There’s a multi-factorial equation brewing out there that is going to impact real estate investors. 

Concerns about flatting property prices tend to get the most press time, along with the ongoing sub-prime lending soap opera. And we’re all keeping an eye on interest rates and hang on Bernanke’s every word. But in my opinion the real story will be how all these factors impact all those risky loans out there, and this is a die that has yet to be cast. 

First American CoreLogic recently released a study on Mortgage Payment Reset and the potential impact that it will have on our economy. Note that First American CoreLogic is an arm of First American – and many visitors will be familiar with First American Title, one of the nation’s largest Title companies. The point being: just like the National Association of Realtors the title industry has a dog in this fight so be careful about taking all of CoreLogic’s conclusions without a bit of scrutiny. But that said, there’s a lot of good data in this report. 

Here’s something that jumped out at me. In 2006 lenders issued $200 billion in ARMs w/ their first reset in 2006. Of that $200 billion worth of quick reset mortgages the vast majority was at super-low teaser rates of less than 2%. Seemed like a good idea at the time: rising prices and brisk home sales made the risks easier to stomach.  Now that market has cooled those 2006 resets are causing problems for many buyers who were overstretched in the first place, and that’s what’s triggering the current wave of foreclosures. 

But, there’s more to come. Most of the ARMS originated in 2006 w/ 2008 resets ranged from 6% to 9% initial rates. Sub-prime territory. And these folks, based on CoreLogic’s assumptions, will be facing increases of from 30% to 50%. The second half of this story is that 23.9% of ARMs originated in 2006 have negative equity, versus only 10.3% of fixed rate loans taken in the same period. 

So not only were ARMS used by the most vulnerable buyers, they were also more than twice as likely to be used for properties in which the owners had no equity. The punchline: during the run-up ARMS were used as an instrument to buy homes that people couldn’t really afford. 

The New York Times ran an interesting article today advising those homeowners who are about to get into trouble to negotiate with their lenders. Many owners don’t realize what we do as real estate investors: the bank doesn’t want your house. Foreclosure is a disaster for the homeowner, but it’s no picnic for the bank. Expect troubled owners to take a page out of the short-seller’s playbook.

I wrote recently about how I was annoyed at USAA's excessive fees for pre-approving a mortgage (fifty buck fee to fax me, their member of seventeen years, a mortgage pre-approval.)

Well I decided to give 'em another chance.  I actually want to be a USAA customer.  I've been with them for seventeen years.  So now that I have a property under contract I gave them a call for a quote.

Yeah, they'll quote me a rate.  But first I'd need to fill out an application for a $350 fee.  And if I don't like the rate?  That's fine - I could simply go with another lender and they'll keep my $350.

What?

So unfortunately this is the second and last strike for USAA as a mortgage lender (this ain't baseball).  Was hoping to be writing a happy post about how the company that serves our nation's servicemen and women came through in the end, but unfortunately it wasn't meant to be.  Oh well.   Looks like I'll be going with Wells Fargo (who I've also done business with in the past, and who treats me like a repeat customer.)

Note: I got a much cooler poll widget from Pat Kitano than the one I was previously using, so I'm trying it out.  If you voted previously it's been deleted, so feel free to vote again.  It's neither fair nor scientific, but hey this is just a blog.  Don't demand a recount. 

Related Posts:

•  Bernanke & Co. shrug at the sub-prime meltdown
• More woes for the sub-prime mortgage market :: What it means for investors
• Sub-Prime lenders take a hit

The Creative Real Estate (CRE) Online bulletin board is a good reference for real estate investors.  You'll see all sorts of discussions there - relevant and irreverent.  It's a fun place to hang out, and every now and then I get a new point of view that makes me look at things differently.  But in all things in life you have to be a discriminating consumer of information - especially the unfiltered stuff that you get on a public online forum. 

Also, be aware that the website sells courses (many costing hundreds of dollars) which I categorically don't recommend - so don't take this post as an endorsement of anything that they're selling.  But make up your own mind, and I'd be interested in any feedback that anyone might have. 

The Federal Open Market Committee kept the fed funds rate target rate at 5 1/4 . Lots of the standard boilerplate comments made it into the short press statement that they put out after the meeting:

• Reference to inflation concerns:  check
• Reference to housing market concerns: check
• Reference to economic expansion: check

Notably absent: any reference to the ongoing meltdown in the sub-prime market.  Perhaps they're simply trying to avoid throwing more gasoline on the fire, but the non-cynical view is that the sages at the Fed just see this as more noise in the data. 

For now investors should still be concerned that the fall-out of the sub-prime train wreck might hit the low end of the market as liquidity dries up and pulls buyers out of the market...but...

...it remains possible that this shake-up just weeds out a few of the more aggressive of the sub-prime lenders - bad apples with flawed business models.  Like a forrest after a fire the system as a whole will be healthier after the purge, and  the surviving companies will hop in to pick up the slack.  To be determined...

I was recently interviewed by Dave Dugdale who runs Rentvine.com, an online resource for landlords and rental applicants. RentVine lets landlords post their vacancies for viewing by perspective tenants. New start-ups like Dave’s and aggregators like RentMarketer are filling a much needed niche in the industry by allowing landlords to use technology to connect directly with applicants. This is a good example of technology bringing transparency and efficiency to the market.

Check these two sites out. And if you’re interested in the interview you can listen in the player below. 

I’ve been a USAA member for seventeen years, since I was a junior at West Point (USAA is the financial institution dedicated to serving our Armed Forces). Great service. Always. That’s why I’ve stuck with them for all these years on an almost no-bid basis, and have done a number of mortgages there. 

I’m in the middle of a 1031 exchange – selling a property and putting the proceeds into a tax deferred account to invest in another property. I’ve done the sell part, now I need to buy something. 

I put offers in on three small multi-family properties this week and needed pre-approvals to submit along with the contract. So I called USAA. The fee to fax me three pre-approvals: $150 bucks. $50 bucks per property, which would be refunded only on those contracts that closed and were financed via USAA. 

I called PHH mortgage. They took my info and faxed me the three pre-approvals for free. And fast.  I’ll do the loans with them. 

Strikes me as peculiar that USAA would chase off a customer w/ great credit and a seventeen year track record. I wrote them a letter of complaint; I’ll let you know if I get a response.  

In January I announced a resolution for the New Year to sell a high-end property that had accumulated some equity and reinvest in a multi-family that generates better income. 

Well the first part of that mission has been accomplished; I sold the property, a three-story townhouse loft.  And what does that have to do with the headline on this post?  Well it highlights a couple of things that investors often overlook when screening for tenants.

1 :: Your tenant is a potential buyer.  I ended up making this sale to the tenant who was in the property.  This has some major advantages. 

Easier and cheaper for you :: No vacancy period.  No showings.  And no real estate agent – which means no commission. 

Easier and cheaper for the buyer :: No relocation costs, no inconvenience of moving

When the stars line up like this it tends to make it easier for the two parties to negotiate mutually beneficial terms.  So when you’re screening your tenants give extra points to applicants who might be potential buyers.  Note: (I’m not a rent to own fan – I’ll talk about this an another post soon.)

2 :: If you’re using a real estate agent to find a tenant make sure there’s not a clause in the contract which stipulates that she can come back and demand a commission in the tenant decides to buy the place from you in a year or two.  This is a flat non-starter for me.  If your agent demands that this is included then find someone else.  Going rate for placing a tenant here in Houston is one month’s rent – fair enough – but I don’t expect to pay the agent a big windfall in a year or two if I manage to build a relationship with the tenant and later negotiate a sale. 

Note:  as an investor you want to work with an agent who values your repeat business, not one who is trying to squeeze every cent out of each deal that you do.  Got a good agent (like I do)? Well share and let other investors know. 

You might notice our new look.  Some of it is eyewash (oooh....new layout!) but you'll also find some new functionality, especially in the blog.  Our previous layout was based on a forum platform but now we've come into compliance with the rest of the blogging universe and made it easier to comment. 

Another new feature is our preferred vendor page.  One benefit of the proliferation of blogs dedicated to real estate services is that we can get acquainted with service providers around the country.  Interestingly, we don't run into too many who focus on real estate investors - but when we run across a professional who shows some insight we'll put 'em on this list.  So check it out, and let me know if there's someone that you work with that makes your life as an investor easier. 

Earlier this month I commented on how players in the sub-prime market were taking a beating.  New Century Financial, the #2 lender to borrowers with weak credit, was emerging as the poster child for the troubles that this market sector was facing.  Based on unexpectedly weak 4^th quarter numbers the company’s share price lost more than a third of its value, dropping from the $30’s to the $20’s.

This, as it turned out, was not a buying opportunity; in fact it was only the start of the bad news.  Today New Century came out with statements which draw into question the company’s future viability.  Wall Street responded decisively, further selling off the company’s stock and driving it down to the low single digits.  Failure to meet filing deadlines may trigger repurchase obligations with New Century will be unable to satisfy, an event that could send the company into a death spiral.