Real Estate Home Value Troubles Ahead!

RIVERSIDE, Calif., Feb. 1 /PRNewswire/ — The following was written by California real estate investor, educator, radio host, and author of the California Crash report, Bruce Norris:

While certain leading economists tell us "now is the perfect time to buy" and "demand is just around the corner," real estate professionals and the general public alike scramble to make sense of a real estate market in transition. With inevitable problems about to make matters worse, those considering buying into the real estate "soft landing" scenario ought to think twice.

There will soon be over $1 trillion of adjustable mortgage payments increasing beyond the payment capacity of the borrower. Many borrowers, upon realizing that the monthly payment is about to adjust, will go searching for loan programs similar to their original loan. Here's where their problems start to compound. Because of all the interest rate hikes, the adjustable loan programs have a much higher starting rate. New "guidance," handed down by the Office of Federal Housing Enterprise Oversight Committee, requires that lenders qualify borrowers under much stricter guidelines. Instead of qualifying with a teaser rate, the borrower must now qualify as if the adjustable loan had already changed to the highest rate possible under the loan program. This new guidance came into effect for two reasons. First, the delinquency rate has been growing and is expected to explode. Second, it has been estimated that 90% of all people who obtained these "stated" income loans lied on their mortgage application about how much they made. So, 90% of borrowers who lied on their original application will try to find a replacement loan that no longer exists. On October 1, 2006, the IRS updated their capacity to respond to lenders' requests verifying borrowers' "stated" income. In short, what used to take months to respond to will now take two days. Inside of 48 hours, the "stated" income will be verified as false. How will these people qualify then?

When the subprime lender, Ownit Mortgage Solutions, declared bankruptcy last December, it attributed its failure to "market conditions." One of those "market conditions" was a request by Wall Street purchasers of Ownit mortgages to get paid back for $165 million dollars worth of delinquent loans. The comments from former CEO William Dallas: "This is going to end badly for the industry."

Ownit won't be the only lender receiving a request to buy back delinquent mortgages. History has proven that some 50% of subprime borrowers get behind in their payments during the life of the loan. Declining real estate values not only increase the likelihood of default by the borrower, they increase the likelihood of a fast foreclosure by the lender. Since the equity in a declining market shrinks with many of these "exotic" loans, the lenders are more likely to go after the only asset their borrower had: the property. Part of the deal when a lender "securitizes" their mortgages and sells them off to Wall Street is something called an "implicit warranty." In other words, if the loan goes bad, the original lender buys back the loan and makes the "securitizer" whole.

What will happen if numerous lenders end up in the same position as Ownit? Wall Street won't be as interested in buying subprime mortgages and the liquidity will begin to disappear. If enough of these loans go bad, tremendous losses will be incurred as the properties are foreclosed upon and then resold by the lender/owner. The subprime mortgage will then be re-evaluated and interest rates will shoot up due to increased risk. Don't think this can be a problem? Ohio is currently the worst-case scenario. According to RealtyTrac, lenders who foreclose on a property in Ohio get 57% of appraised value when they sell the property. That amounts to a 43% hit on principal!

Consider the inevitable: You have buyers in the market with a choice of inventory, which do you think they'll buy? A lender-owned property at a big discount or one owned by a private party for near full price? What would you do? In California, unsold inventory has grown by over 100% in one year. Thus far, there has been limited price damage because almost all of the properties for sale have been privately owned. In 2007, that will change. The new inventory for sale will consist of lender-owned properties, builder auctions, and short sales. All of these sellers will be selling to a less motivated, smaller group of less-able-to-qualify buyers.[tags]real estate, home values, housing bubble, housing market, housing crash, mortgages, home loans[/tags] San Diego MLS  – San Diego real estate agents