Three Reasons Why Foreclosure Rates Keep Climbing
Hi Everyone,
I'm actually writing to you from Minnesota. Heather and I are going to a family summer camp with her family. It's like stepping back in time!
This morning before we left I read in the paper how the Fed lowered its short term rate for banks to borrow from it by half a percent (to 5.75 percent). The housing market has been on my mind of late. In fact, yesterday I recorded a special online class on it for members of Maui Mastermind Online (see below).
In this eLetter I thought I would share with you an article I wrote for you about a year ago on the rise in foreclosure rates and the three factors that were driving it. It's interesting to see how much of what I observed has come to pass and then some!
Then at the end of this eLetter I'll share some new observations I have about the mortgage meltdown and housing market in general.
I hope you enjoy!
*******************
Three Reasons Why Foreclosure Rates Keep Climbing
REASON ONE: Changing mortgage underwriting guidelines.
There was a time four decades ago that in order to get a loan to buy a home the borrower needed a 20 percent down payment, strong credit, and stable income that was at least three times as high as the mortgage payments. But the world has changed, and so has the lending market.
Today home buyers can get zero down loans with adjustable rate mortgages that cause their loan balance to actually increase every month (called "negative amortizing loans"). In fact, lenders today have loosened up their requirements on credit standards (witness the explosion of "sub prime" loans) and income levels (with many lenders requiring only twice the income of the total home monthly payment).
As you can imagine, this loosening of the financial requirements means more borrowers will default on their loans. They have less equity. They have a smaller cushion to make the monthly payments. And in many instances they have lower credit scores.
Just to be clear on this, I personally think many of the mortgage industry changes are good ones. I love the idea that more people than ever are able to get access to financing to purchase their home. To me this gives ordinary people the chance to build wealth and enjoy the freedom of owning their own home.
But there is a downside to this too, when you add in the societal push to buy the "most expensive home you can qualify for a loan for". This influence I think causes many homeowners to get in way over their heads. Hence the need for investors like you and I to be there to bail out many of them for a fair profit.
In many cases the lenders themselves make this profit possible by accepting less than what's owed (aka: "short sale"). Now don't go feeling to bad for the lenders since most loans are bundled up and sold on the secondary market (i.e. wall street) in such a way that the risks are spread and investors make a high enough rate of return to cover the cost of the defaulting loans. In fact, this financial flexibility and growth of the mortgage industry to source off the loans in collective bundles is what has allowed the lending world to offer so many more potential loans for would be borrowers. Again, in and of itself I think this is a very good thing--for borrowers, for lenders, for investors, and for the country as a whole. It's just when you add in the other element I just talked about along with poor financial fluency that so many borrowers get into trouble.
REASON TWO: Toxic Mortgages
A recent Business Week cover asked, "How Toxic Is Your Mortgage?" (September 6, 2006). In the 14-page feature article the Business Week reported on the alarming rise in "option ARM loans". These are adjustable rate mortgages that offer several payment options to the borrow, including one option, called the "minimum payment" that is less than the cost of the interest so that the loan grows bigger every month. According to the article, up to 80 percent of all option ARM borrowers make only the minimum payment!
In 2005, Countrywide Home Mortgage (the nation's number one mortgage lender) had a 500 percent increase in "option ARM" loans! According to the article more than 20 percent of all option ARM loans in 2004 and 2005 were worth less than the outstanding loan balance! And if the real estate market fell by just 10 percent that number would double to 40 percent!
Are you getting a sense of why in earlier wealth tips I suggested that prudent real estate investors would be ready to buy with cash? There will be a lot of properties that are in need of saving. Shortsales, as a technique to buy properties in foreclosure where the lender accepts less than what is owed just to get the defaulting loan off its books and make the best of a negative situation, will be one of the most important buying strategies for investors to master.
And if that wasn't enough, in 2005 lenders gave 43 percent of first time buyers loans for 100 percent of the purchase price (National Association of Realtors) leaving these homeowners vulnerable to the slightest economic quiver.
REASON THREE: A Shift in the Real Estate Market
The headlines are everywhere. The cover of The Economist read, "Has America's Housing Bubble Burst?" (August 26, 2006). USA Today reports about the declining real estate market.
What's happening?
The answer is that another market cycle is playing out in the real estate market. The huge growth of real estate (from 2000-2005 the total value of American homes skyrocketed from $9 trillion to $22 trillion) was drastically slowed and in many parts of the country, especially the Midwest, is declining in value.
When you add this decline in the real estate market to the loose lending trends of the past decade what you get is a recipe for a massive increase in opportunities for foreclosure investors.
*************
Well, reading through that past article you'll see how much has happened. Countrywide announced a few days ago that it has totally tapped out its line of credit. This is basically the biggest mortgage lender in the country saying that it is in bad financial shape!
The subprime default rate is 15 percent! And there are currently over 1 million home owners behind on their payments in the U.S.!
I see this as a time of great emotional extreme, and any time you have a big swing in emotional perception in a market there are opportunities for those people who have the experience and skill to intelligently invest in the market. I see this same opportunity happening over the next 12-24 months in the foreclosure market.
In fact, I just recorded a special Online Workshop on this very subject called, The Sub-Prime Meltdown and Foreclosure Opportunities. In it I'll share with you what I see to be the best opportunities for savvy investors in the residential real estate market. In it I cover the 3 factors that have combined to make now a time of huge opportunity to invest in foreclosures. Plus you'll learn bottom-line suggestions for taking best advantage of this window. Members click here to access it.
Not a member yet? No problem, click here for a free 30-day trial membership. After that your membership is just $9.97 per month auto-billed to your credit card. Each week we add cutting edge updates to the site just for members. You can cancel at any time (but why would you want to?)
Well that's it for this eLetter. I hope you enjoyed the ideas on the foreclosure and housing market. Take care and wish me luck at camp with my family!
My best to you,
David
P.S. For those of you who signed up for your free trial membership to Maui MastermindTM Online last time, thank you. What are the rest of you waiting for! Go ahead and take me up on this free 30-day trial offer. If you don't like it you can cancel and you'll never pay a dime. Plus you'll get to keep the $495 downloadable wealth course that new members like you get as a free gift just for trying it out! Start your free 30-day trial membership right now!
P.P.S. If you enjoyed this eLetter why not forward it on to a friend? You have my permission to post it on the web or email it out or add it to your company's eLetter. All I ask is that you don't edit it down and that you keep the links active.
I'm actually writing to you from Minnesota. Heather and I are going to a family summer camp with her family. It's like stepping back in time!
This morning before we left I read in the paper how the Fed lowered its short term rate for banks to borrow from it by half a percent (to 5.75 percent). The housing market has been on my mind of late. In fact, yesterday I recorded a special online class on it for members of Maui Mastermind Online (see below).
In this eLetter I thought I would share with you an article I wrote for you about a year ago on the rise in foreclosure rates and the three factors that were driving it. It's interesting to see how much of what I observed has come to pass and then some!
Then at the end of this eLetter I'll share some new observations I have about the mortgage meltdown and housing market in general.
I hope you enjoy!
*******************
Three Reasons Why Foreclosure Rates Keep Climbing
REASON ONE: Changing mortgage underwriting guidelines.
There was a time four decades ago that in order to get a loan to buy a home the borrower needed a 20 percent down payment, strong credit, and stable income that was at least three times as high as the mortgage payments. But the world has changed, and so has the lending market.
Today home buyers can get zero down loans with adjustable rate mortgages that cause their loan balance to actually increase every month (called "negative amortizing loans"). In fact, lenders today have loosened up their requirements on credit standards (witness the explosion of "sub prime" loans) and income levels (with many lenders requiring only twice the income of the total home monthly payment).
As you can imagine, this loosening of the financial requirements means more borrowers will default on their loans. They have less equity. They have a smaller cushion to make the monthly payments. And in many instances they have lower credit scores.
Just to be clear on this, I personally think many of the mortgage industry changes are good ones. I love the idea that more people than ever are able to get access to financing to purchase their home. To me this gives ordinary people the chance to build wealth and enjoy the freedom of owning their own home.
But there is a downside to this too, when you add in the societal push to buy the "most expensive home you can qualify for a loan for". This influence I think causes many homeowners to get in way over their heads. Hence the need for investors like you and I to be there to bail out many of them for a fair profit.
In many cases the lenders themselves make this profit possible by accepting less than what's owed (aka: "short sale"). Now don't go feeling to bad for the lenders since most loans are bundled up and sold on the secondary market (i.e. wall street) in such a way that the risks are spread and investors make a high enough rate of return to cover the cost of the defaulting loans. In fact, this financial flexibility and growth of the mortgage industry to source off the loans in collective bundles is what has allowed the lending world to offer so many more potential loans for would be borrowers. Again, in and of itself I think this is a very good thing--for borrowers, for lenders, for investors, and for the country as a whole. It's just when you add in the other element I just talked about along with poor financial fluency that so many borrowers get into trouble.
REASON TWO: Toxic Mortgages
A recent Business Week cover asked, "How Toxic Is Your Mortgage?" (September 6, 2006). In the 14-page feature article the Business Week reported on the alarming rise in "option ARM loans". These are adjustable rate mortgages that offer several payment options to the borrow, including one option, called the "minimum payment" that is less than the cost of the interest so that the loan grows bigger every month. According to the article, up to 80 percent of all option ARM borrowers make only the minimum payment!
In 2005, Countrywide Home Mortgage (the nation's number one mortgage lender) had a 500 percent increase in "option ARM" loans! According to the article more than 20 percent of all option ARM loans in 2004 and 2005 were worth less than the outstanding loan balance! And if the real estate market fell by just 10 percent that number would double to 40 percent!
Are you getting a sense of why in earlier wealth tips I suggested that prudent real estate investors would be ready to buy with cash? There will be a lot of properties that are in need of saving. Shortsales, as a technique to buy properties in foreclosure where the lender accepts less than what is owed just to get the defaulting loan off its books and make the best of a negative situation, will be one of the most important buying strategies for investors to master.
And if that wasn't enough, in 2005 lenders gave 43 percent of first time buyers loans for 100 percent of the purchase price (National Association of Realtors) leaving these homeowners vulnerable to the slightest economic quiver.
REASON THREE: A Shift in the Real Estate Market
The headlines are everywhere. The cover of The Economist read, "Has America's Housing Bubble Burst?" (August 26, 2006). USA Today reports about the declining real estate market.
What's happening?
The answer is that another market cycle is playing out in the real estate market. The huge growth of real estate (from 2000-2005 the total value of American homes skyrocketed from $9 trillion to $22 trillion) was drastically slowed and in many parts of the country, especially the Midwest, is declining in value.
When you add this decline in the real estate market to the loose lending trends of the past decade what you get is a recipe for a massive increase in opportunities for foreclosure investors.
*************
Well, reading through that past article you'll see how much has happened. Countrywide announced a few days ago that it has totally tapped out its line of credit. This is basically the biggest mortgage lender in the country saying that it is in bad financial shape!
The subprime default rate is 15 percent! And there are currently over 1 million home owners behind on their payments in the U.S.!
I see this as a time of great emotional extreme, and any time you have a big swing in emotional perception in a market there are opportunities for those people who have the experience and skill to intelligently invest in the market. I see this same opportunity happening over the next 12-24 months in the foreclosure market.
In fact, I just recorded a special Online Workshop on this very subject called, The Sub-Prime Meltdown and Foreclosure Opportunities. In it I'll share with you what I see to be the best opportunities for savvy investors in the residential real estate market. In it I cover the 3 factors that have combined to make now a time of huge opportunity to invest in foreclosures. Plus you'll learn bottom-line suggestions for taking best advantage of this window. Members click here to access it.
Not a member yet? No problem, click here for a free 30-day trial membership. After that your membership is just $9.97 per month auto-billed to your credit card. Each week we add cutting edge updates to the site just for members. You can cancel at any time (but why would you want to?)
Well that's it for this eLetter. I hope you enjoyed the ideas on the foreclosure and housing market. Take care and wish me luck at camp with my family!
My best to you,
David
P.S. For those of you who signed up for your free trial membership to Maui MastermindTM Online last time, thank you. What are the rest of you waiting for! Go ahead and take me up on this free 30-day trial offer. If you don't like it you can cancel and you'll never pay a dime. Plus you'll get to keep the $495 downloadable wealth course that new members like you get as a free gift just for trying it out! Start your free 30-day trial membership right now!
P.P.S. If you enjoyed this eLetter why not forward it on to a friend? You have my permission to post it on the web or email it out or add it to your company's eLetter. All I ask is that you don't edit it down and that you keep the links active.
posted by David Finkel at 2:24 PM
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