Jason's Blog

Despite signs that the real estate market is bottoming out, millions of homeowners are likely to find themselves in worse shape within the next two years.

Nearly half of the nation's 52 million mortgage borrowers will have negative equity by the end of the first quarter of 2011, up from the 14 million at the end of this year's first quarter, according to estimates in an Aug. 5 report by Deutsche Bank. With so many borrowers underwater – or owing more on their home than it's worth – the risk is high that they'll default and their homes will go into foreclosure, says Mark Zandi, the chief economist at Moody's Economy.com. (Moody's Economy.com estimates that 17.5 million mortgage borrowers will be underwater by early 2010.)

Negative equity is the product of several factors. The most significant weight is the broad and persistent decline in home values. A Zillow.com index of home values fell 12.1% year-over-year during the second quarter, resulting in a total drop of 22.3% since the market peaked in mid-2006, according to an Aug. 11 report by the online real estate marketplace. Many buyers who bought their home around the peak with a 20% down payment have lost that dollar amount.

"The continued decline of U.S. home prices will contribute to rapidly rising rates of negative equity," Karen Weaver, a Deutsche Bank research analyst, wrote in the report. "The most obvious implication is for mortgage defaults."

Current homeowners, or those shopping for a home and who are concerned that they'll end up underwater, should consider how long they expect to live in their house. Being underwater doesn't affect homeowners unless they plan to sell.

Individuals who are staying put for at least the next five to seven years will likely recoup the lost value of their home, says Amy Bohutinsky, a Zillow.com spokeswoman. In addition, homeowners should refrain from borrowing against their mortgage.

Those who find themselves underwater can turn to the federal Making Home Affordable plan, which can help you refinance or do a loan modification.

Whether you're at risk for falling behind may have more to do with the economy and your neighborhood than your job, your credit or your income. Here are four warning signs that you're heading underwater.

1. Foreclosures in Your Neighborhood

The quickest way to end up underwater is to live in a neighborhood that's plagued by foreclosures.

When one home on your block goes into foreclosure, your home's value drops by 1%, Zandi says. But that isn't a one-to-one relationship. If two homes on a block go into foreclosure, your home's value will drop by more than 2%.
As homes go into foreclosure, they create a domino effect, lowering home values throughout a neighborhood in a cascade beyond homeowners' control.

2. Homes Lingering on the Market

When "For Sale" signs linger in a neighborhood for three or more months, that may mean buyers and sellers can't agree on a price. In that environment, homes are unlikely to sell unless the seller lowers their asking price.

"The time on the market is always a good barometer of demand for homes and for the price homes are transacting at, "The longer it appears that neighbors are taking to sell their home the more likely it is they're not getting the price they want and that prices are falling."

Compare the time it took for homes to sell in your neighborhood three years ago vs. today; if it's taking weeks or months longer to sell, the prices homes can fetch are dropping.

3. Increasing Unemployment

In most cases, the cities where homes have lost the most value during the past year also possess the highest unemployment rates.

Homes in Merced, Calif., have lost 40.2% of their value year-over-year, the biggest loss of home values in the nation, according to Zillow.com. The city's unemployment rate is the fifth-worst among 372 metropolitan areas at 17.6%, according to June data from the Labor Department. El Centro, Calif., where home values plunged 37.6% year-over-year (the second-biggest drop in the country), has the worst unemployment rate at 27.5%.

Individuals living in areas battered by high unemployment are likely to see their home values drop further, especially if they live in areas dependent on dwindling industries – like Central Valley, Calif., and the mortgage lending business or Detroit and the auto industry.

4. Homes in Disrepair

Dented siding, peeling paint and broken porches could be signs that neighbors are having trouble making ends meet and can no longer pay to take care of their home, Zandi says. Or they may have gotten an appraisal and discovered their homes have dropped in value and are no longer worth the cost of repairs. Inevitably, as the condition of homes in your neighborhood worsens, home values are likely to drop.

What Underwater Borrowers Have in Common

Risky Mortgages

Some 77% of option-ARM borrowers and 50% of subprime mortgage borrowers were estimated to be underwater as of the first quarter of 2009, according to the Deutsche Bank report. With option-ARMs, borrowers could make minimum monthly payments that didn't even cover the loan's interest. As the market declined, these balances grew over time. With subprime mortgages, borrowers often had poor credit scores and little documentation of their financial situation. In both cases, borrowers often ended up with a large mortgage relative to the house's price.

Date of Purchase

Individuals who bought their home between 2003 and 2008 are at risk of being underwater because they bought while prices were rising. The risk is greater for those who bought between 2005 and 2006, as the market approached its peak.

Excessive Borrowing

Many individuals borrowed against their home when it appreciated in value during the bubble by taking out a second mortgage or tapping into a home equity line of credit or home equity loan. This borrowing left their home with less equity to weather the drop in home values.

Home's Location

The areas that have been hit the hardest by plunging home values include the "sand states" of Arizona, California, Florida and Nevada because they brought the most speculation, easy credit and overbuilding during the bubble, Zandi says. Also hurt: the states where unemployment is especially high and manufacturing jobs have been eliminated like Michigan, Ohio and Indiana.

Shopper Carrie Taylor said that she’s got a plan so she doesn’t wear herself out too much.

“I have a list. I know exactly what everybody’s getting,” she said. “That’s what I get and then I’m done.

Most stores are open longer this time of year and add more hours on the days leading up to Christmas, which can be a drain on employees.

But Fayetteville Best Buy manager Andrew Howell said it’s all worth while.

“We work a lot of hours,” he said. “I’ve got a lot of good people that work with us that put in a lot of long, hard hours, a lot of blood, sweat and tears to be able to provide this experience to our customers.”

The company that developed landmark Cary neighborhoods MacGregor Downs and Lochmere has filed for bankruptcy.

MacGregor Development Co. of Cary lists assets of $23.8 million and liabilities of $41.4 million on its Chapter 11 petition, filed Nov. 14 in bankruptcy court.

"Basically, buyers stopped buying," says company President Michael Whitehead. "Lenders stopped lending."

According to MacGregor’s bankruptcy petition, the company took in just more than $3 million in revenue from January through September. That's a far cry from the almost $20 million the company brought in for all of 2007. And things have only gotten worse since then, Whitehead says, with the fourth quarter looking particularly poor.

The company also faced troubles with what Whitehead called "the interminable entitlement process" – the rezoning and permitting that all developers must go through to get projects off the ground. In particular, Whitehead said, a Chatham County project has been held up for longer than MacGregor was able to afford.

MacGregor Development owed money to some of its employees – including Whitehead, whose claim against the company is listed at more than $37,000 in bankruptcy documents. MacGregor also owed taxes to the Internal Revenue Service, the state of North Carolina and the Wake County government.

It's not alone. Several Triangle homebuilders and developers either have closed entirely or filed for bankruptcy since the start of the year as the residential real estate market has slumped. Sales of existing homes are down, and the credit crunch has left many developers unable to find the loans they need to develop their land.

Building is still being done. But it's slumped severely. Last week, research company Metrostudy said new home starts in the region fell by more than half in the third quarter of this year.

MacGregor’s roots in the Triangle stretch back to the company’s founding in the 1960s. The company has developed some of the area’s biggest residential communities, including the high-end MacGregor Downs golf-club community and the 1,400-home Lochmere neighborhood.

Another thing its history includes: a previous bankruptcy. Whitehead helped guide MacGregor Development through a restructuring in the prolonged economic downturn of the early 1990s, and he says that experience should help him this time around.

MacGregor has a viable plan to get through its bankruptcy, Whitehead says, which it plans to outline for the bankruptcy court.

Whitehead says he knew he would have to file for bankruptcy about three months ago. And other developers, he predicted, will be soon to join MacGregor.

"It's been a steady downward trend for the industry," he says.

Light, sweet crude for December delivery dropped $2.63 to $69.55 a barrel in electronic trading on the New York Mercantile Exchange by noon in Europe.

The November contract expired Tuesday and fell $3.36 to settle at $70.89. Last Thursday, that contract had declined as low as $68.57 a barrel, the lowest since June 2007.

Crude investors have followed equity markets this week, looking for signs on how the U.S. economy will weather the current global financial turmoil. On Tuesday, DuPont, Sun Microsystems and Texas Instruments reported disappointing earnings and bleak forecasts, sending the Dow Jones industrials average down 2.5 percent.

"Oil is now highly correlated with the stock market," said Clarence Chu, a trader with market maker Hudson Capital Energy in Singapore. "People are looking to the Dow for sentiment on the economy."

The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global oil supply, has signaled it plans to announce an output quota reduction at an emergency meeting Friday in Vienna.

But investors are skeptical about how much of the cut will be implemented, given the history of OPEC members exceeding their production quotas.

"There should be a short-term boost to prices when they announce a cut on Friday," Chu said. "But OPEC production has always been above their quotas, so there's a credibility problem."

Crude oil is down 53 percent from its peak of $147.27 reached in mid-July.

A stronger dollar this week has also pushed oil prices lower. Investors often buy commodities like crude oil as an inflation hedge when the dollar weakens and sell those investments when the dollar rises

In what looks like more bad news for flagging home sales, 70 percent of non-homeowners said they do not plan to purchase a home in the next 12 months, according to a survey conducted by real estate information service Trulia.

And nearly half (44 percent) of the respondents in the key first-time homebuyer age range (18-34) confirmed that high costs prohibited them from purchasing a property, despite recent home price declines.

Potential homebuyers in the 35-44 age range said concerns about obtaining home loan financing kept them on the sidelines.

And 92 percent of current homeowners who responded plan on staying put during the next year, which makes sense given the current turmoil.

In all, only 12 percent of non-homeowners said they expect to buy a home in the next year, not great new for the National Association of Realtors.

Interestingly, 77 percent of current homeowners who responded to the survey said they had not taken equity out of their homes in the past two years.

Of course, things had already made a turn for the worse back in late 2006, so it’s not necessarily indicative of any financial responsibility on the parts of homeowners.

Many, in fact, pulled most of the equity out of their homes prior to the downturn that began around late 2006, and those looking to cash out later were met with low appraisals and more restrictive guidelines.

In spite of the ongoing crisis, 49 percent of homeowners still believe their home is a great long-term investment going forward.

It took two voting sessions, but the House of Representatives has approved the costly mortgage bailout bill with a resounding majority.

The vote was won by a count of 263-171, and now awaits a signature from President Bush before becoming law.

The House had originally knocked the bill down by a vote of 228 to 205, ravaging world markets and sending the Dow down 777.68 points, its largest single-day point loss.

But late Wednesday, the Senate approved the bill by a hefty margin of 74 to 25, with both presidential hopefuls casting “aye” votes, prompting the House to reconsider its earlier decision.

The bill now stands at 451 pages, up from just 3 when it was originally drafted as a pure mortgage bailout initiative.

The so-called “Emergency Economic Stabilization Act of 2008” (EESA) now includes a ton of measures not found in the original bill, including health care provisions, a boost to the FDIC limit, tax breaks, and more.

Interestingly, the Dow began to plummet after the news, and is now up less than 50 points after having been up several hundred points earlier in the session.

President Bush plans to sign the bill before he leaves Washington for his Texas retreat today.

"I now expect that we will indeed have a plan that can pass the House, pass the Senate (and) be signed by the president," said Sen. Bob Bennett, R-Utah.

The bipartisan consensus on the general direction of the legislation was reported just hours before President Bush was to host presidential contenders Barack Obama and John McCain and congressional leaders at the White House for discussions on how to clear obstacles to the unpopular rescue plan.

Tony Fratto, the White House deputy press secretary said the announcement was "a good sign that progress is being made."

"We'll want to hear from (Treasury) Secretary (Henry) Paulson, and take a look at the details. We look forward to a good discussion at the meeting this afternoon," he said.

On Wall Street, financial markets grew more upbeat as the Dow Jones industrial average at times rose more than 300 points.

Key lawmakers in Washington said at midday that few difficulties actually remained, although no details of their accord were immediately available.

"There really isn't much of a deadlock to break," said Rep. Barney Frank, D-Mass, chairman of the House Financial Services Committee.

But there were fresh signs of trouble in the House Republican Caucus. A group of GOP lawmakers circulated an alternative designed to attract private capital back into the credit markets with less government intrusion.

Under the proposal, the government would provide insurance to companies that agree to buy frozen assets, rather than purchase them directly as envisioned under the administration's plan. The firms would have to pay insurance premiums to the Treasury Department for the coverage.

"The taxpayers haven't done anything wrong," said Rep Eric Cantor, R-Va., adding that rather than require them to bear the cost of the bailout, the alternative "pretty much puts the burden on Wall Street over time."

Rep. John A. Boehner, R-Ohio, the minority leader, was huddling with McCain on the rescue. Earlier, asked whether the GOP presidential nominee could corral restive Republicans to support the plan, Boehner said, "Who knows?"

And Rep. Spencer Bachus of Alabama, the only House Republican in the bargaining meeting, did not directly say he agreed with the other lawmakers who emerged describing an imminent deal.

"There was progress today," said Bachus, the senior Republican on the Financial Services panel.

Bush told the nation in a televised address Wednesday night that passage of the package his administration has proposed is urgently needed to calm the markets and restore confidence in the reeling financial system. His top spokeswoman, Dana Perino, had told reporters earlier Thursday that "significant progress" was being made.

House Speaker Nancy Pelosi, D-Calif., said Bush's agreement with Democrats on limiting pay for executives of bailed out financial institutions and giving taxpayers an equity stake in the companies cleared a significant hurdle.

The core of the plan envisions the government buying up sour assets of shaky financial firms in a bid to keep them from going under and to stave off a potentially severe recession.

It was not yet clear how lawmakers had resolved lingering differences over how to phase in the eye-popping cost — a measure demanded by Democrats and some Republicans who want stronger congressional control over the bailout — without spooking markets. A plan to let the government take an ownership stake in troubled companies as part of the rescue, rather than just buying bad debt, also was a topic of intense negotiation.

Bush acknowledged Wednesday night that the bailout would be a "tough vote" for lawmakers. But he said failing to approve it would risk dire consequences for the economy and most Americans.

"Without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold," Bush said as he worked to resurrect the unpopular bailout package. "Our entire economy is in danger."

Obama and McCain called for a bipartisan effort to deal with the crisis, little more than five weeks before national elections in which the economy has emerged as the dominant theme.

Presidential politics intruded, nonetheless, when McCain on Wednesday asked Obama to agree to delay their first debate, scheduled for Friday, to deal with the meltdown. Obama said the debate should go ahead.

Unaffordable mortgages continued to plague American households in 2007, according to a U.S. Census Bureau report released Tuesday.

Last year, 38 percent of homeowners with mortgages spent 30 percent or more of their income on housing costs, the limit the government considers affordable.

And more than 7.5 million people, or roughly 15 percent of American homeowners with a mortgage, spent half of their income or more just to pay the mortgage each month.

That figure is up from 7.1 million a year earlier, a clear sign home prices had become far too expensive, despite slapdash efforts to control costs with adjustable-rate mortgages and option-arms.

In the Miami-Fort Lauderdale-Miami Beach metro area, one of the harder-hit foreclosure hotspots in the nation, 29.1 percent spent half their income on the mortgage and 58.2 percent spent 30 percent of their income.

In Stockton, CA, 28 percent of homeowners spent half their paycheck each month to cover housing costs, while more than a quarter of homeowners in Los Angeles County and surrounding areas did the same.

These figures far exceed lender-recommended debt-to-income ratios, exposing the loose lending practices of the last few years perpetuated by no income loans and negative amortization products.

A meltdown among several financial institutions and intense negotiations with Congress over a rescue package the administration has requested led the president to return to Washington early Wednesday from a three-day stay in New York. He canceled a planned trip to Florida, where he had been scheduled to raise campaign cash for Republican candidates later in the day.

“This is a huge moment for America and if we don’t take decisive and bold action, we could be facing financial calamity,” White House press secretary Dana Perino told reporters traveling on Bush’s plane.

She said the president has been trying to address the public’s many questions and concerns.

The White House has struggled to determine how best to deploy Bush during the crisis.

Time for a louder voice?
As the problem mushroomed over the weekend of Sept. 13, Bush generally stayed out of the limelight, letting Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke take the lead with reporters, lawmakers and the public. He even canceled a planned statement on the economy on Tuesday and remained silent for days.

But the president has said something publicly on the situation almost every day since Thursday — albeit very briefly most times — and yet he still is hardly breaking into the debate. News coverage has barely mentioned Bush’s comments. Points that he and his White House aides have tried to make about the aim and substance of the proposed $700 billion bailout plan have been only on the periphery of the story.

So the White House finds itself still wrestling to decide what would be the most helpful role for Bush as the proposal is meeting with deep skepticism on Capitol Hill, especially from conservatives in Bush’s own party who are revolting at the high price tag and unprecedented government intervention into private markets.

Earlier in New York, Bush said he believes a plan will be passed despite the fierce debate.

“I am confident when it’s all said and done, that there will be a robust plan,” the president said.

If you do not already know there are going to be some major changes with FHA on October 1st.

Effictive on all FHA loans that have down payment assistance (DPA) must be closed and funded by 09/30/2008.

Other guidelines will be changing as well so please give me a call to discuss in more detail or email at jmyers@raleighmortgagegroup.com