One trend that we are seeing nationwide as investors are the unfortunate effects of adjustable rate loans that originated 2-4 years ago when interest rates were low. There are numerous examples of owner occupied properties (first time homebuyers and new construction for the most part) that were financed into loans that were very dangerous for the buyers on a long-term basis. We’ve all heard the radio commercials that say, “Why rent when you can own, come to XYZ community this weekend and move in for $699/month.” For the homebuyers that understand how to utilize these loans to their benefit they are great tools. Unfortunately, there are a number of homebuyers that should not have been buying homes on those terms or buying homes at all. When I write about “those terms”, I am writing about 2 year adjustable loans that are fixed for 2 years then the payment starts adjusting upwards to finally reach a point where it is not feasible for the homebuyer to afford to live in the property. In this case that $699/month payment may keep increasing by $120 or more frequently and the buyer cannot adjust their lifestyle to afford it.
Who is responsible for this activity? Well, that is a debate that I’ve heard many different angles on. The federal government has recently been involved to now regulate the minimum credit score needed to receive 100% financing and other loan programs. For example, 1 year ago a homeowner may have been able to get a 100% financed loan with a 560-580 credit score. Now, the average is around a 600-620 mid-score. You may be thinking….what’s 20 points? Well, it’s a lot to most of those folks in that credit range as this not only effects how much they can borrow and at what loan-to-value (LTV) but at what interest rate. This brings forth the following question…
Is it the mortgage broker/company’s fault or is it the homeowner for getting themselves into this type of scenario? The answer is both. There are many great mortgage brokers out there that really help a lot of homebuyers with these programs. I’ve spoken to many of them and their position is that they will explain the 2 year adjustable rate plans to the prospective homebuyers and create a plan for them to bring their credit scores up over the 2 year period then refinance into a better loan program after the 2 year period is over. If the prospective homebuyer decides to proceed then they know all the details and have an action plan for success. If they fail to follow the plan then shame on them. However, the flip side of this scenario is the mortgage broker that doesn’t explain these terms and the program dynamics thoroughly to these prospective homebuyers. The result is 2 years later they are facing a troubling situation. We have received numerous calls from these folks needing to sell their homes and have found that half are accountable for their actions and half of them claim they had no idea their payment would increase like it has. Note: When I say the term “mortgage brokers” this also could be a bank, builder, etc.
So how do these scenarios play out for real estate investors? As investors we can help a lot of these people that are in trouble through many creative solutions. Unfortunately, there are also a number of scenarios in that some of these homebuyers are 100% financed (or higher) on new homes and from an investment perspective it is not always feasible to help them. What you can expect to see are a lot more bank owned properties (REO = Real Estate Owned) hitting your local Multiple Listing Service (MLS) systems. When families face foreclosure and an investor has not come in to solve the problem before the property is sold on the courthouse steps, usually a representative from the bank is at the sale to buy the property back to protect the banks’ interest. So as more and more of these adjustable loans become a problem for homeowners that lack the credit to refinance, we will see a lot more properties hit the courthouse steps nationwide and become bank owned. They will then be offered via local approved REO real estate agents for that bank in your local markets. The opportunities will be much larger for investors to buy properties at a discount conventionally because banks will need to free up these non-performing liabilities from their portfolios. Per federal guidelines, a bank needs to keep 3 times the amount of a loan in reserves. For example, if they loan out $200,000 then they need to keep $600,000 in reserves. You can see very clearly why selling these homes is in their best interest so that they can provide new loans to homebuyers.
Take care,
Mike
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