Real Estate's Fault Line

There is plenty of blame to pass around concerning who is at fault for the real estate bust that is making headlines almost every day in major publications, nightly news and coffee shop chit chat.

I’m going to boldly be a complete pansy and just spread the blame around to everyone.
· Consumers: Know the terms of your loan! Can you afford the monthly payments? Is your loan going to adjust? If so, when? What is the margin? What is the cap? Know your worst case scenario!
· Mortgage Brokers: Keep your buyer’s interests and welfare the number one priority! Very simple. Ask some questions. Educate buyers on loan products. Be a resource!
· Wall Street: Don’t demand loans that aren’t proven performers!!

Whoa! How on earth does Wall Street fit into the mix? Here is how the loan process works.
1. Loan officers take loan applications and send them in to mortgage companies/banks which underwrite (review) the file & fund the loan. At this point, the consumer has closed on their home and the loan process is completed, right?
2. Not even close! Most banks are not portfolio lenders. In other words, most banks bundle millions/billions of dollars in loans sell them as mortgage-backed securities.
3. At this time, the new owner of the mortgage can use the securities as collateral to issue bonds for financing other deals! Homeowners pay the interest that covers interest.
4. These securities are rated by risk groups (tranches) for investors. Riskier loans pay more.
Now you can really see where the demand for risky loans came from. A LOT of people made a ton of money. Mortgage brokers, banks and Wall Street Investors.

The problem occurred when homeowners were unable to make payments for various reasons. Suddenly, the money needed to pay bond interest is not there! At this point Wall Street starts slamming doors closed. Mortgage companies have no one to sell their loans to and lack the capital to hold onto billions upon billions of dollars in mortgages. Doors close! Companies disappear over night.

People who were eligible for loans 9 months ago can’t even come close to qualifying today. What does this mean for Denver??

We have a huge inventory of homes on the market right now. We have fewer eligible buyers. The worst is not over in the housing market! We’re looking at a couple more years of slow real estate.

Time Magazine recently did a nice article on Denver real estate. Check it out.
http://www.time.com/time/magazine/article/0,9171,1653635,00.html

Hate Your Neighbor?

I can think of a couple of good reasons to really dislike your neighbor.


1 - Sold on the fact that the development would take off, you purchased in the first phase. The development tanked and your neighbor bought the same house 8 months later for $50,000 less. That hurts & leads to an awkward conversation at the next barbeque.

"I love your house! Did you guys get in when the builder was slashing prices and giving away upgrades as incentives?"
"No. We paid $50,000 more and didn't get jack squat for upgrades. I'm going to go grab a drink (perhaps a shot or five) right now."

The good news is, you really don't have to harbor the anger towards your immediate neighbor for long. Why?

2 - From your porch, you can see a new development being built. That's great right? The area is taking off!! Long term, that may be true. If you want to sell your house in the next five years a different picture is painted. You will be competing against new builds! In other words, you were $50,000 upside down to start with and now you might be $70,000 upside down because in order to sell, you'll have to beat the prices of new homes!!

Bottom line, new home sales are up, but prices are not. The market remains in turmoil. More houses + Fewer buyers = Struggling housing market

http://articles.moneycentral.msn.com/Investing/Dispatch/070824markets.aspx

Don't Buy New Homes!!!

I'm going to write a book on this. I can't emphasize it enough in today's market!!

DON'T BUY NEW HOMES in NEW DEVELOPMENTS where there is a LARGE INVENTORY!!

You have scrimped and saved.
You've budgeted.
You've hunted.
You've found your dream home!!
It's brand new!
It's in the perfect location!
It's brand new!
It has stainless steel appliances!
It has beautiful brushed nickel fixtures!
It's brand new!

It could be one of the worst investments you make. It is without a doubt, a very risky investment!

Folks, your home is one of your biggest investments! Treat your home as an INVESTMENT!

You don't have to be purchasing a fix and flip, rental or commercial property to be a real estate investor! Your home is the biggest and most important real estate investment 99% of American's will purchase!

The next article will detail some of the reasons to avoid new construction and the risks associated with it. Below, is a link to a horror story I have heard all too many times. The story of a new home, a new homeowner and the upside down blues.

http://www.bankrate.com/nltrack/news/real-estate/20070812_adviser_new_home_price_cuts_a1.asp?ec_id=brmint_ns_mortgage_20070823

Not Ugly for All...

I spend a great deal of my time working with people in the mortgage industry. It's easy to get caught up in the headlines and horror stories of lender upon lender shutting their doors.

One company paid for happy hour and as it ended they sent text messages to all of their employees announcing that they didn't have a job anymore.... Ouch.

I firmly believe that the mortgage and real estate industry faces a couple of challenging years ahead as loan programs reemerge and real estate inventories dissipate.

Sometimes, I forget about the people who all of these market woes will provide a tremendous opportunity!

1 - 1st time buyers.
IF you know you're going to stay in the property for a few years.

2 - Investors
IF you are ready to deal with renters and all the hassles associated for the next four or five years and have some cash reserves.

Another One Bites the Dust....

Accredited Home Lenders is the newest lender to all but close its doors.

They are laying off 1,600 of their 2,600 workers.
They are closing their retail doors.
They are cutting back wholesale loan products.

In other words, there are enough people left to answer the phones and tell mortgage brokers that they can not do any loan that isn't conforming.

I spoke with a sales rep for a mortgage company about a file. His rates were a little off so I'm taking the loan someplace else. I jokingly said,
"Do me a favor and stay in business. You'll be the only ones left and nobody will care what your rates are!"
"I'm scared. I've already got my resume ready in case we shut our doors," he replied.

Bottom Line: The mortgage business is scary. We're facing a couple of difficult years.

http://biz.yahoo.com/ap/070822/accredited_home_lenders_restructuring.html?.v=2

If You Think Michael Vick Has It Bad.....

It could be worse...

Today, Capital One closed a subsidiary, GreenPoint Mortgage. For the 1,900 people who just lost their jobs, Michael Vick's guilty plea is neither here nor there.

The mortgage and real estate industry are in deep trouble and it continues to get deeper. The ingredients are creating a perfect storm of sorts in real estate.

1- House inventories are high which is putting a lot of downward pressure on the market.

2- Loan programs are disappearing. 1st time buyers can no longer buy and those wishing to sell their homes and move up are unable to do so.

The next couple of years are going to be challenging.

http://online.wsj.com/article/SB118764159728403271.html?mod=MKTW

Who On Earth is Buying???

Some interesting facts (all statistics national):

- 36% of home buyers are 1st timers this year - down from 40% last year

- 22% of all buyers are single women - 9% are single men

- Homes are on the market for an average of 6 weeks

Some disheartening statistics (all statistics courtesy of Matt Hanna):

- My condo has been on the market for 5 weeks.
- It's still for sale!

Some statistics of hope (courtesy of real estate agents):

- My condo is priced right according to feedback from agents who have shown the property.

Credit Meltdown?

I'm not a Wall Street expert. I'm a mortgage broker! My primary concern on a daily basis is rates! I want to get the best rates possible for my clients. Essentially, I utilize the bond market to try and get my clients the best rate.

I'm not a financial genius, but I have seen the subprime mortgage industry all but disappear over the past 8 months. There has been considerable concern. Sensationalists speak of financial mayhem in the stock market because of these poorly performing loans. Other sensationalists imply that everything is just fine. (I hate to admit it, but these are typically people in the mortgage and real estate industry.)

I think the truth is somewhere in the middle.

Are subprime loans a mess? ABSOLUTELY!

Are subprime mortgages and easy credit going to destroy the world? I highly doubt it. While the mortgage sector is seeing drastic changes which are affecting the rest of the financial world, one must keep in mind that subprime mortgages are a very limited product within the entire U.S. economy.

Subprime mortgages may affect the stock market to a lesser degree.

We're not talking about the end of the world here folks!

Par for the Course?

I don't know why, but I'm a big fan of sports analogies. Perhaps it is because sports are relevant to me and so sports analogies are a little bit more relevant.... Who knows. Whatever the reason, here we go.

The game of golf is horrible. I love it, but I spend at least half of the round flat out ticked off. The worst part of the game is the simple fact that I alone am responsible for my plight...

I think the terms "What was that?" and "Are you kidding me?" are a couple of my favorite golf phrases. (I must confess, at times there are some four letter words that sneak into the mix along with occasional mistreatment of my golf clubs, but I try and keep those to myself...)

I think its interesting how scoring well works. It doesn't take any great shots. It takes consistency.

We came across a par three. It was about 220 to the pin. I smoked my tee shot and rolled onto the green. My first thought... "Par!"

Wrong... As it turns out my 25 foot putt had about 4 feet of right to left break in it. I blew my first put way past the hole. I faced a 13 footer for par and left it short about 4 feet. I pushed my bogey put about an inch left. I took a 5!

Seeing opportunities to score well explode before your eyes is tough.

Scoring well takes the complete package. It doesn't take any great shots. It requires consistent play and wise course management.

If my business were a golf game, I can't help but wonder how I would be scoring...

Golfing in The Dark

This morning I had the opportunity go and play little bit of golf with the managing broker of a real estate company, mortgage broker and a very successful real estate investor. Here is what I learned....

1 - 5:30 am is too early. Obvious, but true.

2 - Golf scores do not equal business savvy.

3- I'm horrible. 3 putts are bad, but what on earth is a 4 putt?

I also took some time to watch these very successful businessmen. Here are some of the things I noticed...

1 - Their phones started ringing about 7 a.m. and didn't stop. (I thought about texting Tanna just to ask her to call me so I could feel a little bit more important.)

2 - They play golf before sunrise because they don't have time during the day.

3 - Much of their business is built on relationships and contacts.

4 - Both men talked about putting the kids to bed last night and then finishing up their workday on the computer returning emails and preparing for the next day.

Lesson Learned:
These guys are loaded living in million dollar homes. They are successful. They are not content! They work hard. They work long hours. They put in the time and energy required to be successful! Self employment offers great opportunities and freedoms, but it comes at a price. Forget the 9 - 5 with 15 minute breaks and hour lunches! Pay the price!