This post is written by guest contributor Ted Akers of Investor Funding Solutions, LLC. Please visit Investor Funding Site for more information on transactional lending.
Because they will continue to be a VERY significant part of real estate investing for at least two years. It is all in the numbers, and “the numbers do not lie”.
Real estate website Zillow.com says one of every five U.S. home owners owe more on their mortgage than their home was worth in the fourth quarter. YES, One out of every Five – or 20% of all mortgages have some potential as short sale candidates. U.S. home values declined again in the fourth quarter, as the Zillow Home Value Index fell 5% year-over-year. It was the 12th consecutive quarter of year-over-year declines. “The prevalence of markets in or near a double-dip situation shows that we are not yet at the bottom, in terms of home values,” according to Stan Humphries, chief economist for Zillow.
The Federal Housing Administration (FHA) reports that the percentage of loans it insures which are at least 90 days past due hit 9.12% at the end of 2009. This is up from 6.82% one year earlier – a whopping 34% increase. For those not familiar, a 9-10% delinquency rate is of significant concern. FHA currently insures about 30 percent of all new loans for home purchases. AND, FHA just suspended their 90 day no-flip rule allowing Short Sale or REO investors to sell quickly to an FHA buyer.
According to DSNews delinquencies on prime Jumbo loans continue to climb. Fitch Ratings Service says they could reach 10 percent as early as next month, as serious delinquencies rose for the 32nd consecutive month. According to Fitch prime Jumbos at least 60 days past due swelled to 9.6 percent in January, up from 9.2 percent in December 2009. The company says delinquencies accelerated in 2009, nearly tripling over the course of the year. States with the highest volume of prime jumbo loans outstanding are California, New York, Florida, Virginia, and New Jersey and comprise approximately two-thirds of the $381 billion Jumbo loan market. So, 10% of $381 Billion equals $38 Billion in Jumbo loans in trouble. Florida saw the biggest monthly jump of these states. It holds only 6 percent of the market share, but now has the highest serious delinquency rate at 16.6 percent.
However, of primary focus to investors and the market is the approximately $2 Billion per month of Option ARM’s scheduled to “recast” beginning in March 2010 and which will climb to $6 Billion in the month by October 2010. From there “recasts” will gradually climb to a peak of approximately $13 Billion in October 2011 and will taper down to zero by September 2012. A “recast” of an Option ARM is similar to a reset of a traditional ARM. However, a major difference is that the likelihood of an Option ARM mortgage being underwater compared to actual value versus a traditional ARM is significantly higher. Moodys has previously reported that 93% of Option ARM homeowners have chosen to make payments under their “four payment options” that adds principal to their mortgage balance every month, making a potential refinance very unlikely. Moodys also reported that the average payment increase at the time of a recast is 63%. How many homeowners paying $1,000 per month can absorb a new payment of $1,630? Alt-A ARM resets, which are typically stated income mortgages, also nearly mirror the monthly volume of Option ARMS in these same time periods. In my opinion Option ARM mortgages present significant potential for short sale investors.
Short sales are not for all investors, as they can be complicated and time consuming. However, the current numbers of short sales are presenting investor opportunity; and I believe their total numbers will continue to grow until early 2012. To avoid frustration and excessive time spent with banks I recommend that most, and especially new, investors outsource your short sale negotiations to experienced loss mitigation or short sale negotiation companies. I can recommend experienced and successful negotiation companies if you do not have one.
Ted Akers and Investor Funding Alternatives, LLC provide 100% purchase financing plus closing costs for Short Sale or REO investors when you have an end-buyer under contract. Investor financing for flip transactions can be accessed at the website www.InvestorFundingSite.com .
