There IS the possibility that after the Tax Incentive (welfare for Realtors and Buyers) ends in June, there may be more REOs than buyers.
The Fed estimates that there are nearly:
4 Million homeowners in Pre-Foreclosure (30+ days late on payments -lost job-underemployed), Foreclosure (past 90 days late in California - Notice of Default delivered) or Foreclosed (Bank or Lender owned) with former owners renting or squatting back or even sitting vacant.
When the Buyer Tax Credits expire what will happen to these properties? Unless one believes that the housing crisis has been solved and prices will continue back toward the 2007 levels over a reasonable period of time the housing market may be in for more downward movement.
It could turn out that there is a Tsunami of REOs and Short Sales hitting or heading to the market by July-August 2010. Many of the new REOs and Short Sales will be those purchased by the more well to do buyers who used Alt-A Option Arm type loans (2 or 3 year adjustable loans with a less than interest only or interest only option). Those who took loans like this in 2007 started to see their loans adjust in July 2009 and the Foreclosure time frames (usually 130+/- days - less the foreclosure "holds" Fed & State during the Christmas season) are starting to deliver REOs to the market now. With job losses, corporate downsizing and underemployment (wife loses job or one earner is placed on part time) any "small" interest rate change by the Fed may start a chain reaction of defaults, again.
Example: A homeowner who has been paying $3,500 mo, "less than interest only" (balance of interest accruing to the loan balance) might have to pay $4,500 mo P I T I after his loan is recast to fully amortize over the remaining 27 years of the loan. If the interest rates go up 1% or 3% they may not be able to make the payments anymore...AND...their $700,000 home in Orange County or L A County CA is now only worth $550,000. When the payments go up an additional $1,000 to $2,000 per month, they may have no choice but to consider default. This is a pretty common scenario in the beach areas of Orange County CA.
From Ventura County, to L A County, to Orange County through San Diego County the properties within five to ten miles of the beach were roaring up in value far beyond the national averages from 1997 to 2007. People bought them, refinanced or used equity loans to upgrade or buy "life style toys" and lenders were delivering as much as 125% of the current appraised value on HELOC loans until the end came in early 2007.
Many of these affluent (and formerly affluent) homeowners have been waiting for the "Great Recession of 2007 to ??" to end (our grand children will study this time period as we studied the 1939 Great Depression) and the real estate market to start recovering as it did after the 1990 Recession. Many of them have used up their savings, borrowed against their 401Ks or Retirement accounts and have exhausted all Lines of Credit and Credit Cards...as well as their family and friends largesse'. Now it is "decision time". "Can we continue like this or must we sell the house"? With the value of these homes at 60% to 75% of the total of their loans, this will be a very painful decision. Many of these folks have never been in this type of a spot before and will need lots of "counseling" and hand holding.
Unfortunately, the past two years of my real estate career have largly been involved with counseling this type of homeowner and most of them have decided to "wait it out". Some have tried Loan Modifications...to NO avail and some have lost their homes to Foreclosure because the second lender(s) have refused to cooperate and the first lenders refused to give ANYTHING to the junior lenders.
In the past six months, however, I've interviewed a good many of these people who are now ready to throw in the towel and can no longer hold on financially. They have modified their expectations and are ready to "get it done" and move on to the next part of their lives. My business and financial rewards are moving in sync with their decisions and the economy.
The Juniors have it: I don't hold out too much "hope" that the President's new initiative to get Junior Lenders to accept $1,000 for their $30,000 note or HELOC will be successful. The owners of these junior notes appear to be business men and will use the pressure of Foreclosure to obtain "personal notes" from the homeowners before they agree to the short sale. The President says NO...he can "reason" with them...(a few weeks in Guantanamo might do) we'll see.
WHERE'S WALDO? Have you ever tried to help your kids or grandkids find him in one of those pictures...GRRRR&%$#!
The good thing...the ray of hope...if you will is: Lenders will need to deal with all of the Waldos to make a living. There are so many formerly affluent people who are having dire financial problems right now. Eventually, many of them will rebound to affluence and wish to purchase a home, again. Then, they will blend in (Waldo), as opposed to stick out, in the eyes of the lenders. Since an amazing number of people have had financial problems and many of them will be affluent again, I predict that, in the future, Lenders and the Government will find a way to modify the FICO requirements to allow the "lions" to sleep in their own homes again.
HOPE IS A GREAT THING!
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