If you are looking for bigger pockets RIGHT NOW, your concentration should be focused on wholesaling real estate deals to buyers who are looking to occupy the property, and helping them secure the financing needed to make to deal happen. If you haven't become best friends with a mortgage broker then your business may be suffering. In my opinion, Mortgage Brokers play the single most important position on the field of real estate investing. I am pretty sure most of you investors have very reliable brokers in place to handle your acquisition needs; but what about the needs of your owner occupant buyers. Become the one-stop shop for buyers and allow your earnings to run on cruise control.

The ideal scenario is to acquire a property via contract for 50 to 60 cents on the dollar and AS-IS, of course. Have your mortgage broker procure a 100% loan for your buyer at 80% of market value and look to generate a hefty cash now assignment fee. Lucky for us, FHA goes up to $700K. So a house with a market value of $580K based on the properties sold in the last 3 to 6 months should be purchased at or around $460K. That leaves $120K in play. In order to ensure that the property is then purchased NO MONEY DOWN, you allow for the closing costs to be absorbed by the available equity which makes you a hero to the buyers. So the $120K turns into about $90K.

The next step is to write an invoice to the title company as a third party company for that $90K worth of services performed. As I mentioned in the beginning, it is very likely that this project is a rehab of some sort so funds must be set aside for that purpose. Another ring around the wholesale assignment is getting the buyers' desired work and necessary updates done for them, without their involvement, by using the price they paid as a 'construction loan.' So, not only can you demand 3% or more of the purchase price, putting you at almost $14K, but you can also quick turn the rehab work for profit with your 1099ed contractor team. The funds left unused go to your company and all of this happens within 10 business days.

If you can use an extra $20K or so'.you may want to try this technique. Build your owner occupied buyers list and start dropping checks off at the bank.

Blessings to Your Real Estate Investing Successes,

Milton B. Yates

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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.

Bigger Pockets if you Wholesale to Owner Occupants

American investors can thank an Australian investment vehicle for letting them invest in real estate the lazy way. Officially born in 1971 in the land down under it was, and still is, known as the Real Estate Investment Trust (REIT).

When I was a stock broker, some of my clients fell in love with this income producing product because they quite often paid higher yields than stocks or bonds. They also were and still are highly liquid.

The REITs with sound properties in their portfolio not only paid like clockwork but paid well. The same holds true today even though the market has been whacked around a bit.

I am not advocating anyone or everyone become a REIT investor. While I still like them, I prefer to slog around neighborhoods looking at potential inventory and doing the attendant research. My son on the other hand is the true lazy American. He will let someone else do the work for him. REITs are perfect for him.

For those who may not be familiar with real estate investment trusts, they are simply entities that invest in different kinds of real estate or real estate related assets, including shopping centers, office buildings, hotels, and mortgages secured by real estate. You buy shares in them through your broker.

There are three types and all three have a level of risk so it is important to understand your risk parameters. Chances are excellent if you already invest in real estate, you have a handle on your risk taking level.

According to the SEC, the three types of REITs are:

1) Equity REITS, the most common type of REIT, invest in or own real estate and make money for investors from the rents they collect;
2) Mortgage REITS lend money to owners and developers or invest in financial instruments secured by mortgages on real estate; and
3) Hybrid REITS are a combination of equity and mortgage REITS.

You can visit the SEC website for more information. Another good source of information is the National Association of Real Estate Investment Trusts. Both provide information that should help you make an informed decision. Due diligence is extremely important in this arena as it is in any other investment.

By the way, some REITs offer a dividend reinvestment plan (DRIP). This means you can let the dividends buy more shares. If you have a REIT that is doing well, you now have the benefit of compounding working for you.

REITs may not be for everybody but they may be for you. Happy investing!

Note: Image Copyright © Globe Business Publishing Ltd 2008 - Globe Law and Business - Real Estate Investment Trusts: A Global Analysis

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The Lazy Man’s Way To Real Estate Investing

The Investor Buying Process

1. Build your TEAM
If there was one thing that will make a difference between a good experience/deal or a bad experience/deal…it is your team. Your team could consist of a Real Estate Agent, Mortgage Broker, Title/Escrow Agent, Insurance agent, Home Inspector, General Contractor, Real Estate Attorney, and the list can go on. We are going to start with the most important…and that is your Real Estate Agent and Mortgage Broker.

So how do you know the difference between a good team member and a bad one…we recommend the book Rich Dad’s Real Estate Advantages …in chapter 5 it covers some of the questions to ask and what to look out for. We have listed a few of these questions for you'.

2. Your Exit STRATEGY (& Credit) = Loan Options

You need to start with your exit first. If we break down your exit strategies, they will fall into 2 categories'cash flow or capital gains. What is the difference' My parents have a ranch and they raise cattle for beef. They raise the cattle and sell it for a profit (hopefully) and get that profit only once. Had they chosen to be a diary farmer, the cattle would continually produce milk which equals a profit. Real Estate is the same way, I can sell it for a 1 time gain (or loss) or I can us it for a monthly income. All of the real estate investing strategies fall into 1 of those 2 categories'cash flow or capital gains.

Most mortgage brokers focus on your credit as the key factor in placing you into a certain type of loan. While your credit is important…It is your intended exit of the property that will define your loan options. If you are looking to hold this property for the long term then you may be looking for a 30 year fixed loan that is paid off within the 30 years or sooner. If you intend to only keep this home a few years, then an interest only loan may make the most sense. Why, because it will keep your monthly payment low.

No matter what your exit is, there is a loan program for everyone. The problem, most people look for the ‘best deal’ instead of the loan program that is the ‘best fit’.
Team Members Needed - Mortgage Broker, Credit Repair specialist
Tools - Mortgage Calculators , Online Mortgage Application

3. FIND a Property

So here comes the step of going out and finding a property. One of the most important parts of this process is managing your emotions. Yes, the purchase of a property can be an emotional decision…lets just be aware of that. To give you a different perspective though, it is important to understand the difference between a consumer and investor. Consumers make decisions based on emotions while an investor makes decisions solely by the numbers.

My recommendation is be both a consumer and an investor, get what you want (emotions) yet make sure it makes financial sense. So how do we make sure that a deal makes financial sense' Well that is entirely based on your exit strategy that we discussed in step #2. But lets talk about the 2 different tracks that you may look at'Cash flow vs. Capital Gain. If you want cash flow you will need to evaluate the income of the property'if you want capital gains you want to evaluate the future value of the property. Lets break these 2 elements down. Cash flow is a relatively easy formula'

income ' expenses = cash flow

So why do so many people end up with negative cash flow' Simple answer'they don't use the formula. They so often mistake different numbers for different things or don't use the formula at all. An example of this'your real estate agents tells you the Cash Flow is $800 on a 3/2 single family home. The problem is, this number didn't include the largest expense'your mortgage. So you got a great deal, unfortunately your mortgage turned out to be $1000 a month so you are losing $200 a month. The other problem is that so called investors are using the wrong formula'they use the formula for capital gains to evaluate cash flow. I will hear from people that the property is 20% below market value'problem is it is still over priced from a cash flow perspective. Capital Gains. How do you predict the future value of a property'

Do you have a crystal ball'

I don't'but if you do let me know as I will pay you a lot of money to use it. So lets get real, to invest in capital gains you are not going to use a crystal ball and predict where the market is going, you have to base your decisions on where the market is today. The key with capital gains is to build in your profit before you buy. So how does this look, another simple formula of addition and subtractions.
ARV ' Expenses ' Profit = Your Highest Offer

Team Member Needed - Real Estate Agent
Tools - Real Estate Listings

4. CONTRACT

When in doubt, tie up the property by getting the property ‘under contract’ and just ensure that your escape clauses are in place. Earnest money…it is important to know ‘how much’ earnest you need to put down. Truth is, all that you need to put down is $1 to $100, whatever amount is required by your title/escrow company to open an escrow account. Real Estate Agents will tell you they like 1% or some other amount because it show that you are a ’serious’ buyer. Point is…earnest money is negotiable. Everything is negotiable.

Quick Contract tips…if you want something, be specific. If you want an ‘escape’ be broad. Two examples, I want the Viking Refrigerator so in my contract I am going to add the serial number and photograph…or; This deal is subject to my partners approval. You may not want that Viking to be replaced by a GE (no offense GE) and for the other example I never said that my partner was my dog and the property didn’t pass the sniff test.

Team Members Needed - Real Estate Agent…getting into serious contracts, use a Real Estate Attorney.
Tools - Your real estate agent will have a standard purchase agreement. In case of you are looking for other legal forms click here.

5. ANALYSIS of the Property

There are 2 areas of property analysis to consider: Property condition and property value.

Property Condition- Do you know if you are buying a dog' Do you want to buy a dog' (Believe it or not some people do as they love the concept of fixing a property up.) The point is do you know what needs to be ‘fixed’ or ‘updated’ on the home prior to purchasing. A good home inspector will identify issues or problem areas throughout the entire home. If your home inspector does identify issues, then you will want to bring in specialists to quote the work and evaluate what it will take to handle the work.

Property Value - When buying a home there is one primary number that you want to be aware of…The Appraised Value of the property. You will get this from an appraiser, but one tip…ask for (and review) a copy of the appraisal before you close.

Team Members Needed - Real Estate Agent (introduce you to an appraiser and home inspector), Appraiser, Home Inspector, any other specialists required.
Tools - Sample Appraisal

6. LOAN Analysis

Below is a quick checklist of items that you will want to know concerning your loan. You will want to compare this information to your current financial situation and your exit strategy to ensure that this loan fits your needs. It is always recommended that you talk to at least 3 mortgage brokers about your deal, as every mortgage broker may have access to a different loan program.

Here is the hit list of what should be included in a Good Faith Estimate:
-Interest Rate
-Monthly Payments
-Taxes and Insurance
-Loan Amount
-Pre-payment Penalties
-Fixed or Variable Rate
-Term (Length)
-Amount of money needed to close (your check to bring to closing)
Team Member Needed - Mortgage Broker

7. CLOSE on the property

Closing takes place at a title/escrow company. As we discussed in step 6 - Loan Analysis, you will need to know how much money to bring to the closing table. There are a lot of documents, take the time to make sure you know what you are signing. If you don’t know what a document is for, ask the title agent for clarity. While all of the documents are important, the HUD 1 is very important to review. This outlines who (seller, buyer) pays what and who (mortgage broker, Real Estate Agent, Title, etc.) gets paid what.

Take a friend, spouse, therapist, family member to closing with you. Remember this can be a very emotional experience, so if you need to have some ’support’ with you, take it.
Team Members Needed - Title/Escrow Officer, Mortgage Broker
Tools - Sample HUD 1

8. Execute your EXIT

Now that you have closed and own the property it is time to execute your exit. Is your plan to hold the house for a few years and then sell it' If so, you will want to talk to your CPA to discuss when to sell. Owning the property for 1 year and a day could be the difference between paying 30ish% tax (taxed as ordinary income) or using a 1031 exchange to roll the profit into another property, tax deferred. If you own and have lived (occupied) in the property for 2 out of the last five years, you could take the profits with no tax hit. 1 day could be the difference between thousands of dollars that you may need to pay in tax.

Maybe your plan is to accelerate your loan pay down' Your mortgage broker should have tools to help you take what is normally a 30 year payoff to a 10 or 11 year payoff by using a combination of increased monthly payments and utilizing a HELOC (home Equity line of Credit).

Team Members Needed - CPA, Mortgage Broker

9. EXPAND - What’s Next

No matter where you are starting from, there are tremendous opportunities in real estate to create and make money…even in an up and down market. It often starts with your first home, and then you build from there.

So what resources are available to you get the education and find the right team members…

1. Join a Real Estate Investors Club - National REIA Website
2. Attend seminars in your area - you can find these in your local newspaper.

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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.

The Real Estate Investor Buying Process

Will we ever learn' Doesn’t look like it.

You’d think what with all that has gone down with the subprime mortgage/credit mess, the real estate industry (or, at least, segments of it) would be in the forefront of a much needed reform movement.

Instead, there seems to be an almost pathological desire to return to “normal” as soon as possible.

While it is certainly true that people all over the country are finding it difficult to obtain mortgages–even people with good credit ratings, hardly a week goes by when I don’t read a newspaper ad or hear a radio commercial that tells would-be home buyers that they can get a mortgage even with rotten credit, the very thing that go us into this ordeal in the first place!

Since most people with bad credit are finding it nearly impossible to get reasonable mortgages, it is baffling about why some places are advertising that they can'

I don’t have a good theory on what they might be up to and would be interested in informed opinions (as opposed to speculation, please) as to why this may be the case'

Regardless, it is discouraging that it took so little time for these potentially abusive practices to resurface.

It is understandable that Americans want to see the light at the end of the tunnel. But, things just aren’t that simple I’m afraid.

When Fannie Mae on Tuesday issued what Reuters calls “reassuring comments about the credit and housing markets” the stock market took notice and went up…investors eager for any bit of positive news they can find.

But, it would be foolish not to take note of the other bit of news Tuesday: a barrel of oil went above $122 for the first time!

Another dose of reality comes by way of Las Vegas. Yes, I said Las Vegas.

According to the New York Times, Vegas is starting to feel the pain caused by the real estate/credit crisis. The city way overbuilt based on an economic model that just doesn’t hold up anymore. The prospects are apparently not very good that the city will quickly rebound,either.

It is more than okay for real estate and potential real estate investors to reach for optimism, so long as they keep their eyes open to what is really going on in the world around them.

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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.

Real Estate Lessons Learned Or Lost'

When U.S.News & World Report’s Luke Mullins was researching and writing an article about using the internet for home buying, I’m pleased that he turned to BiggerPockets.com as one of his key sources of information.

Six Secrets of Internet Home Buying by Mr. Mullins, a really nice guy, BTW, details some good tips for home buyers who may be using the internet to assist in their quest for a new home.

The interview and mention was another nice acknowledgment of what we’ve been able to accomplish with BiggerPockets, and I look forward to working with more journalists in the future on their articles.

What’s great is that several friends of BiggerPockets, including the always great Pat Kitano were also interviewed for the piece.

I hope that everyone gets a chance to check out the article and all of Luke’s other articles.

Thanks, Luke!

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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.

BiggerPockets.com Mentioned in U.S.News & World Report: Six Secrets of Internet Home Buying

There are many thousands of savvy investors across the United States who would love to begin investing in apartment buildings but they just don't have a plan for success. In other words, they don't have a clear understanding of the necessary skills, knowledge, and mechanics of commercial real estate investing. Unfortunately, there are very few resources available to the first time apartment building buyer that offer clear, concise and effective information that can be followed like a business plan. The market is flooded with gurus and secret formulas but most of these gurus and formulas are ineffective and actually will have a negative impact on the efforts of the first time apartment building investors for reasons that will be explained in the following article.

Many real estate gurus that teach apartment building investment seminars are very successful real estate investors, however, their major flaw as educators lays in the fact that they teach one 'system' that has worked for them personally in one or two markets during one small period of time.

Heraclitus, the Greek philosopher, is famous for saying 'you can't step into the same river twice'. I would say that you can't invest in the same real estate market twice. Recent headlines make it apparent that the real estate market is in constant flux. What the gurus teach in their courses, to return to the river metaphor, is the way that they personally crossed the river and reached their own personal success at one particular time. Unfortunately, when students try to follow the gurus system they find that the market has changed and the system no longer works. This causes frustration and the student concludes that is impossible to succeed in commercial real estate investments and the student eventually quits or goes on to the next guru, hoping that he or she has the answers and the formula that work.

For the first time apartment building investor these secret strategies and proven formulas for apartment building investment success can seem irresistible because they promise that investing in commercial real estate is really an armchair activity that requires very little work and pays back big profits. However, in reality, nothing could be further from the truth. Commercial real estate investing is more difficult and complicated then residential real estate and the beginning investor should first spend as much time as possible learning the subject and studying the market.

Here are some real world tips that I would give to the first time apartment building buyer:

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This Post is from the BiggerPockets Real Estate Blog. Copyright © 2008 BiggerPockets, Inc. All Rights Reserved.

Buy an Apartment Building with No Guru Included

In the late 1990s country music star, Trisha Yearwood, had a hit song titled Walkaway Joe. The title of that song would be an apt description of many borrowers today. These people invested in real estate by leveraging themselves as much as possible. Many of them bought homes with little or no money down.

The softening of real estate prices has left many of these investors owing significantly more than the house is worth. A lot of people decide to walk away from the homes rather than fulfill the obligation that they signed for. They make a business decision based strictly on dollars and cents rather than feeling any moral obligation to repay the loan.

There will always be people that are blindsided by some catastrophe in life that sends them into foreclosure. Perhaps a job loss or medical crisis has impaired their ability to repay. I hope these individuals find a way to get back on their feet and find a way to get on with their lives. They are not the problem.

Born to Be a Leaver'

The foreclosure crisis has resulted in a blitz of advertisements from bankruptcy lawyers and others looking to capitalize on this mess. The media has portrayed those who are walking away from their homes as victims. While unscrupulous lenders, real estate agents and others may have preyed upon some of them, most of them are victims of nothing more than their own greed. They should have known better. Now they are being told that it is okay, or that the government will bail them out.

One company that has sprung up is You Walk Away, LLC, located in San Diego. Their Website states that they can help you live in the home for as long as 12 months without making payments or being hounded by creditors. What happened to personal responsibility and the stigma of defaulting on a large debt' Insanity.

Destined to Deceive'

It's not just the small time investors who are abandoning their obligations. Just last week on the TV show, Inside Edition, former baseball star Jose Canseco made a stunning admission. He stated that he stopped making payments on his $2.5 million mortgage and is letting the house go into foreclosure. According to Canseco, “It didn’t make financial sense for me to keep paying a mortgage on a home that was basically owned by someone else.” In essence he just decided that he didn't want to pay anymore.

Guess who pays for all of this' The irresponsible borrower gets a break while the responsible one gets nothing. We all pay in the end. We now have a situation where lenders don't want to provide loans to qualified borrowers. Can you really blame the lenders' If the consequences of not living up to your obligations are so minimal how can they trust anyone'

We've become a nation of victims. It seems so few people have any sense of personal accountability. It's like the four-year-old kid with cookie crumbs all over his face who claims that someone else raided the cookie jar.

Everybody wants to take responsibility when you win, but when you fail,all these fingers are pointing. -Mike Krzyzewski Duke University

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A Walkaway Joe

Reuters - Entertainer Michael Jackson said on Sunday a foreclosure sale on his Neverland Ranch set for this week was averted after a loan on the California property was sold to Colony Capital, a large real estate investment firm.

Reuters - A California man who has defaulted on nine homes and expects banks to foreclose on all of them, forcing him into bankruptcy, says he now considers it a mistake to have invested in the real estate market.

AFP - Citigroup, reeling from the subprime mortgage crisis, said Friday it plans to sell roughly 400 billion dollars in assets in a streamlining reorganization aimed at restoring the US banking giant to profit.

Reuters - The White House on Friday set out terms for a possible deal on a housing market rescue plan, as a sweeping package backed by the House of Representatives was on its way to an uncertain greeting in the Senate.

Reuters - Countrywide Financial Corp shares fell nearly 6 percent on Friday on renewed speculation that Bank of America Corp will renegotiate or cancel its agreement to buy the largest U.S. mortgage lender.

Reuters - Goldman Sachs economists expect a total of $500 billion in residential mortgage credit losses, a renewed slowdown in economic activity after the near-term boost from fiscal stimulus, and no monetary policy tightening in 2008 or 2009, according to a research note from the firm.

Reuters - American International Group , after disappointing with a worse-than-expected loss on Thursday, did little to buoy investor spirits on Friday, telling shareholders it does not yet see signs of a rebound in the market for mortgage assets, which have cost it dearly over the past two quarters.

AP - Democrats' plans to help hundreds of thousands of homeowners struggling with rising subprime mortgage rates and plummeting house values could be sidetracked by President Bush's threatened veto and the backing of many congressional Republicans.

AFP - The US House of Representatives has approved a bill that lawmakers hope could stem the tide of home foreclosures due to the subprime mortgage crisis, but it faces a presidential veto.

Reuters - American International Group Inc , the world's largest insurer, posted its largest ever quarterly loss on Thursday after writing down assets linked to subprime mortgages, and said it would raise $12.5 billion to strengthen its balance sheet.

The latest bill would allow lenders to reduce their exposure to foreclosures if they agree to cut the outstanding balance of an existing loan, thus allowing homeowners to refinance into a new loan that would be FHA insured. The reductions taken by lenders are substantial and must be based on new appraisals that should reflect current home pricing levels.

The Bush Administration has opposed the legislation even though Frank included two measures near and dear to the president's heart - a revamp of the FHA and greater government control over Fannie Mae and Freddie Mac.

The House late Thursday approved a narrowly focused bill that would provide $15 billion to the states to buy and spruce up foreclosed properties.

The bill is different from one that has been widely discussed that would enable to Federal Housing Administration (FHA) to ensure new mortgages where the...

The Federal Reserve and Federal Trade Commission proposed new rules on Thursday which would require lenders to inform consumers of unfavourable developments or changes to the terms of their loans.

Under the proposed regulations, the lenders would also have the option of divulging a consumer's credit risk rating.

The current pace of jobless claims is relatively low compared to the previous recession, some economists say. However, others note that the rise in continuing claims is consistent with a higher unemployment rate than its current 5.0%, suggesting more trouble in the labour market than the latest figures might indicate.

Surprising to the upside, seasonally adjusted consumer debt rose $15.3 billion in March, according to data released Wednesday from the U.S. Federal Reserve, which also showed that total consumer credit rose to 2.558 trillion.

Economists say the March report for pending home sales confirms what has been known for many months now: the U.S. housing market is still several months away from stabilizing.

Benjamin Reitzes, economist at BMO Capital Markets, said the report essentially gives no new data, just a confirmation of the longer- term trend. He explained that the U.S. housing market will take several more months until it recovers, and that...

Continued tight credit and worries about inflation worked to keep mortgage rates essentially locked into place during the week ended May 1 according to the Primary Mortgage Market Survey conducted by Freddie Mac.

MBA also reported that mortgage originations for commercial and multifamily properties were up 19 percent last year (2007) with lenders closing $507.7 billion in loans.

Increases were seen in originations for...

Fed Governor Randall Kroszner said rising mortgage foreclosures are an "urgent problem" and called on Congress to pass a Fannie Mae and Freddie Mac regulatory bill.

"As the Federal Reserve builds on its consumer protection efforts in order to mitigate foreclosures for current homeowners, we are also concerned about the...

Kansas City Fed President Thomas Hoenig (non-voter) says that inflation is becoming embedded in the economy and that may compel a significant interest rate hike. In a speech in Denver, Colorado, Hoeing that consumers are showing an "inflation psychology to an extent that I have not since the 1970s and early 1980s."

Weekly mortgage applications in the United States rose in the week ending May 2 following two weeks of declines, according to data from the Mortgage Bankers' Association (MBA) on Wednesday, which said applications increased by 15.6%.

President Bollinger, Dean Hubbard, Co-Chairman Kravis, and distinguished guests, I am very pleased to be here and especially honored to receive the Columbia Business School’s Distinguished Leadership in Government Award.  This evening I would like to offer a few thoughts on mortgage markets and the recent increase in the pace of delinquencies and foreclosures.  My particular focus will be on geographic variation in mortgage performance and how that variation can help us better understand and prevent foreclosures.  I will also discuss some initiatives taken by the Federal Reserve to address the foreclosure crisis as well as other policies that might be used to strengthen mortgage and housing markets.

Geographic Variation in Loan Mortgage Performance
As my listeners know, conditions in mortgage markets remain quite difficult, and mortgage delinquencies have climbed steeply.  The sharpest increases have been among subprime mortgages, particularly those with adjustable interest rates:  About one quarter of subprime adjustable-rate mortgages are currently 90 days or more delinquent or in foreclosure.  Delinquency rates also have increased in the prime and near-prime segments of the mortgage market, although not nearly so much as in the subprime sector.  As a consequence of rising delinquencies, foreclosure proceedings were initiated on some 1.5 million U.S. homes during 2007, up 53 percent from 2006, and the rate of foreclosure starts looks likely to be yet higher in 2008.  Not all foreclosure starts result in the borrower’s loss of the home; sometimes the borrower is able to make up the missed payments or other arrangements are made with the lender.  But, given the number of borrowers in distress and the weakness of the general housing market, the share of foreclosure initiations that ultimately result in the loss of the home seems likely to be higher in the current episode than customarily has been the case.

Many foreclosures are not preventable.  Investors, for example, are unlikely to want to hold onto a property whose value has depreciated significantly, and some borrowers–perhaps because they were put into an inappropriate loan or because personal circumstances have changed–cannot realistically sustain homeownership.  However, if a foreclosure is preventable, and the borrower wants to stay in the home, the economic case for trying to avoid foreclosure is strong.  Because foreclosures impose high costs, including legal and administrative costs as well as the costs of leaving the property vacant for a possibly extended period, both the borrower and the lender often are better off avoiding foreclosure.  Moreover, it is important to recognize that the costs of foreclosure may extend well beyond those borne directly by the borrower and the lender.  Clusters of foreclosures can destabilize communities, reduce the property values of nearby homes, and lower municipal tax revenues.  At both the local and national levels, foreclosures add to the stock of homes for sale, increasing downward pressure on home prices in general.  In the current environment, more-rapid declines in house prices may have an adverse impact on the broader economy and, through their effects on the valuation of mortgage-related assets, on the stability of the financial system.  Thus, finding ways to avoid preventable foreclosures is a legitimate and important concern of public policy.

To determine the appropriate public- and private-sector responses to the rise in mortgage delinquencies and foreclosures, we need to better understand the sources of this phenomenon.  In good times and bad, a mortgage default can be triggered by a life event, such as the loss of a job, serious illness or injury, or divorce.  However, another factor is now playing an increasing role in many markets:  declines in home values, which reduce homeowners’ equity and may consequently affect their ability or incentive to make the financial sacrifices necessary to stay in their homes.

On the principle that a picture is worth a thousand words, Federal Reserve staff, using detailed, county-by-county information on mortgage performance, have developed a series of “heat maps,” which summarize the incidence of serious mortgage delinquencies across the nation as well as some of the key drivers of loan performance.  As the examples will make clear, the figures use warmer colors–orange and red–to show counties for which the factor being considered has a higher value or change.  Lower values or changes are indicated by cooler colors–shades of green–and yellows indicate areas where the factor under consideration has a moderate value or change.

Nationally, as of the fourth quarter of 2007, the rate of serious delinquency, as measured by credit records, stood at 2 percent of all mortgage borrowers, up nearly 50 percent from the end of 2004.  The fourth quarter of 2004 is a useful benchmark, because general economic conditions were fairly normal and the lax underwriting that emerged later was not yet evident.

Shows the national patterns of serious mortgage delinquency in 2004, which, again, I am taking as representative of a relatively normal period, with orange and red indicating the highest rates of delinquency and greens indicating the lowest.  In 2004, the areas of the country with the highest rates of serious delinquency included significant portions of the Southeast; parts of the Midwest, most notably Ohio and Indiana; portions of the Rocky Mountain region; and Texas, Oklahoma, and areas in the Mississippi valley.  In contrast, many parts of the country experienced exceptionally good loan performance at that time, including most of the West Coast, New England, and much of southern Florida.

However, conditions in some areas changed greatly in a relatively short period of time.  Shows the pattern of delinquency rates as of the last quarter of 2007.  Many of the areas that exhibited elevated delinquency rates in 2004 continued to show relatively high rates of delinquency in 2007.  But some areas that had low rates in 2004 experienced high rates three years later.  Makes this point more sharply by showing the pattern of increases in delinquency rates between 2004 and 2007, with the largest increases shown in red.  The strong regional pattern is evident in the figure.  Although many parts of the country have seen significant increases in mortgage delinquencies and foreclosures, a number of areas–such as California, parts of Nevada, Arizona, Colorado, Florida, portions of the upper Midwest, and New England–have been particularly hard hit.

The regional pattern of the recent rise in mortgage delinquencies and foreclosures requires explanation.  Again, we can use heat maps to examine the underlying relationships across geographic regions between changes in mortgage delinquency rates and factors identified as driving loan performance.  For example, the change in the unemployment rate in a county can be used as a proxy for disruptions in family incomes and subsequent financial stress.  shows changes in average annual unemployment rates across counties between 2004 and 2007, with counties indicated in red experiencing the largest increases in joblessness.  The data suggest that increases in unemployment rates account for at least some of the recent increases in mortgage delinquencies.  Parts of New England, states in the Great Lakes region–including Minnesota, Michigan, and Wisconsin–and a number of other states, such as Nevada, show both increased mortgage delinquencies and notable increases in unemployment rates.

However, the behavior of unemployment does not seem sufficient to explain the increased delinquency rates in other areas, including California, Florida, and portions of Colorado, where mortgage delinquencies increased during a period in which unemployment generally decreased.  Another important determinant of loan performance, identified by research at the Federal Reserve and elsewhere, is changes in house prices. Figure 5 shows the regional pattern of changes in house prices between 2006 and 2007, with the sharpest price declines indicated in reds and oranges. The figure shows that Florida, California, Nevada, Michigan, and parts of New Mexico and Colorado experienced decreases in house prices between the fourth quarter of 2006 and the fourth quarter of 2007 (a pattern which has continued and intensified in 2008).  As I noted, sharp declines in house prices, and thus in homeowners’ equity, reduce both the ability and incentive of homeowners, particularly those under financial stress for other reasons, to retain their homes.

Other factors affect foreclosure rates, and once again the heat maps can give us a visual impression.  Figure 6 shows the share of home purchases by non-owner occupiers–investors or purchasers of vacation homes, for example–during 2005 and 2006.  Again, there is some correlation with the increase in delinquencies and foreclosures, as purchases by non-owner occupiers were relatively high in the West, Southwest, and in Florida.  Figure 7 shows the incidence of junior liens (or piggyback loans), often an indicator of little borrower equity at the time of purchase.  The greater use of these mortgages in the West and East Coasts presumably reflects higher house prices in those regions; again, the geographical pattern suggests that the use of piggyback loans may also have contributed to the recent rise in delinquencies and foreclosures.

What are the implications of these relationships, particularly the linkage of mortgage payment problems and falling house prices'  Loan servicers are used to dealing with mortgage delinquencies related to life events such as unemployment or illness, with the most common approaches being a temporary repayment plan or the folding of missed payments into the principal balance.  A widespread decline in home prices, by contrast, is a relatively novel phenomenon, and lenders and servicers will have to develop new and flexible strategies to deal with this issue.  In some cases, when the source of the problem is a decline of the value of the home well below the mortgage’s principal balance, the best solution may be a write-down of principal or other permanent modification of the loan by the servicer, perhaps combined with a refinancing by the Federal Housing Administration or another lender.  To be effective, such programs must be tightly targeted to borrowers at the highest risk of foreclosure, as measured, for example, by debt-to-income ratio or by the extent to which the mortgage is “underwater.”  Finding the right balance–particularly the need to avoid programs that give borrowers who can make their payments an incentive to default–is difficult.  But realistic public- and private-sector policies must take into account the fact that traditional foreclosure avoidance strategies may not always work well in the current environment.

The Federal Reserve’s Homeownership and Mortgage Initiatives
I would like to say a few words about the Federal Reserve’s efforts to strengthen homeownership and reduce preventable foreclosures.  The Federal Reserve’s decisions regarding monetary policy and our efforts to increase financial stability affect housing and mortgage markets, of course.  But, as an organization with a national presence in the form of regional Federal Reserve Banks and their Branches, we are also working to address these issues more directly.  We are collaborating with other regulators, community groups, policy organizations, lenders, and public officials to identify ways to prevent unnecessary foreclosures and their negative effects on local economies.

Our efforts have taken a variety of forms.  First, we have employed economic research and analysis, a particular strength of the Federal Reserve, to increase the sum of knowledge about mortgage and housing issues.  For example, we are providing community leaders with detailed analyses identifying neighborhoods at high risk of foreclosures, analogous to the heat maps I showed you this evening.  These analyses have helped community organizations better focus their scarce resources, such as deciding where to target counseling services or other intervention efforts.  A Federal Reserve System work group has prepared overviews of the current state of knowledge about housing and mortgage markets, and further research is currently under way to fill in the most important analytical gaps.

Second, we are collaborating with interested parties across the country, taking advantage of our national presence and our existing relationships with local lenders, community groups, government officials, and other stakeholders, to take practical steps to address the causes and consequences of foreclosures.  For example, I mentioned earlier the destabilizing effects foreclosures have on neighborhoods, resulting from factors such as decreased home values and deterioration of vacant properties from neglect.  To help address this problem, the Federal Reserve is joining in a partnership with the nonprofit NeighborWorks America to develop materials, tools, and training programs to help communities and others acquire and manage vacant properties. The goal is to support the provision of affordable rental housing and new homeownership opportunities in low- and moderate-income neighborhoods.  Federal Reserve Banks and Branches have also hosted numerous meetings and workshops to bring together local officials, lenders, community groups, and others to try to find ways to reduce the incidence of foreclosures and mitigate their economic and social effects.

Third, we are engaged with mortgage servicers to understand impediments they may face when modifying loans or offering other alternatives to foreclosure.  Servicers still report difficulty connecting with troubled borrowers, and we have supported efforts to encourage borrowers to contact their lenders or housing counselors.  Working with the Hope Now alliance and independently, we have encouraged the industry to increase their efforts to work with troubled borrowers, to develop guidelines and templates for reasonable standardized approaches to various loss-mitigation techniques, and to adopt uniform reporting standards, such as those sponsored by Hope Now.  Clear disclosures of loan modifications will not only make it easier for regulators, the mortgage industry, and homeowners to assess the effectiveness of foreclosure-prevention efforts, but they will also foster greater transparency, and hence greater confidence, in the securitization market.

Prospectively, we are committed to promoting an environment that supports the homeownership goals of creditworthy borrowers.  To this end, the Federal Reserve Board has proposed new regulations to better protect consumers from a range of unfair or deceptive mortgage lending and advertising practices.  To help ensure that the rules are broadly enforced, we are engaging in a program with other federal and state agencies to conduct consumer compliance reviews of nondepository lenders and mortgage brokers.  These reviews are targeting underwriting standards, risk-management strategies, and compliance with consumer protection laws and regulations.

The Federal Reserve also is continuing its long-standing practice of providing educational and information resources to help consumers make informed personal financial decisions, including choosing the right mortgage.  Through their community affairs offices, Federal Reserve Banks are working to establish foreclosure-mitigation resource centers on their websites to be used by small municipalities, housing counselors, and community groups.  For consumers who have questions about banking procedures and rules or who believe they may have been treated unfairly by their lender, the Federal Reserve Consumer Help Center directs queries to the various regulatory agencies so that a consumer has only one call to make to ask questions or file complaints.  

Additional Mortgage Initiatives
Additional government policies can help address problems in the mortgage markets.  The Congress can take an important step by moving quickly to reconcile and enact legislation permitting the Federal Housing Administration (FHA) to increase its scale and improve its management of risks.  Such legislation could help the FHA reach a wider range of borrowers and develop appropriate underwriting and pricing methodologies to deal with any increase in credit risk.  Giving the FHA greater latitude to set underwriting standards and risk-based premiums for mortgage refinancing, as well as more flexibility in product development, would allow it to help still more troubled borrowers. 

Separately, the government-sponsored enterprises (GSEs)–Fannie Mae and Freddie Mac–could do more.  Recently, the Congress expanded Fannie Mae’s and Freddie Mac’s role in the mortgage market by temporarily increasing the limits on the sizes of the mortgages they can accept for securitization.  In addition, because the GSEs have resolved some of their accounting and operational problems, their federal regulator, the Office of Federal Housing Enterprise Oversight, has lifted some of the constraints that it had imposed on them.  Thus, now is an especially appropriate time for the GSEs to move quickly to raise significant new capital, which they will need to take advantage of these new securitization and investment opportunities, to provide assistance to the housing markets in times of stress, and to do so in a safe and sound manner.

As the GSEs expand their role in housing markets, the Congress should move forward on GSE reform legislation, which includes strengthening the regulatory oversight of these companies.  As the Federal Reserve has testified on many occasions, it is very important for the health and stability of our housing finance system that the Congress provide the GSE regulator with broad authority to set capital standards, establish a clear and credible receivership process, and define and monitor a transparent public purpose–one that transcends just shareholder interests–for the accumulation of assets held in their portfolios.

Conclusion
The realtor’s mantra is “location, location, location,” and, as I have discussed this evening, local variation in housing and mortgage markets is considerable.  This variation is useful for understanding the sources of the increase in mortgage delinquencies and foreclosures, and it should be taken into account as servicers and policymakers consider how best to avoid preventable foreclosures.

Most Americans are paying their mortgages on time and are not at risk of foreclosure.  But high rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy.  Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers.  It’s in everybody’s interest.

References
Avery, Robert B., Kenneth P. Brevoort, and Glenn B. Canner (2007).  “The 2006 HMDA Data (1.26 MB PDF),” Federal Reserve Bulletin, vol. 93 (December), pp. A73-A109.

Gerardi, Kristopher, Adam Hale Shapiro, and Paul S. Willen (2007). “Subprime Outcomes, Risky Mortgages, Homeownership Experiences, and Foreclosures,” Working Paper No. 07-15.  Boston: Federal Reserve Bank of Boston, December 3.

1.  Based on servicer data from First American LoanPerformance.

2.  This information from TrenData is drawn from the credit records of a geographically stratified random sample of more than 20 million individuals (roughly a 1 in 10 sample of all credit records) for each calendar quarter beginning in 1992.  TrenData is a registered trademark of TransUnion LLC.  “Serious delinquency” includes accounts that are 90 days or more past due or in foreclosure.

3.  Unemployment rate data are from the Bureau of Labor Statistics.

4.  For example, see Gerardi, Shapiro, and Willen (2007). 

5.  Displayed is the annual percentage change in the Office of Federal Housing Enterprise Oversight price index for each county from the end of 2006 to the end of 2007.

6.  Several different series measure home price changes.  The index compiled by the Office of Federal Housing Enterprise Oversight uses the values of homes whose mortgages were purchased by Fannie Mae or Freddie Mac.

7.  Information on non-owner occupiers comes from Home Mortgage Disclosure Act (HMDA) data.  HMDA is implemented by Regulation C (12 CFR 203) of the Federal Reserve Board.  For more information about HMDA, see Avery, Brevoort, and Canner (2007). 

8.  For details about the technique used to identify piggyback loans and for more information about their use, see Avery, Brevoort, and Canner (2007). 

9.  See www.newyorkfed.org/mortgagemaps/ to view more maps related to mortgage lending. 

 Consumers can call 1-888-851-1920 or visit http://www.federalreserveconsumerhelp.gov/. 

These figures are presented with Flash®; the software to view these figures is available at Adobe’s web site. 

Accessible version of charts

Critics are blaming Alan Greenspan for today’s financial crisis, but now the former Federal Reserve chief is fighting back.

Greenspan sets the record straight in an exclusive interview.

Part 1

Part 2

What are others saying about Alan Greenspan

Alan Greenspan unfair blame for sub prime crisis…

The Stock Market Crash Of October, 1987

A few ideas on how to fix the problem, with Robert Shiller, Yale School economics professor

Sales of new homes plunged last month to the lowest level in 16 and a half years.

It is not just Bank of America that is reeling from subprime problems, the largest banks in the world have posted $290 billion of credit losses, since the beginning of 2007.

Bordering On Insanity

U.S. home prices rose approximately 0.6 percent on a seasonally adjusted basis between January and February, according to OFHEO's new monthly House Price Index. For the 12 months ending in February, U.S. prices fell 2.4 percent. Since its peak in April 2007, the index is down 3.1 percent.

The OFHEO monthly index is calculated using purchase prices of houses backing mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac. The index, introduced in OFHEO's fourth quarter 2007 House Price Index (HPI) report, provides a timely indicator of house price conditions for the nation and each of the nine Census Divisions. For the nine Census Divisions, seasonally-adjusted monthly price changes from January to February ranged from -0.6 percent in the Mountain Census Division to 2.2 percent in the New England Division.

Changes in the national index, which is constructed as a weighted average of data from the nine Census Divisions, reflect movements in market prices as well as changes in the mix of geographic areas within Census Divisions. Normally changes in the mix are relatively small. However, in February, the share of reported sales volumes rose in states with stronger housing markets, which significantly increased estimated appreciation above what it would have been in the absence of such effects. Holding the weights for each state constant, the national increase would have been only 0.3 percent in February.

Monthly index values and appreciation rate estimates are provided in the table and graph on the following pages. All estimates are seasonally adjusted and, as with OFHEO's quarterly HPI, will be revised in later releases. As indicated in OFHEO's fourth quarter 2007 House Price Index (HPI) report, quarterly HPI releases will include updated monthly data presented in the same format as the attached table.

For detailed information concerning the new monthly HPI, please see the HPI Frequently Asked Questions (FAQs), at http://www.ofheo.gov/hpi.aspx'Nav=60. The next release of monthly index data will be included as part of OFHEO's next quarterly HPI, released May 22, 2008. That release will include quarterly index data through the first quarter of 2008 and will report monthly estimates through March. Please e-mail ofheoinquiries@ofheo.gov for a printed copy of this report.

Bank of America Net Drops 77%

NEW YORK, April 15, 2008 (PRIME NEWSWIRE) — Beleaguered investors of Washington Mutual (NYSE:WM) were delivered more bad news by the company in Tuesday’s after-hours earnings announcement. The company reported a first-quarter loss of $1.14 billion and indicated that it expects Writedowns of $12 billion to $19 billion of its $187 billion portfolio of single family residential home loans in 3 to 4 years.

Litigation on behalf of Washington Mutual employees and 401(k) plan participants has commenced against the company for alleged violations of the Employee Retirement Income Security Act (ERISA) in the United States District Court for the Western District of Washington. If you are an employee of Washington Mutual and wish to discuss the investigation or have questions concerning this notice or your rights, please contact Scott+Scott (scottlaw@scott-scott.com, (800) 404-7770, (860) 537-5537), for more information. There is no cost or fee to you.

Scott+Scott is a law firm with significant experience in prosecuting investor and employee class actions. The firm currently is litigating major securities, antitrust and employee retirement plan actions throughout the United States and represents pension funds, foundations, individuals and other entities worldwide.

Bear Stearns reaped a profit of $115 million or 86¢
a share before the JP Morgan takeover.

WASHINGTON, DC ' James B. Lockhart, Director of the Office of Federal Housing Enterprise Oversight (OFHEO) today released OFHEO's 2008 Report to Congress, detailing the agency's annual examination conclusions and regulatory oversight of the
Government Sponsored Enterprise (GSE), Fannie Mae and Freddie Mac, for the year 2007. The report concludes that both Enterprises made very good progress in remediating their operational areas and providing stability and liquidity to the mortgage markets, but they remain 'a significant supervisory concern' because of increased mortgage market and credit risk.

'Fannie Mae and Freddie Mac should be commended for the timely filing of their 2007 annual statements,' said Lockhart. 'While they have made progress in fixing many of their systems, internal controls and risk management problems, they still have much work to do, especially with the continuing challenges of today's mortgage market.'

'These challenges and the pressures on Fannie Mae and Freddie Mac to do even more to support the mortgage market require a stronger regulator,' Lockhart said. 'As I noted in my transmittal letter, last month both GSEs agreed that a 'world-class regulatory structure' is needed and they 'renewed a shared commitment to work for comprehensive GSE reform legislation. The time to act on the legislation is now.''

In addition to the annual reports of examination for Fannie Mae and Freddie Mac, the report includes a review and summary of related topics, including:

The full report is available: Here. To request a printed copy, please send an e-mail to ofheoinquiries@ofheo.gov or call (202) 414-6922.

"The man who chases two rabbits catches neither."

– Confucius, philosopher

The Federal Reserve Was Ready to Make Lending Available to Other Brokers on Same Day They Helped Out Bear Stearns; Borrowers at Discount Window Included Goldman Sachs, Morgan Stanley and Lehman Brothers.

Mortgage lenders are shutting down your home equity lines of credit in order to preserve their interests and combat homeowners from over mortgaging in depreciating markets.

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