many of these situations CAN be reversed and the outlook can be very positive.
If you or someone you love would like more information regarding Reverse Mortgages, you can request it by email at telder@metlife.com, Or click on the "BOOK NOW" button under my picture and choose Reverse Mortgage Consultaion option, pick a date and time you would like it sent or a call, and provide your contact information and the FREE info will be on the way. I will provide a Free DVD and tons of valuable information that you must know before considering these loans.
There are many aspects of this new bill that are both confusing and controversial. In order to provide the facts and allow my loyal readers to draw their own conclusions I am providing a link to the Bill itself in all of its 260 page splendor.
If you are interested in reading the final version of the bill, you can read it by clicking here. Please take a moment and leaf through it. It is important to understand how these changes will effect you and how they will change the industry once again.
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.
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