Friday, September 25, 2009

Strategic Mortgage Defaults

The L.A. Times reports that a study shows borrowers with good credit are actually more likely to default on their mortgages than borrowers with lower credit scores. These "strategic defaults" appear to be done based on a simple business analysis and with full knowledge of the consequences: if the property is seriously underwater, just give it up.

When I first read this, my thought was the defaulters were mainly people who bought investment properties during the bubble and were now giving up This does not appear to be the case, however. "Two-thirds of strategic defaulters have only one mortgage -- the one they're walking away from on their primary homes." And, not surprisingly, the study found "Strategic defaults are heavily concentrated in negative-equity markets where home values zoomed during the boom and have cratered since 2006."

One site I was reading opined that this would make loan modifications harder to obtain. But I'm not sure that is a bad thing. A report published in April showed "Fewer than half of loan modifications made at the end of last year actually reduced borrowers' payments by more than 10 percent... [while] nearly one in four loan modifications in the fourth quarter [of 2008] actually resulted in increased monthly payments."

Friday, September 18, 2009

The Next Mortage Crisis: Option ARMS

Now that the subprime loan debacle is pretty much behind us, the next threat on the horizon for the mortgage industry are Option-ARMs and Alt-A loans. Alt-A loans are loans made to people just above the sub-prime cutoff. Option-ARMs are loans that allow the borrow to choose from a variety of different payments each months, including payments that are less than the interest that has accrued during the previous month. As the graph here shows, a large wave of these loans are getting ready to reset (have their interest rate adjusted) in the next two years.

Reuters has a story about the Option-ARMs here.

Wednesday, September 9, 2009

The Hard Money Blog?

It appears this blog is turning into a blog about hard money lending. This was not a conscious decision on my part, but just an evolution caused by the real estate market collapse and my relative lack of free time. When the real estate bubble burst, flipping houses because financially more dangerous. With prices dropping steadily, it was difficult to find a house at a low enough price that could be rehabbed quickly and sold at a profit some time later. It is the nature of the rehab business that delays occur. Large delays coupled with rapidly dropping prices made estimating the eventual sale price of the property difficult. An unforeseen delay could end up costing tens of thousands of dollars in lost value, thus rendering the rehab project a financial loss. So, I got out of that business until the markets stabilized.In my area, prices were dropping too rapidly and properties could not be bought cheap enough for deals to make sense. I also had some additional commitments on my time, so I was no longer able to devote as much time as I had in the past to finding deals and, should one be found, to the rehab project itself.

However, other parts of the country are seeing some stabilization. Other people have the time to find and work the deals. So I delved a bit deeper into hard money lending, and that’s the direction the blog has taken. Having the experience of rehabbing houses myself, I feel I have some additional insights into the hard money deals that come my way. Although my deals are primarily in another part of the country, I still have a general idea of the costs and effort involved. This allows me to make more informed decisions on whether or not to invest in a hard money opportunity. It also helps to have partners you trust and who have more experience than you, as I do. As I look back over the last several months of my real estate investments, I find myself moving more and more into the passive income arena. The various hard money loans I have made are passive, as is my investment in the Houston apartment complex. While the returns may not be as great as doing deals completely myself, I am getting good returns and still have my time available for other things. I recently turned 41 years old. I have a 5 year old daughter. At this point in my life, the passive investment route suits me fine.

Which is a long way of saying I received more passive income checks yesterday. I got my monthly payments for hard money loans #8 and #9, right on schedule.