Foreclosures are spreading

Thanks for the information Bill, I believe there is opportunity at every downturn in the economy or stock market. There is a reason the Donald Trump and Robert Kyosaki (wrong spelling) have predicted that there will be more millionaires created in the next few years than in anyt other time frame of history and there is also a reason the 2% of the population is in control of 98% of the money! Great post, definitely makes you think...

ty for article

I agree big time with you. It is a mess out there and will continue to be a mess for quite sometime. There is so much info that is being covered up by the big banks, I don't know if we will ever get the right picture on how bad it is...Jan

I agree with you about the fact that there is always opportunity, BUT, you have to make sure that the timing is right. Just make sure that every time you buy something that you have a well thought out exit plan. We never know where in the housing cycyle we are until after the fact. There are plenty of smart people that went bankrupt simply because they were early to the party. Rule #6 in investing states:

"A market's irrational behavior can last longer than your available funds"

Here's a recent article regarding foreclosures in 2011. You'll find these numbers staggering. But it is better to know than bury your head in the sand. Don't let this info discourage you, determine how you can help yourself and other!

http://seekingalpha.com/article/246578-foreclosure-situation-to-worsen-i...

According to RealtyTrac, home repossessions will rise in 2011 from the record one million homes that were repossessed in 2010. There are five million homeowners who are at least two months behind on their mortgages, primarily due to job losses and declining home prices, which pushes more borrowers underwater.
One in 45 households received a foreclosure filing in 2010, for a record high 2.9 million homes. RealtyTrac projects three million foreclosures in 2011, with 1.2 million repossessions. This hidden inventory is on top of the 700,000 homes on the books of banks within the $53.2 billion in Other Real Estate Owned (OREO). It will likely take three years to clean up these unwanted homes and some banks are abandoning OREO properties. This environment will reduce property appraisals, which will eventually filter through to lower home prices.
Foreclosure Players: The Home Owner, The Bank, The Investor
When a homeowner buys a home and takes out a mortgage, he is usually unaware of whether or not the bank holds the mortgage as an investment or has the mortgage pooled into a mortgage-backed security that is sold to an investor. Before the housing crisis began, many mortgages were sliced and diced into mortgage derivative structures sold in the private market, as well as to Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB). Since Fannie and Freddie became government-owned through conservatorship, these GSEs have securitized roughly 90% of mortgage securities, as the private market fell off the map.
This tangled web is one of the major problems in trying to unravel how to help homeowners stay in their homes, and to accurately perform a foreclosure procedure when there is no hope of their doing so.
The Home Owner – May have bought a home he could not afford with a mortgage that he could not understand. As home values plunged, owners owed more than what the home was worth. Defaults resulted when mortgage payments increased because of higher mortgage rate adjustments, or because the homeowner lost his job, or felt screwed by the bank.
The Bank – May have exaggerated how easy it would be for the homeowner to afford adjustable mortgages. Most mortgages were packaged by the bank, entered into the securitization process, and were sold by Wall Street to investors around the world, who thought the mortgage securities were “AAA” rated -- and, in the case of Fannie and Freddie, were backed by the U.S. government, which was not true.
The Investor – The main reason to securitize and sell mortgage structures to investors is to spread the risk of default to a broader group. The problem was the false ratings and assumed U.S. backing of Fannie- and Freddie-backed securities. As a result, instead of investors taking a hit, tax payers have, through the conservatorship and guarantee assumption of Fannie and Freddie, which cost about $150 billion through 2010.
Now state attorneys general are meeting with mortgage securities investors, who want to shield themselves from losses that may result in settlements relative to the foreclosure dilemma. The so-called “too big to fail” banks are in the middle of this, as they risk having to buy back the mortgage securities they sold to investors. I see no problem with this as long as it’s done at a current market price, not at the original price. That’s what makes a market. The investor bought betting on gains, but market conditions have changed due to default and foreclosures, so the investor should simply sell the bonds back to the bank at a current market price, where the investor takes the loss. That’s the free-market solution.
At the end of 2007, the mortgage market totaled about $15 trillion, by some estimates. Of these, FDIC data shows only $2.25 billion were held as investments on the books of our nation’s banks at the end of 2007. At the end of Q3 2010, this asset class was down $364.9 billion or 16.3%. It’s hard to evaluate why mortgages had this huge decline, other than defaults and foreclosures, or packaging loans to Fannie Mae or Freddie Mac. They all did not go into OREO, which rose 338.2% to a record $53.2 billion. This stress in the banking system is a factor in making the foreclosure process even more difficult for the bank.
The bigger problem is how many mortgages are sliced and diced into Notional Amount of Derivatives, which grew 43.5% to $236.4 trillion at the end of Q3 2010. You can’t put Humpty Dumpty mortgages back together again as investors fight over whether they own the front door or even the kitchen sink of the underlying collateral known as the home.
I do not have a solution, and neither does our government, the legal folks sorting through the mess, or the financial market place.

I've noticed as an ex-mortgage broker who maintains contact w/ former clients, the adjustable rate mortgages never seemed like the real culprit to me. So far, the ARMs have kept adjusting down with the interest rates. This lowers the payment so a person who kept their payment consistent is paying more on their principal than before.

I have no problems with ARMS for short term and intermediate term deals. I can show mathematically, it is usually better to go ARM for holdings less than 6 years because of the differential from the 30 yr fixed.

Bill you are correct, ARMS can be a great financing option. The devil is in the details as they say. The ARMs I have seen being foreclosed on in my area were under terms the borrower should never have agreed to. They looked only a the teaser rate initially quoted. One I looked at in the public records was an initial rate of 7.5% which was slightly high for the time. The initial rate was for one year. The mortgage clearly stated that the the rate would be 14.5% as of the date the mortgage was made based on the index used plus the the spread. This particular mortgage could increase by 1% every six months after the first year until it reached the index-plus-spread rate. Those terms virtually assured the borrower's rate and payment would go up substantially over time. It would be workable if the owner was an investor looking to do a quick turn but a for a long-term owner-occupant it was a disaster waiting to happen.

The major problem wasn't that it was an ARM it was an Option Arm with 4 types of payments. You could pay minimum payment, interest only, 30 year, 15 year, and they usually all started with an extremely low interest rate but the fine print was the interest rate changed in one year or when the mortgage was sold. They were pretty much all sold within the 1st month, most you signed both mortgages at one closing and you didn't even realize it.

It's nice to see you on here Bill, sorry we missed our call yesterday. We don't have the snow issue down here. If I need you i will call if not speak to you on Tuesday. Thanks for all your help.