Understanding the "Good Bank", "Bad Bank" Strategy

Attached is a video that explains the "Good Bank", "Bad Bank" strategy. You will begin to hear more about this in the upcoming weeks and months.

If it doesn't load immediately once you're on the CNN Money page, just click on the photo that shows the CitiBank Logo titled "Caution: Bad Banks Ahead"

Misery Index Uncovers REO Opportunities

The Misery Index Tallies up the total Bankruptcies, and Foreclosures for a period of time. The attached index shows that last year alone there were 1,089,130 Bankruptcies and 1,285,873 Foreclosures. With the Foreclosure Moratorium ending on January 31 and the Cramdown Bill likely to pass allowing primary residences to be included in a bankruptcy, it is very likely that we will equal or surpass those figures by Q3 of this year. Adding to that likelihood is the record and growing unemployment figure and our current recession that is rapidly progressing toward a depression.

But it's not all gloom and doom...This report shows that many states have very low foreclosure rates which is a strong indicator that home values are somewhat stable in those areas. If you are able to secure discounted REO product in those geographic areas there is a better chance that these properties can be sold at or near retail levels.

Work with your Bulk REO buyers and sellers to encourage them to seek out some of the less sought after areas of the United States. I'm confident they will find the deals easier to close and the pricing much more competitive.

Home Prices Continue To Decline 2% per month - REO Buyers/Sellers Pay Attention!

Please read the article below for a little insight as to why buyers are so concerned with the price they pay and whether the BPO's are current on an offered REO Package. As the article indicates, values are dropping at up to 2% per month nationwide (more in hard hit areas like CA, AZ, NV, MI, OH) . As qualified buyers try to forecast the market trend, their offer prices must take into account the potential for market depreciating during the due diligence and holding period. One way to expedite this process is to improve the transparency of the transactions. On average 3-5 business days are lost in the transaction while all parties try to protect their identity.

See my blog from January 16, 2009:

Prepare Yourself For Further Declines In Home Values

Home Prices Continue to Slide

January 27, 2009

House prices fell by another 2.2% in November for the second consecutive month and prices are off by 18.2% over the previous 12 months, according to the Standard & Poor's/Case-Shiller housing price index that tracks home sales in 20 major metropolitan areas. Since the peak in August 2006, prices have fallen 25% and the "freefall" continued in November, according to David Blitzer, chairman of S&P's index committee. Average house prices are now back to first-quarter 2004 levels. "The main force driving down house prices is foreclosures, which are still rising," IHS Global Insight economist Patrick Newport said. He expects house prices will continue to decline over the first half of this year.

Wait Before You Buy A New Car

It looks like everyone has begun to put their thinking caps on. Here is a relevant article about tax incentives that are being discussed as a way of motivating consumers to purchase new and more fuel efficient cars. If you are in the market for a new car, I would recommend following this initiative to see if it is implemented. I'm certain that many car dealerships will create further incentives to bring their prices under the $49,500 threshold in order to drum up business.

Costs Associated With Remodeling.

Thanks to JMO Reader Peter Bourget for this information:

With a move toward smaller, more viable REO transactions this information regarding the costs associated with remodeling properties might prove to be very useful to your clients with a fix/flip, fix/rent strategy. Be sure to click on your particular state/region as the costs are not universal throughout the country.

Fix Housing First Homebuyer Tax Credit - Senate Bill 253

The new senate bill 253 - Fix Housing First Homebuyer Tax Credit could be a very much needed first step in stimulating the housing market. This bill would not only extend the time period for receiving the tax credit, if passed it could also increase the tax credit from the current $7500 to up to $22,000. With record low interest rates and significant tax credit and an easing in the credit markets this could create the "perfect storm" for jump starting the housing market at the homeowner level.

Florida REO's - Make Sure You Have Insurance

Thanks to JMO Reader Dave Keller for making us aware of the developments in Florida.

As if Florida hasn't been punished enough...High foreclosure rate, Hurricanes etc. Now it's becoming even harder to get homeowners insurance in that state. State Farm, Florida's second largest insurer is pulling out of Florida after having their bid for a 47% rate increase rejected. Citizens Property Insurance Corp. the state created insurer and the largest insurer in the state has been trying to reduce the number of policies it insures.

What does this mean?

• premiums will go up as policies are shifted to smaller insurance companies
• concerns that the smaller companies will not be able to withstand the claims if a large-scale disaster occurs
• REO buyers can expect increased holding costs and lower bids for Florida properties.

If you or your clients are buying Florida properties for cashflow purposes, make sure you research available homeowner's insurance policies and premiums when calculating your NOI. The previous factor of .35 may no longer apply for Florida.

Cramdown Clears House Panel - But There's a Catch!

The bankruptcy cramdown bill passed the House Judiciary Committee today. But there are a few catches that I think we should all be aware of:

1. lender could recoup losses if property is sold within 4 years of cramdown
2. bankruptcy protection would not apply if borrower committed fraud or misrepresented themselves
3. the bill is likely to change before it is finalized.

Comments:

1. If the homeowner must stay in the home for 4 years then the cramdown cannot be used to bring the sales price down to market rate in an effort to sell. It also means that once the cramdown value has been established, the homeowner is not protected if the market continues to drop over the 4 year period.
2. THIS IS VERY IMPORTANT: expect lenders to be very diligent in reviewing the INITIAL LOAN APPLICATION to look for any fraud or misrepresentations i.e. "stated" income loans in which the income was inflated to qualify. This would make the homeowner ineligible for the cramdown and could make put them at risk for further legal action.
3. We must continue to stay aware of the progress made on this bill. Much like the current bailout bill, the final draft was more than 500 pages larger than the initial bill and included many unrelated issues. I think we can expect the same for this bill.
   

Bankruptcy Cramdown....Read The Fine Print

As the new administration promotes the mortgage cramdown portion of the new stimulus plan, some of the fine print is beginning to emerge.. Full article is below, but here are the high points:

• All loss mitigation options will need to be "exhausted before cramdown would be allowed
• Limiting cramdowns to only subprime loans originated during the real estate boom
• Only providing cramdown relief on a temporary basis
• 66% of bankruptcy repayment plans fail

All of these points create concerns that there will be a "mad rush" to get through the loss mitigation process which will overload the already understaffed banks. There is also the added impact of all the other creditors that will be rolled into these bankruptcies which will cause credit card issuers, including retailer and gas cards to struggle even more. If something doesn't happen soon, we may have to just let this run it's course. Like they say..."never try to catch a falling knife!"

MBA: Cramdown Supporters Gaining Momentum

January 26, 2009

While remaining steadfast in their opposition to "cramdowns," the Mortgage Bankers Association acknowledges that supporters are gaining momentum and the trade group has outlined parameters it would like to see included in legislation that would allow bankruptcy judges to reduce the secured portion of a mortgage loan. In a conference call with reporters, MBA representatives said a bill that allows bankruptcy judges to alter the contractual terms of a mortgage should limit the discretion judges have to reduce principal, lower rates or extend terms on a mortgage. MBA chairman David Kittle said that if Congress does go this route, cramdowns should only be allowed after a "waterfall" of other loss mitigation options have been exhausted, including repayment plans, loan modifications, an extension of terms and principal deferral. He also proposed that cramdowns be limited to subprime loans originated during the peak of the housing boom and that cramdown relief should be temporary. "We need to set a permanent sunset date after which judges will no longer have this extraordinary power to alter the terms of a mortgage," Mr. Kittle said, noting that two thirds of bankruptcy repayment plans fail, in which case the borrower typically loses their home to foreclosure anyway. Steve O'Connor, MBA's senior vice president of government affairs, acknowledged that "clearly there is political momentum" favoring supporters of cramdown relief. "We recognize the realities of the landscape. And if in fact cramdowns are implemented, we think there should be some constraints to limit damage to the marketplace."

2008 FORECLOSURE DATA

States ranked by 2008 foreclosure rates

Rank	State	Total Foreclosure Filings	Total Properties with Filings	% chg. from 2007	% chg. from 2006	% Housing Units (foreclosure rate)
1	Nevada	123,989	77,693	125.74	529.5	7.29
2	Florida	501,396	385,309	133.11	411.68	4.52
3	Arizona	152,621	116,911	203.13	655.04	4.49
4	California	837,665	523,624	109.86	497.91	3.97
5	Colorado	66,795	50,396	27.9	61.41	2.41
6	Michigan	145,365	106,058	21.61	107.89	2.35
7	Ohio	146,099	113,570	26.22	155.4	2.25
8	Georgia	116,225	85,254	44.36	117.07	2.2
9	Illinois	115,063	99,488	54.7	126.01	1.91
10	New Jersey	69,612	62,514	101.2	186.84	1.8
11	Indiana	61,141	45,937	64.18	113.59	1.67
12	Tennessee	51,496	44,153	70.38	127.87	1.65
13	Utah	18,657	14,836	99.46	68.25	1.65
14	Massachusetts	53,797	44,342	150	577.08	1.64
15	Connecticut	25,510	21,925	84.87	570.49	1.53
16	Virginia	67,695	49,011	200.55	1746.68*	1.52
17	Rhode Island	7,334	6,583	258.16*	1525.43*	1.46
18	Maryland	41,582	32,338	71.29	945.18	1.41
19	Idaho	11,272	8,512	133.85	302.08	1.38
20	Missouri	42,054	31,254	33.04	139.11	1.19
21	Oregon	25,049	18,001	112.75	168.67	1.13
22	New Hampshire	8,018	6,636	436.03*	5430.00*	1.13
23	Arkansas	16,611	14,277	122.87	198.06	1.12
24	Texas	129,201	96,157	13.84	14.96	1.04
25	Washington	32,271	26,058	71.61	116.64	0.97
26	Minnesota	23,716	20,282	75.5	336.74	0.89
27	North Carolina	41,750	33,819	16.21	153.14	0.84
28	Wisconsin	25,164	19,695	62.33	249.02	0.78
29	Oklahoma	16,059	12,465	50.98	32.86	0.78
30	South Carolina	16,136	14,995	253.07*	220.41*	0.76
31	Alaska	2,265	1,946	46.1	96.76	0.7
32	Pennsylvania	42,949	37,210	127.18	68.88	0.68
33	Delaware	2,998	2,516	151.85*	701.27*	0.66
34	Hawaii	3,346	3,185	229.71	489.81	0.64
35	New York	55,641	50,032	29.32	129.23	0.63
36	Kansas	7,983	6,218	155.46	179.96	0.51
37	New Mexico	4,543	3,727	24.48	38.29	0.44
38	Maine	3,171	2,851	896.85*	5602.00*	0.41
39	Nebraska	3,326	3,190	-12.27	25.84	0.41
40	Iowa	6,405	5,385	31.25	135.77	0.41
41	Louisiana	7,837	7,129	79.66	111.42	0.39
42	Kentucky	8,820	7,244	41.9	45.46	0.38
43	Alabama	8,436	7,764	39.34	184.19	0.37
44	Montana	1,220	1,246	8.35	32.55	0.29
45	Wyoming	921	677	90.17	165.49	0.28
46	Mississippi	2,364	2,293	62.74	181.35	0.18
47	North Dakota	391	371	48.4	148.99	0.12
48	South Dakota	405	402	1575.00*	793.33*	0.11
49	West Virginia	687	685	48.91	170.75	0.08
50	Vermont	124	137	372.41*	705.88*	0.04
	District of Columbia	4,631	4,182	438.22*	3245.60*	1.48
--	U.S.	3,157,806	2,330,483	81.24	224.8	1.84
*Actual increase may not be as high due to data collection changes or improvements

Illegal Foreclosures Could Make "Proof of Product" Mandatory

Well we all knew that sooner or later there would be a price to pay for the "fast and loose" practices in the REO business. There are now concerns that some foreclosures could be illegal. This recent article indicates that homeowners are fighting back by disputing whether the lender is the legal note holder and therefore capable of foreclosing on a property. As many of you have heard me say, we've gotten away from selling real estate and have begun to sell spreadsheets. The main reason is that investors don't want to spend money on title reports and title insurance, both of which would help maintain a clean "chain of title" to a property. This added expense would create higher acquisition and exit prices and would put REO buyers in more direct competition with banks that are trying to sell inventories at closer to current fair market value.

In my opinion, now more than ever, sellers will need to be prepared to provide, up front, proof of product as evidence of their titled ownership of the assets being offered for sale. If not, they may need to "hold harmless" the buyer from potential liability should clear title not be available.

Fannie Mae is Beefing Up Their Foreclosure Division

If you were wondering what's going to happen after after the foreclosure moratorium expires on January 31, here's your answer: Despite layoffs in other departments, Fannie Mae is beefing up their staff in the Foreclosure and Loss Mitigation departments.

Layoffs at Fannie in the 'Hundreds'

January 23, 2009

Fannie Mae, which has been operating under a government conservatorship since September, has laid off hundreds of workers over the past four weeks, according to sources both inside and outside the mortgage investing giant. At press time, a Fannie Mae source confirmed that "hundreds" of layoffs have occurred but said the company is beefing up its foreclosure and loss mitigation efforts -- particularly in its Dallas office -- and hopes to end 2009 with as many employees as it had in 2008. The GSE issued a statement saying it is "taking steps to realign the company's organization, personnel and resources to focus on our most critical priorities, which include preventing foreclosures to help keep people in their homes and aiding in the recovery." Among the known job cuts, said one individual, are reductions in government affairs, communications, marketing, and technology. "They can't lobby any more so what's the point in having a government affairs division?" said the individual. Freddie Mac also has been quietly laying of workers with more cuts on the way, said one mortgage executive close to the company. "This shouldn't be surprising to anyone," he said.

U. S. Financial Crisis makes the GAO High Risk List

The United States Government Accountability Office (GAO) has issued its most recent High Risk Report of areas of serious concern to the United States. Not surprisingly, the current economic crisis tops the list. Please read this report it gives far greater detail as to the governments concerns that without major financial reform, we run the risk of experiencing further economic failure. The GAO also released a report how we can modernize our outdated Financial Regulatory System.
These are both fairly extensive reports and are best read when you can dedicate the time to absorb all of the information.

Financial Crisis Causes Icelands Government to Collapse

I will need to do more research to determine what the economic impact of the collapse of Iceland's Government would have on the U.S. or our economic allies. It is still worth reading to see how quickly an economy can crumble.

Impending New Wave of Foreclosures

The following link was shared by JMO reader Tim Heffernan...thanks Tim!

Although I've been talking about this for over a year, it looks like the news media understands the impact of the impending recast or reset of Pay-Option ARMs. It's worth it to watch the entire video. I learned that despite the "foreclosure moratorium" there is a Florida company that is evicting as many as 20 homeowners every day on behalf of the banks with that number growing rapidly.

Prepare Yourself For Further Declines In Home Values

PMI Sees Broader Risk of Further Home Price Drops

January 14, 2009

A quarterly index that attempts to quantify the risk that housing prices will deteriorate over the next two years finds that the likelihood of further home value declines has broadened. The index, created by mortgage insurer PMI, shows the risk of price declines rose in 369 of the 381 metropolitan areas tracked in the survey. PMI estimates that half of the nation's 50 largest metropolitan areas have an "elevated or high" risk of seeing home prices fall further. And a growing number of cities in the industrial Midwest and the East Coast show an increase in the probability that home values will be lower in two years, PMI said. David Berson, PMI's chief economist and strategist, said that "the continued high level of foreclosures and rising unemployment" continue to put downward pressure on home values.

CA Notices of Default Almost Double in Month

For those of you that have been following the JMO Newsletter and now the JMO Blog you will recall that I've been saying that once the foreclosure moratoriums were lifted that we would begin to see a dramatic increase in foreclosures, providing a more accurate representation of the housing crisis. The article below refers to California state senate bill 1137. In the bill it required lender or other parties that took possession of properties subsequent to foreclosure to maintain the upkeep and aesthetics of the property or face fines of up to $1000 per day until they came into compliance. Clearly, the lenders have realized that with a average negative equity of $180,000 (just wait til the pay-option ARMS begin to recast!) and many homeowners failing to make payments for up to a year that foreclosing may be the only option to protect themselves. This means for those of us in the REO game, that even more inventory will become available in the near future.

CA Notices of Default Almost Double in Month

January 14, 2009

ForeclosureRadar has issued its California Foreclosure Report for December 2008 and year-end summary, noting that notices of default have rebounded from the stall caused by California State Senate Bill 1137, which it said temporarily slowed foreclosures by imposing new requirements on lenders. The Discovery Bay, Calif.-based website, says with 42,421 filings in December, notices of default are back to the record levels reached in the second quarter of 2008, nearly doubling the 21,557 notices recorded in November. In 2008, California saw 249,940 foreclosure properties sold at trustee sale auction, representing $107.8 billion in combined loan value. Of those properties 96.4% went back to the lender after no bid was received from a third party. For the year, there were a total of 437,955 notices of default filed, an increase of 56% over the 279,821 filed in 2007. Notice of trustee sale filings increased 122.9% over 2007 rising from 157,273 filings in 2007 to 350,514 filings in 2008. Properties sold at auction increased by 158% by volume, and 179% by combined loan value. Lenders took back a total of 241,093 properties, with a combined loan value of $103.9 billion, the report said. "While a number of lenders have announced significant loan modification programs to reduce payments to affordable levels, these plans fail to address the fact that the average foreclosure in California now has $180,000 in negative equity," said Sean O'Toole, founder of ForeclosureRadar.

Fannie Mae tests 'short sale' program / Works with renters

Fannie Mae is working with Countrywide to test market a new program in Phoenix, AZ intended to speed up the short sale process. By creating a pre-determined short-sale price even prior to a buyer being identified Fannie Mae is hoping to reduce the logjam typically associated with short sales. On a similar note, Fannie is also working with renters that remain in REO properties after a foreclosure by offering the tenants to pay market rent on a month to month basis. They will not require a security deposit and will also provide financial asssistance if the tenant chooses to move. The rental program is available nationwide.

Staggering Projection! 13 Million Foreclosures by 2013

With the foreclosure moratorium expiring on January 31st. Congress is working with the incoming administration to create a plan to stem foreclosures. With the staggering projection of up to 13 million total foreclosures within the next 4 years it's clear that we need to do more than give all the money to the banks. Please read the insert within the article labeled "fact file" which outlines in greater detail, the ideas that are being considered.

Potential solutions include:
1. bankruptcy reform
2. an FDIC plan to create monetary incentives to mortgage servicers for loan modifications
3. eliminating restrictions that would make the FHA "Hope For Homeowners" program a more viable solution
4. raising loan limits to allow more properties to qualify for conforming loans
5. tax incentives
6. lowering interest rates

I believe it will take a reasonable combination of all these solutions in order to avert further disaster in the housing market. Those of us in the REO industry should watch very closely as this will signal a turnaround and cause us to redesign our acquisition and exit strategies.

Understanding the New Credit Scoring Model

FICO 08, the name given to the new credit scoring model is supposed to take effect this year. There are several changes that impact consumers both positively and negatively. Please review the attached link and make sure you understand the changes so you are best prepared to protect your credit score.

Make sure you have appropriate Disaster Insurance Coverage

I found this interesting article regarding the impact of natural disasters on our current mortgage crisis. It's the new year and an excellent time to check your coverages on life, health, auto and homeowners insurance. If you live in an area that is susceptible to natural disasters like earthquakes, floods, hurricanes, etc. make sure you have adequate full replacement coverage. If a disaster were to strike you would not be able to rely on receiving or qualifying for adequate financing to replace your home.

Increased Pressure on Fed to Assist Homeowners

The Fed is beginning to see increased pressure from congressional oversight committee to show how the bailout funds are being used to provide direct assistance to homeowners and not just banks. The veil has been lifted and the Fed appears to have been exposed for not providing any direct benefit to homeowners/consumers with the distribution of bailout funds. Expect to see a significant focus on homeowners and consumers as the incoming administration appears to recognize that our economy is driven by consumers, not institutions. I anticipate that in the coming months we will begin to see a relaxing of loan guidelines. My sincere hope is that the we first make it easier to borrow money for appreciating assets, rather than depreciation or convenience items like cars and credit cards.

Robin S. Reed
JMO-Just My Opinion
ProEquity Management, LLC
robin@proequitymanagement.com
480-242-1952

Bill introduced that would allow primary residences to be included in bankruptcy

This was offered by Peter Bourget. Thanks Peter!

Durban Introduces 'Cramdown' Bill

January 6, 2009

Sen. Dick Durbin, D-Ill., has introduced a bill that would allow bankruptcy judges to modify mortgages on primary residences and he is working to include it in the economic stimulus package. The Senate assistant majority leader said Congress has already committed over $1 trillion to address the financial crisis. "Why don't we take a step that would indisputably reduce foreclosures and that would cost taxpayers nothing?" Sen. Durbin asked. The Financial Services Roundtable said the Durbin bill and a similar measure introduced by Rep. John Conyers, D- Mich., in the House would be "counter-productive" and encourage bankruptcies. "They will inject additional risk into home buying and the markets will respond by increasing interest rates, fees, downpayments, or all three," FSR president and chief executive Steve Bartlett said.

IRS Offering to waive late penalties

JMO Reader, Bryan Jones sent in this article. I've included the link rather than the article. Thanks Bryan!

IRS waiving late fees,

JMO 1/7/08 - economic outlook, Fannie/Freddie as Utility

JMO - JUST MY OPINION

For those of you who have followed JMO for a while you know that our purpose is to provide news and information regarding the economy as it relates to or impacts the REO, Real Estate and Mortgage industries. Nowadays, it seems like everything impact these industries. What I've begun to look for is "a plan", some indication that the powers-that-be are doing more than chasing this economic crisis. I firmly believe we need to make big moves to get in front of this problem and stop it. This won't happen overnight, no matter how much money you throw at it.

One Fed Chairman said the economic outlook is grim(link) . He is concerned not only of how we provide financial assistance to fund a stimulus package, but also the timing that is involved in properly withdrawing such assistance and returning our economy to self-sufficiency.

Treasury Secretary Paulson recommends turning Fannie/Freddie into a utility-like (link), company that acts as a guarantor of mortgages, but does not hold an investment portfolio as they have in the past. The concern with this is where would banks and wholesale lenders sell off their loans and this would virtually eliminate the secondary market. Such a move would further impact the banks liquidity if they were required to hold and service more of the loans they originated.

Clearly, a much needed change is coming. Hopefully this will be change for the long term benefit of our economy.

Robin S. Reed
JMO-Just My Opinion
ProEquity Management, LLC
robin@proequitymanagement.com
480-242-1952

Welcome to the JMO BLOG

Welcome to the JMO Blog.

I decided to convert the JMO Newsletter into in a blog in an effort to get information out in a more timely manner. The blog will also allow our readers to contribute and participate with ideas and information. I look forward to hearing from you.

Regards

Robin S. Reed
JMO-Just My Opion
ProEquity Management, LLC