Real Estate News & Commentary by Chris McLaughlin, December 28, 2009

S&P Downgrades Five Mortgage Insurers

Standard & Poor™s downgrade the credit ratings on five mortgage insurance
companies. The credit ratings agency said continued losses on insurance claims
exceeded previous expectations, as low-risk books of business are starting to
experience greater losses.   œThe lower-risk books of business within the
mortgage sector (such as those with higher FICO scores or lower loan-to-value
ratios) have been and will be more adversely affected than we had anticipated
and U.S. mortgage insurers™ losses will continue to be greater than previously
expected overall, S&P analyst Ron Joas wrote.   œIf the US economy were to
experience another setback, prolonging the exit from the recession,
delinquencies and resulting losses could increase at an even greater rate, with
lower benefits available from rescissions than what has been seen over the past
year, Joas wrote.   œIn addition, any existing and potential benefits from
modification programs might reverse, and modification attem
pts might be ineffectual.   The mortgage insurers downgraded are: Genworth From
triple-B plus to triple-B minus; PMI Group from double-B minus to B plus; Radian
Group from double-B minus to B plus; Republic Mortgage Insurance Co. From A
minus to triple-B minus; United Guaranty From triple-B plus to triple-B.

Mortgage rescue can kill your credit rating

Most troubled homeowners don’t realize that President Obama’s entering a trial
mortgage modification can actually hurt their credit.   It’s true that many
people who apply for the president’s plan are already delinquent in their
mortgage payments, but being in a months-long trial period may only add to the
pain.   Under the president’s plan, troubled borrowers can have their monthly
mortgage payments reduced to 31% of their pre-tax income.   Homeowners are first
put in a trial modification for several months to prove they can handle the new
commitment and to give the bank time to collect the necessary income and
hardship verification documents.   During this period, industry guidelines call
for loan servicing companies to report borrowers to the credit bureaus according
to their status before they entered the modification – either current or the
number of days delinquent.   However, borrowers’ accounts are also designated
with a code indicating they are in a partial payment plan.
  The coding alone can impact credit scores, which measure a consumer’s
financial health and range from 300 to 850 under the FICO system. The severity
depends on how many payments the borrower missed before entering the program.
Those who were current in their mortgages could see their scores fall up to 100
points, according to the Treasury Department.

WSJ – Government now rooted in the economy

In 2008 and 2009, Washington strove to save the economy. In 2010, Americans will
get a clearer picture of how Washington has changed the economy.   Only as the
recession recedes will it become fully evident how permanently the state’s role
has expanded and whether, as a consequence, a new, hybrid strain of American
capitalism is emerging.   One thing is clear: The government is a much bigger
force in today’s U.S. economy than it was before the financial crisis. “The
frontier between the state and market has shifted,” says Daniel Yergin, whose
1998 book “Commanding Heights” chronicled the ascent of free-market forces
starting in the 1980s. “The realm of the state has been enlarged.”   Washington
pumped $245 billion into nearly 700 banks and insurance companies, guaranteed
almost $350 billion of bank debt, made short-term loans of more than $300
billion to blue-chip companies, propped up life insurers and money-market funds,
bailed out two of the three U.S. auto makers, lent billi
ons trying to jump-start commercial-real-estate, small-business and credit-card
lending, and in two February stimulus bills enacted a year apart, committed $955
billion to rouse the economy.  

Today the U.S. government, directly or indirectly, underwrites nine of every 10
new residential mortgages, nearly twice the percentage before the crisis. Just
last week, the Treasury said it would cover an unlimited amount of losses at
mortgage giants Fannie Mae and Freddie Mac through 2012.   John Taylor, a former
Bush Treasury official who is now a Stanford University economist, says the
government’s role will be huge. “While we may be past the emergency, we’re still
in a mode that will create similar interventions for quite a while, even for
minor emergencies,” he says. “We have a bailout mentality in this country.”  
Even if the government withdraws, business will expect bailouts in the next
crisis, and that will inspire another round of cavalier risk-taking. “If we
don’t re-regulate the banking system properly, we’ll either get very slow growth
from overregulation, or another financial crisis in just 10 to 15 years,” says
Kenneth Rogoff, a Harvard University economist and
co-author of a new book on financial crises since the Middle Ages.

Holiday sales up

According to figures from MasterCard Advisors’ SpendingPulse, which track all
forms of payment, including cash, retail sales rose 3.6 percent from Nov. 1
through Dec. 24, compared with a 2.3% drop a year ago.   Adjusting for an extra
shopping day between Thanksgiving and Christmas, the number was closer to a 1
percent gain.   Last year, the economy was in “critical condition,” said Michael
McNamara, vice president at MasterCard Advisors’ SpendingPulse. “This year, it’s
in stable condition.”   “We had a pretty decent surge,” McNamara said.   Online
sales were a particular hot spot, fueled by a big increase the weekend before
Christmas. They rose 15.5 percent on the season, though they make up less than
10 percent of all retail sales.   Stores count on a post-Christmas boost because
of the growing importance of January on the retail sales calendar. Last year,
the week after Christmas accounted for 15 percent of overall holiday sales,
according to ShopperTrak, a research firm.   Retai
l consultant Burt P. Flickinger describes gift cards as “the lifeblood” of the
post-Christmas season, because shoppers typically spend more than the value of
the cards.   “Retailers with a disappointing December are going to need January
to survive,” Flickinger said. “Inventories are even too low for retailers.”

Now on to our real estate educational section…

The 5 C’s to Securing Cash – Understanding How & Why Lenders Make Loans

Banks are in the business of making money so it should come as no surprise that
lending is at the top of the priority list. Outside of transaction fees and
other miscellaneous charges, the main method of making money available to most
lenders is the origination and/or servicing of loans. Understanding how and why
lenders make loans should be the concern of every short sale investor. Use these
5 C’s to secure cash during an economic boom or bust.

Character – Believe it or not, character still counts when it comes to securing
credit. Although the days of personal banking have given way to big business and
impersonal internet applications, a substantial character reference is still as
valuable as ever. Prior education and experience, quality of references,
background and industry experience as well as other character traits can provide
the additional incentive to put your application over the edge.

Conditions – Make it clear how the money will be used; for example, to purchase
a property, make needed repairs, fund a small business operation or other
conditions and contingencies. Demonstrate a steady growth pattern and history of
success before moving to bigger and better things. Novice short sale investors
will need to be more flexible on conditions when obtaining funding in order to
obtain funds but be sure you fully understand all conditions prior to signing.
Remember – a significant number of current short sale properties were originally
purchased by investors. Don’t add to the swelling ranks of investments gone bad.

Collateral – Collateral is essentially a tangible asset used as security on a
loan. In theory, it can consist of nearly anything of value including tangible
assets such as other real estate, equipment, business assets, inventory or even
future receipts. This is an area frequently overlooked by many short sale
investors; for example, rather than simply securing a loan based upon personal
assets, consider using future rents or profits as collateral when securing a
private loan.

Capital – This is the money you bring to the table in order to secure the deal.
Generally speaking the more “skin” you have in the game, the happier lenders are
to loan money. The rationale is that people are more motivated to make a
property pay off if they have a significant amount to lose along the way. Of
course, cash is king but for those that aren’t quite ready to finance the entire
purchase out of pocket, providing sufficient capital is one way to sweeten (or
save) a deal.

Capacity – This is the most critical factor of all; the ability to repay the
loan. Whether you borrow from Aunt Sally or a big institutional bank, everyone
wants to know how and when you will repay the money. Be prepared to show cash
flow, reserves, repayment schedule and other pertinent information. Remember,
banks frequently discount rents by at least 25% in order to address vacancies
and maintenance so be sure to build-in a buffer on currently carried properties
so they work as assets in your favor when attempting to secure funding for
future properties.