Appearing on a recent episode of “Dialogue with Jim Doti”, RealtyTrac CEO James Saccacio cited a number of factors for the more than 60 percent year-to-year increase in foreclosure activity in September 2006. Chief among those — local economic conditions, poor planning for the future by home buyers, and rising interest rates.

Now the stage is set. The nation’s foreclosure total already broke the 1 million glass ceiling in October, and just how high foreclosure levels will go in 2007 is open to debate depending on how steep one believes the downturn will be.

“When I got into this business, back in 2000, defaults were about 1 percent of all first mortgages. Today we’re at 1.5 percent. While it’s not a large number, it’s still a significant move. Do I think the economy is going to crumble? No! Will (the foreclosure rate) go to 2 percent? We’ll have to wait and see,” Saccacio told Doti, an economist and president of Chapman University.

For Esmael Adibi, executive director of the A. Gary Anderson Center for Economic Research at Chapman University, the key concern is all those people who signed up for those “exotic” adjustable-rate mortgages in 2005 and thereafter. In California, for example, 27 percent of all mortgages were so-called “option ARMs,” where the buyer pays 1 percent interest and the underpaid amount gets added to the loan’s principal.

“Our concern is with interest rates not going down, with wages growing very slowly, employment growing slowly, we’re going to see increases in Notices of Default and ultimately foreclosures. The magnitude is very hard to project,” Adibi said.

The problem with so many people signing up for these adjustable loans, according to Saccacio, is that they don’t have enough money set aside for a rainy day if the loan’s interest rate moves higher. And with increased inventory levels and longer marketing times around the country, the prospect of distressed homeowners being able to bail themselves out is statistically against them.

“If you all of a sudden have inventory to sell and the length of time to sell goes up, people with problems are not going to have the ability to move the asset quickly,” Saccacio said. “Sometimes people operate out of fear.”

Expectation is a key factor in the movement of the real estate market up or down. When people expect the market to keep appreciating, prices have gone up 15-20 percent. But now, the level of pessimism will determine how rapidly and how steep the reductions in prices are going to be.

Still, owners of million-dollar properties, generally speaking, will normally have more cushion to work with in cutting prices and staying out of foreclosure than owners of the median-priced homes around the country, Saccacio concluded.

We'd like to hear what you are seeing in your city, county, state or region of the country. Are people being pessimistic about their local real estate market? Or are they just sitting on the fence waiting to see how low the prices will go?

Please feel free to comment on this article, or write an e-mail to us at: editor@foreclosurepulse.com.

 

Traditionally, Thanksgiving is a time we take to reflect on our lives and what we can do to make the world a better place in which to live. Volunteers go out and serve meals to the hungry, religious and non-profit organizations run campaigns to collect food, clothing, blankets, etc. for the needy, and we spend time with family and friends around the dinner table.

We live in a country where we have the freedom to do almost whatever we want.  — including the opportunity to own and invest in real estate. If you have been following RealtyTrac during the year you have witnessed the ebb and flow of foreclosure activity around the country every month of 2006 so far. In fact we have only reported foreclosures through October and the national total has already topped 1 million with two months left to report — way ahead of the 885,000 foreclosures reported for all of 2005.

And the projections are that there will be much more foreclosure activity in 2007 and 2008, especially as the effects of an estimated $1 trillion in “exotic” adjustable-rate mortgages start being felt. The bottom line is: more homeowners — who most likely bought more home than their budgets could really afford the past few years — are dangerously close to being in foreclosure.

As the interest rates on those loans reset to higher levels, some of these homeowners will enter the foreclosure process, leaving them needy for a way out of their financial predicament as their mortgage payment escalates by possibly as much as 50 percent.

As a legitimate real estate investor, professional, or potential home buyer, the next couple of years will present an excellent opportunity to help out these needy homeowners who don’t want a black mark against their credit history, and would like to find a way out with at least some cash in their pockets.

So as we pause to celebrate Thanksgiving, now is a good time to reflect on how we can all help the needy — including needy and distressed homeowners — to live better in the future. RealtyTrac is a prime source of information that can provide you with leads and educate you on how to help these people in a way that is a win-win-win situation for the needy homeowner, for you and the lender who doesn’t want to take the property back in foreclosure.

The staff of RealtyTrac wishes you and your family a Happy Thanksgiving and a happy holiday season.

 

Two law suits have been filed against a controversial Illinois law that mandates financial counseling for certain consumers obtaining mortgages or refinancing loans in 10 ZIP code areas in Chicago. The suits — filed by eight consumers and the real estate community — seek to halt the implementation of Illinois House Bill 4050, which took effect September 1.

"It's a discriminatory law," said Julie Santos, a Chicago Realtor and co-chair of the Coalition to Rescind HB 4050, a group formed from several community organizations who are collecting signatures in an attempt to repeal the law. "If the law is good, then make the law apply to all, not just the South Side of Chicago."

The mortgage counseling law is generating a rising chorus of critics — from homeowners, lenders, realtors, investors, consumer rights advocates, title companies and others — who are concerned that the new law could destroy property values in selected minority communities and add an extra layer of bureaucratic red tape.

Limited to just 10 selected zip codes in Southern Chicago, the law targets minority communities where many Black and Latino residents live. Under the law, if a borrower’s FICO credit score is 620 or less, a borrower must get financial counseling sessions from a U.S. Housing and Urban Development-approved counselor to make sure the would-be homeowner knows what he’s getting into. Moreover, the law requires that borrowers give their private information to a state government database.

The suits charge that the law unfairly singles out residents of those zip codes, applies only to state-chartered lenders and disproportionately affects African-Americans and Hispanics, who make up the majority of residents in those areas. Critics allege that the law amounts to state-sanctioned redlining, the illegal practice of refusing to extend credit to borrowers because of their ethnic background or where they live.

Already, the law has chilled the housing market in the predominantly Black and Latino areas, where homeowners in the neighborhood saw a 45 percent drop in home sales in September. The law is also driving out mortgage lenders who fear litigation over the implementation of Chicago law.

RealtyTrac is monitoring the Illinois law because it could have broader implications for real estate buyers, investors and agents. Although the intent of the law was to protect consumers from predatory lenders, it appears to be having the unintended effect of driving down housing sales instead. We want to hear from you. Send us an e-mail to editor@foreclosurepulse.com.

Foreclosures filings for the year surpassed the 1 million mark in October, when 115,568 foreclosure documents were recorded nationwide, according to the RealtyTrac U.S. Foreclosure Market Report, released today.

The report shows a foreclosure rate of one new foreclosure filing for every 1,001 U.S. households — up 3 percent from September and 42 percent from October 2005. The year-to-date foreclosure total stands at 1,029,132, up from 732,608 at the same time last year.

Colorado and Nevada once again posted the nation’s two highest foreclosure rates thanks to increasing foreclosures in both of those states. Georgia, Michigan, Illinois, Florida, Ohio, Tennessee, New Jersey and Utah also documented foreclosure rates among the nation’s 10 highest in October.

California recorded more than 16,000 new foreclosure filings during the month, the most of any state for the second month in a row and more than three times the number reported in October 2005. The state’s foreclosure rate was 12th highest in the nation.

View full report.

As if it wasn’t bad enough that the local economy has been steadily losing jobs in the automotive sector, Detroit reported the highest foreclosure rate of the top 100 metropolitan statistical areas (MSAs) in the country for the third quarter of 2006 as well.

After two straight quarters when Indianapolis, Atlanta and Dallas led the nation in foreclosure rate, Detroit took over the top spot on the RealtyTrac Q3 2006 U.S. Metropolitan Foreclosure Market Report — followed by Ft. Lauderdale and Denver. Miami, Dallas, Indianapolis, Ft. Worth, Atlanta, Las Vegas and Memphis rounded out the top 10.

Unlike the first two quarters of the year when foreclosure activity was noticeably slowing down in many of the top 100 MSAs, the tide turned during the third quarter with the majority of MSAs now reporting growth in foreclosure activity. This trend corresponds to what RealtyTrac is seeing in the national real estate market where sales volume is slowing down — heading negative in many areas of the country — price appreciation has slowed to either single-digit rates or even negative rates in a few instances, and interest rates on adjustable-rate mortgages are starting to reset to higher levels.

                  Detroit Foreclosure Rate Heat Map -- October 2006

An Illinois law intended to help reduce foreclosures is drawing cries of discrimination from some of the people it is trying to protect, according to the Chicago Defender newspaper.

“Nearly 60 days after Illinois House Bill 4050 went into effect to supposedly protect consumers from predatory lenders, a coalition of Black and Latino city residents say the new law is actually destroying property values in select minority communities.”

The law is a pilot program that is being applied in 10 Chicago zip codes chosen for their high foreclosure rates, among other factors. But opponents say the law is cutting down on the legitimate loans available to residents of the 10 zip codes and thereby will lower house values by reducing the number of potential buyers who can qualify for a loan, creating a glut of unsold inventory.

The bill requires certain “high risk” mortgage applicants to receive credit counseling before taking out a home loan, and only applies to state-chartered loan originators, not federally chartered loan originators, according to the Chicago Association of Realtors.

Local mortgage planning specialist and blogger Dan Green created the map to the right showing where mortgage fraud has been reported in Chicago (black dots and orange fill) and where the pilot program is being applied (red fill). Also below is a heat map RealtyTrac created of the Chicago area based on the number of total foreclosure filings (defaults, sales and REOs) in September.

While some of the legislators involved in pushing through the bill continue to defend it, the fallout from this law will likely make them think twice about unforeseen repercussions of enacting similar legislation in the future. One such law is Illinois Senate Bill 2349, which passed back in June and is scheduled to become effective January 1, 2007. This law is aimed at providing “consumer protections against property fraud for homeowners who are in default or foreclosure,” according to a press release put out by Illinois Gov. Rod Blagojevich. The ways it does that is it:

• Limits the amount so-called mortgage rescuers can make to 125 percent of the total debt on the home if the homeowner buys back the home from the rescuer.

• Requires that all mortgage rescue companies provide disclosures and give homeowners the right to cancel contracts, and increases penalties for violations.

• Requires that the mortgage rescuer provide the homeowner with at least 82 percent of the value of the home if the homeowner is not able to buy back the home.

It wouldn't be surprising if this law, like HB 4050, resulted in some harmful consequences to the very people it's trying to protect. By applying such stringent standards to foreclosure property purchases, this law could drive away not only the scam artists but also the ethical buyers and investors who want to purchase foreclosures. That will leave defaulted homeowners with fewer options to avoid foreclosure, let alone recoup any equity they might have in their home.
       
Chicago Foreclosure Rate Heat Map -- Sept 2006

Falling prices, sluggish sales and risky loans that let borrowers pile up debt faster than they can pay it off could put more homeowners out of their houses this year than at any other time this decade.

Yet many homeowners — particularly in California, Florida and Colorado — are still purchasing or refinancing their mortgages with “exotic” loans that may keep their monthly payments low now, but when these gimmicky loans “reset” upward borrowers could lose their homes if they haven’t planned for an increased monthly mortgage payment. While these loans certainly can be used for good, too often consumers don’t fully understand the risks involved. Here are three popular, yet risky loans that the average consumer should think carefully about before jumping into:

1. Adjustable Rate Mortgages (ARMs)
With an adjustable rate mortgage, also called ARMs, borrowers lock in a lower interest rate for the first few years. The loan then readjusts periodically in tandem with often volatile short-term interest rates. The danger with ARMs is that the risk of readjusting upward is often too great to justify the minimal savings — especially if a borrower plans to hold onto the property for at least a couple years. For most borrowers, it’s better to lock in a fixed interest rate on a 30-year loan and never worry about interest rates rising.

2. Option Payment ARM Mortgages
Option Payment ARMs are some of the riskiest mortgages around. They offer borrowers a low initial interest rate and then allow them to choose the amount of monthly payments. Homeowners can opt to pay both the interest and principal on a fully amortized loan. Or they can make a payment that is so small it covers only the interest due on the mortgage. With this loan it can be very tempting to make just that minimum payment. In just a few months homeowners who aren’t fiscally disciplined could find themselves "upside down" with this type of loan, and owing more money than they borrowed.

3. Interest-Only Mortgages
The interest-only mortgage gives the homeowner an option to pay just the interest on the mortgage. As the name implies, borrowers don't pay down any principal for the first three, five, seven or 10 years of their loan. But after the initial "interest only" grace period expires, the monthly payments balloon to cover the remaining interest and all of the principal owed on that mortgage. People who take on these loans are more likely to go into foreclosure because their monthly payments can quickly balloon out of control. For more details, read "Could you handle an interest-only loan?"

Today, when borrowers apply for a loan, they have more choices than ever before.  But before homebuyers choose either a traditional fixed-rate mortgage or an adjustable-rate mortgage, they should make sure they understand their risks and how they work.  Buyers who intend to own a home for a short time, or can handle higher payments in the future, may consider ARMs.

But homebuyers who plan to be in their homes for years, or do not expect a significant increase in income by the time the monthly payments go up, should carefully consider the risks and advantages of adjustable-rate loans.

At RealtyTrac, we want you to know the facts. For more information on mortgages, read our Mortgage and Financing FAQ.

“Buying foreclosed real estate at an auction is like having a license to steal,” says Larry Blachman, a Realtor who specializes in foreclosures and author of Buying Foreclosures at a Trustee’s Sale.   But buying foreclosed homes at an auction is also probably the most dangerous way to purchase real estate — unless you know how the process works.  “If you know the game, you can make a killing; if don’t, you can get killed,” added Blachman.
 
RealtyTrac expects foreclosure activity to rise in the next couple of years, meaning more foreclosed properties will be available for home buyers, investors and real estate agents. But successfully buying foreclosed properties off the auction block isn't that easy. It requires knowledge, planning, preparation, patience and perseverance.  
 
Before taking the plunge, however, spend a few months researching the market and reading up on foreclosure investing.  Begin the process by researching foreclosures in RealtyTrac’s vast database, targeting neighborhoods and communities that you are interested in and familiar with. Read the laws and make sure you understand the legal process.  Moreover, make sure there aren’t any IRS liens, other tax liens, second or third mortgages, bankruptcy filings or any other monetary encumbrance.
 
Next, attend several auctions as an observer to watch and listen to how the auctioneer and bidders interact. The purpose of this exercise is to become knowledgeable about how the auction process works.  Pay particular attention to the rules of the game.  Observe “the regulars” who show up again and again.  Don’t try to get too friendly with these regulars; they will be your future competition.
 
After attending several auctions as an observer, use your RealtyTrac foreclosure data and drive by several of the homes to check them out.  If the property is empty go inside and do a visual inspection, paying particular attention to the roof, kitchen, bathrooms and foundation.  Take careful notes.  Narrow your list to only one or two homes to bid on. You’ll also want to estimate the value of the property and set a maximum bid of about 60 to 70 percent below the market value, factoring in any repair costs.
 
Once at the auction, follow these rules:  Only bid if you see one of the regulars bidding.  Never be the first one to bid.  If you bid, raise your bid in small increments.  In California, if you are the winning bidder, you need to pay the entire amount in cash or cashier’s checks, so bring several checks in different denominations.  Know what your top bid is going to be — and never bid above your ceiling. 
 
Buying foreclosures at the auction can be a smart investment if you know how the system works.   At RealtyTrac, we want to arm you with the best information so you can make a killing at the auction — not get killed.