REO Business 2010 February Update

In the past six weeks, I have received several hundred emails from agents all over the country trying to get into the REO business or from existing REO agents trying to get more REO business.

First of all, most if not all lenders/servicers/outsourcers (LSO’s) are low on inventory and will be until the end of 2nd QTR of 2010. This is because of the change in accounting rules and Mark to Market valuation allowing future date values. They have to hold the REO’s for a period in order to use the future date values. This will lead to a controlled release of inventory.

Signing up over and over with the same LSO’s, or harassing various asset managers isn’t going to work and will actually diminish your chances of getting business.
The LSO’s already have more than enough experienced agents in their systems to dispose of the upcoming REO inventory. This is allowing them to trim off many non-performing agents at will.

While BPO’s are an incremental source of revenue. Short sales will more than compensate for the decrease in REO revenue due to the current shortage of REO’s. Short sale properties are in better condition that REO’s and will earn both higher sale prices and higher commission rates.

Your carrying costs for short sales is lower than REO’s and help reduce your overhead. You need smaller staffs, less office space, fewer PC’s as well.

Paying lots of fees in order to sign up for a bunch of agent directories and vendor firms is making them rich, but they don’t have any REO listings to give you. REO listings come from LSO’s.

You will have to sign up with the major online portals if you want to list REO’s, but you must also sign up directly with the banks. Now go back and re-read the 3rd paragraph. They already have enough agents.

So what to do? Go old school. List homes (short sales), re-learn how to work with first time buyers (all buyers actually have to qualify for a loan the hard way, and so will the house, FHA 203K anyone?). Go back to marketing your inner circles, your farms, previous clients, personal contacts.

Real Estate Market in 2010 (Southeast Michigan Area)

2010 should be know as the year of balance, equal parts if you will of foreclosures, short sales and home buyers. I expect that it will take a balanced effort by REALTORS to succeed in the Southeast real estate market.

Foreclosures have set the stage for more realistic home values (more affordable than ever) and short sales will help alleviate the financial problems for people who overpaid on homes purchased between 2000 to 2006. Buyer’s who kept their credit clean and who have jobs will eagerly take advantage of the fantastic deals in the marketplace.

Foreclosures Round 2, the far majority of sub prime defaults have cleared the the decks, although estimates put almost 1,000,000 leftover sub primes hiding on desktops and in file cabinets at the major banks. Many of these have been sitting vacant for as long as 18 months now. Imagine the condition of these REO’s. But on the very near horizon are some almost 2,000,000 ALT A’s, Zero down, 5 year balloon, and they were mostly in the $300,000 to $750,000 range. This wave of defaults should lay waste to home values in the outer suburbs of Metro Detroit (Canton, Novi, Northville, Farmington, Bloomfield, Birmingham, Troy). Even though they are already down considerably from 2006, I expect the home values to pancake by year end.

People who have jobs and who pay their bills on time will be quick to take advantage of the coming deals in the outer suburbs and the recently displaced homeowners in the outer suburbs should make great tenants for all the rentals that have been created in the inner suburbs (Dearborn, Redford, Westland, Garden City, Warren, Hazel Park) since 2006.

Detroit values are going to remain flat for several years due to the overwhelming number of foreclosures and the lack of repaired comps for appraisers. The increasing number of vacant and stripped homes is going to further hold values flat and the fix and flips of the past will not likely be seen for at least 3 years or more until repaired comps exist once again.

Short sales will outpace foreclosures in the next six months and should for the next 18 months at about a 2 to 1 ratio. So agents all are going to need to get additional training to becomes an expert in short sales.

Office staffs and overhead must be minimized and watched very carefully as lower sales prices and longer closing times are going to hold down agent income and profits. I expect to see up to 25% of agents disappear from the business as Board dues and MLS fees come due this next week. The “part time” agents will go away.

Stop bailing out the banks and create jobs

If you want to fix the economy, stop bailing out the banks to the tune of $800 Billion and instead give employers $8,000 tax credits for every full time new hire creating almost 1 M new jobs having a much more significant impact on restarting the economy by increasing home sales, new purchases of consumer goods and services including automobiles. Big banks should fail, the FDIC will step in and seize the mismanaged bank, sell the remaining mess to a financially stable bank who will then better manage the remaining entity and it’s accounts, assets, debts and shareholders.

Let everyone do their jobs without interference

In an effort to stave off future mortgage crisis’s, banks should NOT own real estate companies nor be allowed to sell real estate without going through a REALTOR. Banks should NOT be allowed to select their own appraisers, nor have any influence on the appraisal, and finally, REALTOR’s should NOT be in the BPO business, let appraisers determine values, banks make loans and REALTOR’s sell houses. Everyone can do their jobs without interferences from other parties.

The future of the REO world, well at least the next 6 months

As we the final quarter of 2009, with inventory levels at the lowest point ever for the past 5 years, the major lenders are about to announce another moratorium for the sake of the poor homeowners so that they can stay in their homes through the holidays. What’s that you ask, another moratorium? Sure, this way the banks can further extend the current market conditions and delay economic recovery of the United States. What? Why would they do that you ask? The banks have taken a beating on Wall Street, they don’t want to report the the losses, so last fall they put their little thinking caps on and conspired to create the moratoriums for the sake of the homeowners, then the extended the moratorium month by month until the government changed the rules for writing off losses in late April. Now the banks don’t have to report losses until the properties are assigned to an agent and the BPO’s come in. So in other words if the don’t assign the listings, they don’t have to write off the losses. So that’s why they stopped giving out listings you say. Maybe you thought the banks we letting the market prices recover….HAH…not even close. They are trying to show profits on their books for 2009 so that the shareholders don’t overthrow management. Well now you probably want to know what they are gonna do with all the back logged houses. They are going to start repairing them be cause after sitting vacant for up to 3 years, many of them can’t be mortgaged. The longer the banks keep the housing stock of the open market, the more the condition of those properties will decline. Leaky roofs, flooded basements, MOLD, boarded windows, code violations will slowly deteriorate the properties over time further reducing the values. The condition of the housing stock will quickly erode, further reducing market values long term. After years of avoiding short sales, the banks have finally figured out that a short sales will bring them a higher return than selling an REO, so many of the banks have been pulling people from the REO departments and shuffling them over to the Short Sale departments. While we were in Dallas recently, two of the banks we visited were transferring Asset Managers right in front of us. The banks told us outright to downsize our staff’s, develop short sales departments and reduce our overhead to get through the winter, and expect REO listings to start coming back early next spring, say around March or April.  So take it from me, make changes to your business model ASAP.

Almost 2/3rd’s of all sales in Metro Detroit area are Bank Owned

According to REALCOMP II MLS service, 61.1% of all recent home sales are bank owned homes.  Funny thing about this is that for over two years now, actually, April of 2007, I have been making my opinion well know to anyone who cared to listen, that I thought REO sales would overwhelm the housing market and that I felt that 2/3 rd’s of sales would be the exact percentage it would hit.  I am feeing pretty good about that prediction.

So now it’s time to step up again and I predict that by the time that the ALT’s A’s start to peak in 3rd QTR 2010, we shall expect to see between 75 to 78% of all real estate sales be REO, short sale, or some level of default.

Upwards of 1 Million foreclosures are being hidden

According to several different recent articles, upwards of one million foreclosed homes are being hidden from the real estate market for no one particular reason.  A variety of reasons which include: too many to process, waiting for market competition to diminish, waiting for the Feds to change accounting rules from Mark to Market to a Fair Market Value write of reporting.

The longer the homes remain off the market, the longer the economic malaise will continue.  The banks need to list the properties for sale, just flush them through the system and let the housing prices settle and build a firm base.  When the homes become affordable again, qualified and responsible buyers will purchase them, and begin consuming both goods and services which will restart the economy.

2 Million Unemployed in US since Jan 1 2009

According to Mortgage News Daily, a survey of private employment in the U.S. showed a record 742,000 jobs were lost in March, the worst result in the series history.  Economists had been expecting 663,000 jobs lost in the Automatic Data Processing report. The previous month’s print was revised to -706k from a previous reading of -697k.

At this rate you can expect 10 to 12 million more by the end to 2009.  Is the economy  getting better?  Nope.  Not even close.  The three trillion dollars in bailouts and economic stimulus was completely wasted.  Let the poorly managed businesses fail.  All of them.  It is called free market.  Might have well just given the money to scientific research, cure for AIDS,  cancer,  or helped the poor in Nigeria or Haiti where it actually made a benefit.

In order to solve the economic problems in the US, you need to do one thing and one thing only.  Create jobs, about 20 million of them, right now today.  Put people to work, then they can pay their bills, get loans, refi their house, buy cars, and spend money which drives the economy.

Put 20 million back to work.  Fix the economy.

Not only are buyers walking away from foreclosures, banks too

In a new disturbing trend, both buyers and now banks too, are walking away from foreclosed homes in droves.   It seems that the 2000’s will be known as the walkaway decade where everyone chose to depart from their responsibilities, personal and business, when it became emotionally or financially too difficult to bear.  What is the point of signing mortgage notes, or contracts of any kind whatsoever?  Personal responsibility is becoming too much of an emotional cross, a burden.  Not happy in marriage? Walk away.  Don’t want to pay your mortgage? Walkaway.

View more about this issue: http://www.dsnews.com/index.php/home/news_story/2766

Home prices in Michigan are finding a bottom, for now…

Well after a two year free fall, home prices in some neighborhoods are finally starting to find a bottom. As values have plummeted to below $10,000 in many areas, competition between overseas, out of state and local buyers is causing multiple offer situations and actually pushing up sale prices. It is becoming the norm for multiple offers on almost every new listing, with some buyers paying almost double the initial list price. The cause of this is easy to explain. First, many lenders including Fannie Mae, Freddie Mac and eight of the major banks have been on a foreclosure moratorium since Nov. 1st of 2008. This has reduced inventory levels by as much a 50% in some areas. This decline in the total number of listings, coupled with a major increase in cash purchasing from out of state and overseas buyers, along with increasing local buyer activity has created a bottom for many different areas in Southeast, MI. Local buyers, who have really been absent from buying activity for the past 12 months, are finally recognizing the excellent values in the local marketplace. Older listing inventory, much of which is often in very poor condition, and usually priced way over market, is floundering on the market. These homes frequently are suffering from days on the market exceeding 365 days. In order to sell this aged inventory, banks will need to basically donate these to non-profits, bulk them in packages at a major discount, or sell them for $1.00. As 70% of last years foreclosures have still not yet hit the MLS, I expect when that when a fresh wave of foreclosures is finally released when the moratorium is lifted, values will again begin the march downward towards $1. Per releases by the MBA, 48% of all subprime mortgages are in default or foreclosure, and with the ALT A loans about to come due, a whole new wave of foreclosures is about to wash across the US landscape. Most ALT A loans are in higher value areas, and those areas have been under assault by drastic price declines, so as many as 75% of existing home owners in these areas are going to be severly under water. This will further exacerbate the foreclosure trend as they won’t be able to refinance or sell win time. And don’t forget, commerical foreclosures are close behind, and they loans will be high dollar. Continued declines in consumer spending is forcing many retailers to shut their doors, pulling up stakes and abandoning strip malls and other commercial locations that were having hard times even before the market started to fall out.