Shadow Inventory

The term “shadow inventory” refers to real estate properties that are either in foreclosure and have not yet been sold, or to homes that owners are delaying sale until prices improve. Shadow inventory can create uncertainty about the best time to sell a home and when a depressed local market can expect full recovery. Also, it typically causes reported data on housing inventory to understate the actual number of inventory in the market.

Why is this important?

According to the National Association of Realtors, only 15 to 20 percent of the homes that were foreclosed on during the downturn were making their way to the market in 2008 and 2009. The remaining 80 to 85 percent of the homes were bought back at foreclosure and are now owned by the banks. One might ask why the banks would want to own these properties. The answer is both telling and very scary.

Current bank regulations do not require the banks to “mark-to-market” their real estate holdings. Bank management, therefore, would rather continue to book an inflated real estate value and pay the debt service and management costs to hold the property rather than sell the property and book the losses. This is why some markets have no inventory, why banks are still hesitant to lend money and why we are not free from the issues we created in the U.S. and globally by overextending our leverage.

(iStockPhoto)

We have seen a decline in this inventory of about 35 percent from the peak in 2010, however, the last quarter saw a fairly dramatic increase of 9 percent. So which way is the pendulum swinging next? In April of 2012, the finalization of the national mortgage settlement clarified acceptable foreclosure processing procedures giving the banks better ability to effectively foreclose and avoid a lengthy court process. We have seen a rise from $175 billion to $205 billion in the estimated value of the shadow inventory and I am guessing there is more to come.

So what should you do given this scenario?

Consider avoiding investing in banks that hold large real estate shadow inventory. Shares of most of these banks have appreciated substantially this year and these moves are likely not sustainable. If you are looking to sell real estate in the next five years, consider doing it now. Interest rates have begun to rise and this shadow inventory will likely make selling more difficult. We suggest investing new money in real estate only if your timeline is 10 years or more, your liquidity needs are low and you’re able to lock the debt service rate for a long period of time. Invest with caution. I am not suggesting that the shadow inventory issue, our building deficit and our current interest rate environment are going to cause another 2008-like crisis, but these issues are real and are not small numbers. If the regulators forced some of these banks to mark their holdings to prices in the real estate today, losses could be substantial. In short, the banks are certainly clawing their way back but we have a ways to go before it’s safe to wade back into the bank space.

Michael Patrick Jacobs, CFP®, is a Partner at Monument Wealth Management, a Registered Investment Advisory firm located just outside Washington, D.C. in Alexandria, VA. Follow Mike and the rest of Monument Wealth Management on their “Off the Wall” blog which can be found on their website, and on their Twitter, LinkedIn, YouTube, and Facebook pages.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance referenced is historical and is not guarantee of future results.

Selling a House? 5 Reasons You Should Do It Now

Many are talking about why now is a great time to buy a home. Today, we want to look at why it might also be an opportune time to sell your house. Here are the Top 5 Reasons we believe now may be a perfect time to put your house on the market.

1.) Demand Is High

Homes are selling at the fastest pace since November 2009 when the market spiked in response to the home buyer tax credit. The most recent Existing Home Sales Report by the National Association of Realtors (NAR) showed that monthly sales increased 9.7% over the same month last year. Total sales have been above year-ago levels for 22 consecutive months. There are buyers out there right now (buyer traffic is 31 percent stronger than a year ago) and they are serious about purchasing.

2.) Supply Is Beginning to Increase

Total housing inventory last month rose 11.9% to 2.16 million homes for sale. This represents a 5.2-month supply at the current sales pace, compared with 4.3 months in January. Many expect inventory to continue to rise as more sellers escape the shackles of negative equity. Selling now while demand is high and before supply increases may garner you your best price.

3.) New Construction Is Coming Back

Over the last several years, most homeowners selling their home did not have to compete with a new construction project around the block. As the market is recovering, more and more builders are jumping back in. These ‘shiny’ new homes will again become competition as they are an attractive alternative for many purchasers.

4.) Interest Rates Are Rising

According to Freddie Mac’s Primary Mortgage Market Survey, interest rates for a 30-year mortgage have shot up to 3.98% which represents a jump of more than ½ point since the beginning of the year. Even those trying to be the voice of reason on this issue are projecting higher rates. For example, Polyana da Costa, senior mortgage analyst at Bankrate.com said:

“Rates are unlikely to keep going up so quickly and should remain below 5%.”

Whether you are moving up or moving down, your housing expense will be more a year from now if a mortgage is necessary to purchase your next home.

5.) It’s Time to Move On with Your Life

Look at the reason you are thinking about selling and decide whether it is worth waiting. Is the possibility of a few extra dollars more important than being with family; more important than your health; more important than having the freedom to go on with your life the way you think you should?
You already know the answers to the questions we just asked. You have the power to take back control of your situation by putting the house on the market today. The time may have come for you and your family to move on and start living the life you desire. That is what is truly important.

Buying a House: Is Now the Time?

The real estate community is often criticized for always seeming to have a Pollyanna attitude about the housing market. Many believe that the industry’s current call ‘to buy now’ is nothing more than a scare tactic with the sole purpose of creating more commissions for the industry. Let’s take a look at whether or not that advice was good advice over the last year.

The ‘cost’ of a home is determined by two major components: the price of the home and the current mortgage rate. According to the most recent Case-Shiller Home Pricing Index, home values have risen over 10% in the last year. If we look at Freddie Mac’s Weekly Primary Mortgage Market Survey®, the 30 year mortgage rate has increased from 3.67% to 3.91% during that same period.

The table below compares the cost of the same exact house over the last twelve months:

We can see that the advice to buy a year ago made complete financial sense.

What About Moving Forward?

Most experts are not only calling for prices to continue to rise but are also upgrading their projections as the housing market is showing strong signs of recovering.

Regarding interest rates, the 30 year mortgage rate has soared by over a half point already this year and many believe that the increases will continue. Even those trying to be the voice of reason on this issue are projecting higher rates. For example, Polyana da Costa, senior mortgage analyst at Bankrate.com said:

“Rates are unlikely to keep going up so quickly and should remain below 5 percent.”

Short Sales: Are the Numbers Beginning to Slide?

RealtyTrac recently released their Q1 2013 U.S. Foreclosure & Short Sales Report™. One of the more interesting revelations in the report was the decrease in the number of short sales being completed. According to the report, properties not in foreclosure that sold as short sales in the first quarter accounted for an estimated 15% of all residential sales. This is down 10% from the last quarter (4th quarter of 2012) and down 35% from the first quarter of 2012.

Daren Blomquist, vice president at RealtyTrac, was also surprised:

“We expected foreclosure-related sales to be lower given the downward trend in new foreclosure activity nationwide over the past two and a half years, but the decrease in non-foreclosure short sales was a bit of a surprise given the 11 million homeowners nationwide still underwater.”

Certain Markets Still Heavily Impacted

Though the national numbers of short sales are down, there are still some markets that are impacted by this category. Here are the states with the highest percentages of short sales:

• Rhode Island (44%)
• Connecticut (42%)
• Massachusetts (40%)
• Nevada (29%)
• Florida (26%)
• Ohio (24%)

Here are the major markets with the highest percentages of short sales:

• Boston (38%)
• Cleveland (33%)
• Memphis (32%)
• Las Vegas (32%)
• Detroit (30%)

Why the Decrease in Short Sales?

Yet, the overall decrease wasn’t anticipated. Blomquist explains why this may have taken place:

 “Rising home prices in many markets are stunting the continued growth of short sales by reducing incentive for both underwater homeowners and lenders. Underwater homeowners may be willing to stick it out a few more months or even years in the hope that they will be able to walk away with money at the closing table and without a hit to their credit rating, and for lenders a failed short sale may no longer translate into bigger losses down the road given that average prices of bank-owned homes are rising — at a faster pace than non-distressed home prices in many markets.”

Short sales will remain a major segment of the real estate market as 15% is still a very significant number. However, the decrease is further evidence that the housing market is recovering.

How to Short Sale: Chase’s New Process and Timeline

In an attempt to help more consumers who are facing foreclosure, Chase has streamlined their requirements in order to expedite their short sale process. We will cover the basics on the process and timeline in this post. Chase will let you start the short sale process prior to having an offer on your property. However, in order to start the process, you have to show a legitimate financial hardship; meaning your financial picture has changed since you have taken out the loan.

Here are examples of what most lenders and investors accept as hardships:

Hardships that Qualify for a Short Sale:

1. Loss of employment
2. Business Failure
3. Damage to the property(could have been under insured)
4. Death of a Spouse of wage earner
5. Death of a non-wage earner. For example, a family member who was watching the seller’s children and now the seller has to pay to put the children in child care; or they were a financial contributor even though they weren’t on mortgage.
6. Sever illness
7. Inheritance(inherited an underwater property, cannot pay taxes etc…)
8. Relocation
9. Divorce
10. Military Service
11. Payment increase or mortgage adjustment
12. Insurance or tax increase
13. Legal separation
14. To much debt vs income
15. Incarceration
16. Combination of above

These are all pretty self-explanatory but you need to remember that, whatever the hardship, it has to be documented and provable. If there is an income change, you will need to document it to the lender via pay stubs and tax returns; if it is an illness, you will have to provide medical records; divorce – you have to show the divorce decree. Regardless of the hardship, the more information you provide to support the claim the easier it is to show the bank there is a true hardship.  

The very first step in the short sale process with Chase is to gather all of the documents needed for the short sale package. You can go directly to my website to download their package and get information on what you need. You can get it here:

https://www.chase.com/ccpmweb/chf/document/ChaseShortSaleFull.pdf

You cannot start the short sale process with Chase until they receive your financial package. To perform a short sale with Chase, you will also have to list the property for sale. You should have most of your financial package together when you are ready to list your property to avoid any time delays.

Once Chase has your package and you have it listed, they will verify that you qualify for a short sale and they will set up you up with a “list assist professional” that will work with your agent to order a valuation on your property and verify all documents throughout the process. The list assist professional will inform your agent of the value range once it is received and will work with your agent until you receive an offer. it will then be assigned to a negotiator who will review the actual offer.

Here is some information on timelines based on who the investor of the loan is (meaning who actually owns the loan). Please note that these timelines are based on the time it will take after the bank has received a complete package from you.

Timelines based on investor for contract and short sale approval:

• FHA backed mortgage 45-60 days from receipt of complete offer
• Fannie-Freddie backed 60 days for approval
• USDA 60-75 days for approval
• VA 60-75 days for approval
• Portfolio owned (meaning Chase owns the loan) 45-60 days (these are closer to 45 days as Chase does not have to get approval from the investor when they can make the decision in-house).

In order to meet these timelines, it is important that you and your agent start the short sale process prior to having an offer so that:

1. Your documents can be reviewed 
2. Your eligibility can be determined 

Both of these steps have to take place whether or not you have an offer. Chase, like Wells and Bank of America, will review a borrower for short sale eligibility prior to having and offer on the property. For the best results get your package organized early in the process and submit it right away!

Well over a million U.S. homeowners are months behind on payments on government-backed mortgages, raising the risk federal housing agencies will end up facing the cost of managing a fresh flood of foreclosed homes, two government watchdogs said on Thursday.

Some 1.7 million borrowers have missed several payments on mortgages backed by the U.S. government, the inspectors general of the Federal Housing Finance Agency and Department of Housing and Urban Development said in a joint report.

These loan delinquencies represent a "shadow inventory" of homes that could hit the market if foreclosed on, which would need be managed by government-run Fannie Mae (FNMA.OB) or Freddie Mac (FMCC.OB), or some other federal housing agency.

Once seized, these so-called real estate owned properties, or REOs, present significant financial challenges to these government agencies, the report said.

"Not only are current REO inventory levels elevated ... they may rise over the next several years depending on the number of shadow inventory properties that are ultimately foreclosed on," the report stated.

Since the housing market boom and bust, the government has employed billions of dollars to help borrowers manage high-cost loans and stabilize neighborhoods hit by foreclosures. Fannie Mae, Freddie Mac and HUD, which oversees the nation's mortgage insurer, the Federal Housing Administration, have been burdened with a glut of repossessed properties as a result of the housing market collapse.

Not only does the government need to cover maintenance costs, it also needs to hire real estate agents and contractors to rehabilitate and sell the homes. Finding cost-effective ways to deal with the supply poses a challenge, the report said.

"These networks require significant oversight to ensure that they perform effectively and that they mitigate both REO-related expenses and foreclosure's negative effects," the report stated.

The report said the shadow inventory, which is made up of loans that have been delinquent for at least 90 days, is more than seven times the inventory of REOs that Fannie Mae, Freddie Mac and HUD currently own.

"Even a fraction of the shadow inventory falling into foreclosure could considerably swell ... inventories of REO properties," the report warned.

Fannie Mae, Freddie Mac and the Federal Housing Administration are backing about nine out of every ten new home loans. Fannie Mae and Freddie Mac owned about 158,000 REO properties at the end of September 2012, while HUD had about 37,000.

HUD, Fannie Mae and Freddie Mac have all taken steps to shrink their REO inventories, the report noted. Fannie Mae has already launched a pilot program to mitigate the costs of foreclosures, auctioning off some of its properties in bulk to investors with the intention to convert them into rentals.

(The story is refiled after report's authors correct references to number of borrowers in 1st and 2nd paragraphs)

(Reporting by Margaret Chadbourn; Editing by Bob Burgdorfer)