Renaissance Realty Group’s Blog: Georgia: Lawrenceville

Is reducing mortgage principal a good idea?

 Many critics of the Obama administration's mortgage loan-modification program say it won't work because it doesn't do enough to address "negative equity," the plight of people who owe more on their home loans than the current value of those properties. According to this thesis, without equity in their homes, borrowers have little incentive to keep paying and are apt to walk away as soon as things get tough, if not before. There is even a new word to describe this approach: Lenders need to "re-equify" borrowers by chopping the loan balances to something less than their homes' values.  The trouble is that selectively reducing principal, mortgage paying behavior will be affected.  When he was asked about that in a news briefing Friday, Assistant Treasury Secretary Michael Barr didn't rule out broader use of principal reductions.

 But he suggested that there would be a risk that such a program would change a lot of borrowers' behavior. "Most people, most of the time, make their mortgage payments ...even if they're underwater," Mr. Barr noted. "You have to be quite careful not to design a program that induces more people to walk away" or one that strikes people as unfair.  How would principal reductions induce more people to walk away? Let's say your neighbor, who hasn't made any payments on his loan for months, gets a huge reduction in his loan balance. Meanwhile, you've been working three jobs and dining on cat food to pay your note each month. Your reward from the bank? Zilch.  So maybe you'd decide to stop paying, too, in the hope of the same deal your neighbor got.

If your asking your self - "Why didn't my short sale close it was a good offer" Maybe this is the ansewer.

Eric Reid Managing Broker / Renaissance Realty Group Office 770-277-6652 eFax 404-795-1009

What caused the housing bubble?

In a monthly survey of business economists by the  Wall Street Journal, 42 said low interest rates were partly to blame for the housing boom while 12 sided with Mr. Bernanke, who said they weren't. Academic economists who specialize in monetary policy were split in a separate survey: 13 said low interest rates helped cause the housing bubble; 14 said they didn't.  Mr. Bernanke laid out his defense of Fed policy in a speech to the American Economic Association last week, acknowledging that interest rates were very low but adding that policy "does not appear to have been inappropriate." Other factors -- notably an explosion of exotic mortgages and a flood of cash coming into the U.S. from abroad -- were the crucial drivers of the housing bubble, he said. "Regulatory and supervisory policies, rather than monetary policies, would have been more effective means of addressing the run-up in house prices," he said.  The "basic problem" was "the mistake" of raising short-term interest   rates too slowly from 2004 through 2006, said Miles Kimball of the University of Michigan. "Going up quicker would have been better." 

 "The appreciation of house prices was but one of many indicators which called for a somewhat more restrictive interest-rate policy" in 2004 and 2005, said Marvin Goodfriend of Carnegie Mellon's Tepper School of Business.  Many economists met Mr. Bernanke halfway -- arguing that low rates played a role in fueling the housing boom, though they may not have been the key force. Some noted that low rates encouraged banks to write the riskier loans that Mr. Bernanke puts at the center of the crisis.  "There is plenty of blame to go all around," said Martin Eichenbaum of Northwestern University, expressing a commonly expressed view. "Loose monetary policy certainly contributed to easy financing, which was one element of the bubble."

Option ARMs feeding foreclosures

 There are no specific numbers on how many option ARM loans there are. But analysts estimate that as many as 1.3 million borrowers took out $389 billion in option ARMs in 2004 and 2005 alone.  Many of those option ARM loans have already re-adjusted to higher payments, but more are on the way. Some 88 percent of Option ARMs originated between 2004 and 2007 are going to adjust higher between now and 2012. Those option ARM borrowers could see their housing bills go up as much as 63 percent, according to Fitch ratings.  "It's going to kill off housing," warns Patrick Pulatie, CEO of Loan Fraud Investigations, a predatory lending audit firm. "We have pretty close to 500,000 option ARM payments going higher in California over the next couple of years. The impact of the higher payments will be devastating for homeowners who are having trouble now making ends meet." 

 As the terms of those mortgages now readjust, homeowners are facing much higher mortgage payments at a time when the value of their house has plummeted and many are out of work. In some cases, homeowners who chose a very low starting interest rate have actually seen the overall amount of their mortgage increase-known as negative amoritization-putting them even deeper in debt.  "Option ARMs have been a disaster from day one and a lot of them have already defaulted," says Greg McBride, senior financial analyst with Bankrate.com. "This is a very big issue because interest rates are rising."

 And there's more misery. If the Fed increases rates in the months ahead to fight inflation, rates tied to option ARM indexes will rise further-causing more payments to adjust up even sooner. And while Option ARM borrowers might want to re-finance, they often can't because of falling home values and tighter credit restrictions.  "I don't see how the option ARM problem is not a huge issue," says Sylvia Alayon, vice president and director of operations for the Consumer Mortgage Audit Center, which provides auditing services to advocacy groups. "This is a major hit for housing. It will continue to feed the excess supply of housing with more foreclosures."

As "they' say it not over till it's over,and this first week of 2010 we have heard more than a few perspectives of what to come in 2010. A few things that I heard that made me think is that is not over yet.

1) Arm Rates have reached the  3 -5  reset date, According to one business journalist:."The big wave of Option ARM resets has yet to come, and given the drop in home prices, refinancing won't be realistic.".

2) Municipal Defaults: yep, local towns and counties are feeling the pinch with foreclosures and tax defaults draining their coffers.  And when a town goes broke, it will put their resident's property even further underwater.

 3) Loan modifications aren't working.  Unless and until there is meaningful principal reduction, most people getting a loan modification will stop making their payments if they are $100,000+ upside down on their home.  And there are A LOT of people upside down.  There will be lots of "jingle mail," where the homeowner just sends back the keys to the bank, this year.

4).  Commercial Real-Estate Collapse: The second largest chain of malls has already declared bankruptcy.  Obligations needing refinancing in the commercial market are in the trillions. And most of them, even with positive cash flows, are as underwater as residential mortgages.  As these businesses crash, they will cause even more unemployment.

So when will it be over -- we an economist  said we really will not know until long after we should have known

Just rememebr all Real Estate is local and now more than ever Hype Local so work with a Realtor that New the details of your market .

Biggest Buyers Market

When it comes to short sales, investors would do well to take a look at these major metropolitan areas presenting the largest peak-to-present value price drops. There are a variety of reasons each area has experienced larger than average price drops; from over building in Orlando to unemployment in Modesto, pressure on pricing has resulted in once in a lifetime bargains. Other areas such as Port St. Lucie or Lehigh Acres in Florida have been hit by a perfect storm of unemployment, over building and aggressive sub-prime lending practices combined with lax zoning standards to create a dramatic excess of inventory that could take years to absorb. Whatever the original reason, the result is clear...a big buyers market for those in the know.

Other hard hit cities throughout the nation include the following metro areas:

Merced California - With over 62% drop from highest price, the average cost of a home in Merced was $336, 750 in Q2 of 2006 compared to only $127,585 by Q3 of 2009.

Stockton/Modesto California - Both cities have lost roughly 54% of value since their former high in 2006. Today the average price is an affordable $168,000/$151,000.

Las Vegas Nevada - After a huge building boom during 2005 and 2006, Las Vegas residents are walking away from homes previously valued at over $300,000 which are now selling for just under $160,000.

Port St. Lucie Florida - After reaching a peak price of over $281,000 in 2006, prices in Port St. Lucie are lucky to bring in $151,000 as of Q3 of 2009. In fact, nearly all of Florida has been extremely hard hit due to a combination of high unemployment, sub-prime lending standards and an unprecedented building boom. Fort Myers, Cape Coral,

Naples, Marco Island, Bradenton, Sarasota and Venice are just a few of the other cities experiencing in excess of 40% or greater price decline.

Detroit - It should come as no surprise that Detroit and surrounding areas have been especially hard hit due to high unemployment despite the fact the building boom managed to miss much of Michigan. Affordable homes reached a high of $155,000 during 2005 but continued to plummet in price to the new low of just over $107,500 by the end of 2009.

Bottom Line - short sale investors looking for the best prices as compared to former high's should concentrate their efforts on California, Nevada and Florida. Those searching for affordable housing alternatives may do well to examine Michigan and other areas of the mid-west that managed to escape much of the building boom from recent years. The greatest price stability is to be found in the New England states where prices remained relatively unchanged yet present some price reduction as compared to the past few years.

 Experts from a range of political leanings, speaking at American Economic Association's annual gathering, were in agreement when it came to the chances for a robust and sustained expansion in 2010.  It won't happen.  Many predicted U.S. gross domestic product would expand less than 2% per year over the next 10 years. That stands in sharp contrast to the immediate aftermath of other steep economic downturns, which have usually elicited a growth surge in their wake.  Housing was at the heart of the nation's worst recession since the 1930s, with median home values falling over 30% from their 2005 peaks, and even more sharply in heavily affected states like California and Nevada.  The decline has sapped a principal source of wealth for U.S. consumers, whose spending is the key driver of the country's growth pattern. The steep drop in home prices has also boosted their propensity to save.  "It's very hard to see what will replace it," said Joseph Stiglitz, Nobel laureate and profe  ssor of economics at Columbia University. "It's going to take a number of years."  One reason is that U.S. consumers remain heavily indebted.  Another is that many of the country's largest banks are still largely dependent on funding from the U.S. Federal Reserve and the implicit backing of the Treasury Department.  He cited government programs giving large financial institutions access to zero-cost borrowing as artificially padding their bottom lines.  "There's something of an illusion of profitability," he said.

Jobless claims down

 The Labor Department says there were 432,000 initial jobless claims filed in the week ended Dec. 26, down 22,000 from the previous week's revised 454,000, and the lowest since July 19, 2008, when there were 413,000 claims filed.  A consensus estimate of economists surveyed by Briefing.com expected claims to jump to 460,000.  Jobless claims have been trending downward since the end of March, when they peaked at 674,000, the highest figure since 1982.  4,981,000 people filed continuing claims in the week ended Dec. 19, the most recent data available. That's 57,000 down from the preceding week's revised 5,038,000 claims.  The 4-week moving average for ongoing claims fell by 122,250 to 5,101,250 from the previous week's revised 5,223,250.  However, the fact that employers are running out of people to lay off isn't necessarily a good thing.  The slide may signal that more filers are dropping off those rolls into extended benefits.  The employment picture will continue to improve a  s jobless claims continue to fall, but Tim Quinlan, economic analyst at Wells Fargo, said they will need to drop near 350,000 for positive job growth

Making Home Affordable a disaster

 Critics of the Obama administration's $75 billion program to protect homeowners from foreclosure increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes, and some economists and real estate experts now contend it has done more harm than good.    They say many desperate homeowners have sent payments to banks in efforts to keep their homes, wasting dollars they could have saved in preparation for moving to cheaper rental residences.  Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.  "The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis," said Kevin Katari, managing member of Watershed Asset M

 anagement, a San Francisco-based hedge fund. "We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway."  Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books.  Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.