The euphoria that surrounded six years of escalating home prices, record levels of home sales and rock-bottom interest rates crashed and burned in 2007, forcing many foreclosure investors to ratchet down their purchases and patiently wait for an expected flood of bargains to emerge from the ashes of the housing downturn.
Foreclosure-related stories saturated the headlines throughout the year, and the Foreclosure News Report has compiled the following top 7 stories of the year based on their impact on foreclosure investors.
#1 The ‘Mortgage Meltdown’
The national media used the phrase ‘mortgage meltdown’ to denote the biggest real estate story by far in 2007: the subprime mortgage fiasco that saw dozens of lenders close their doors, lay off employees, and left thousands of homeowners stranded with adjustable-rate mortgages they could no longer afford to pay as interest rates began to reset upward.
A number prominent subprime lenders — including New Century Financial Corp., Option One Mortgage Corp., Ameriquest Mortgage, ResMae Mortgage Corp., Fremont Investment and Loan and People’s Choice Home Loan Inc. — either closed their doors or reorganized under Chapter 11 bankruptcy protection Some major lenders, including Countrywide, Wells Fargo Bank and Washington Mutual, closed down their subprime operations, writing off losses and laying off employees go.
Doug Duncan, chief economist of the Mortgage Bankers Association, told Bloomberg News that he expected more than 100 other lenders to go out of business this year.
In the meantime the mortgage meltdown is a story with an ending that hasn’t been written yet and one which investors should continue to monitor in 2008 because it affects one of the pillars of real estate investing: financing.
#2 Foreclosures Surge
No matter how they were counted, or how their effects were interpreted by the media, the government or the public, rising numbers of foreclosures garnered national attention in 2007. When the final numbers are tallied, RealtyTrac is estimating about 2 million foreclosure filings on 1.2 million properties, an increase of more than 60 percent from 2006, when 1.2 million foreclosure filings on 735,000 properties were reported.
As of this writing, the nation’s foreclosure activity peaked in August at 239,851 foreclosure filings, a 36.7 percent increase from the previous month. The nation also experienced double-digit increases in January (35.4 percent) and May (19.25 percent). The largest decline in activity was posted in September (down 8.3 percent).
In this climate, most foreclosure investors have had to shift their investing strategy, typically from more of a buy-and-flip strategy to more of a buy-and-hold strategy. But as this story continues to play out and foreclosures become available at deeper discounts, investors may be able to shift back to the buy-and-flip method.
#3 Popped Housing Bubble
Many industry experts denied the possibility of it happening, but when the real estate bubble did finally burst in 2007 a lot more than just egos were deflated.
Inventories of unsold housing stock, which not too long ago were around a month a two, quickly ballooned up to a 10-month supply nationwide. The National Association of Realtors, which early in the year came out with a forecast calling for the housing market to turn around in late 2007, recently revised its forecast, now calling for the nation’s real estate market to finally turn the corner some time in 2008. Homebuilders likewise have become less confident that the national housing economy is in good shape, with their housing market index sinking to a 22 year low in October and staying at that level for November.
For savvy investors who weren’t overly influenced by the Goldilocks predictions of recent years, the deflated housing market is probably expected and could prove profitable.
#4 Return of Short Sales and Auctions
The year also saw a comeback of two popular methods of disposing of foreclosure properties resurrected from the early 1990s — the last time so many properties were going into foreclosure at one time. More and more lenders of defaulted loans agreed to a short sale/short payoff situation because the homes securing those loans were “upside down” financially.
And more lenders who had repossessed homes via foreclosure turned to auctions to help them unload their increasing inventory of real estate owned (REO) property.
“Sellers want to speed up the process. Some of these are new REOs, and have not been put on the market with a Realtor first. They’re sending them right to auction,” said Rob Friedman, who brought back his Real Estate Disposition Corp. to take advantage of the current change in the real estate business climate.
#5 Credit Crunch Hits Wall Street
With local lenders writing loan documents at breakneck pace between 2004 and 2006, many of the adjustable-rate, no-interest, negative amortizing, so-called exotic” loans ended up pooled together with more traditional loans and sold to Wall Street investors as mortgage-backed securities.
When many of those loans became delinquent, the end result was that many high flying Wall Street firms took major hits to their bottom line. The nation’s fifth largest investment banker, Bear Stearns, had two mortgage-based hedge funds valued at $3.2 billion totally wiped out in July, making it the first well-publicized victim.
Then in November the news hit that Citigroup’s chief executive officer, Charles Prince, had tendered his resignation amidst the growing subprime loan fallout. Prior to Prince’s departure the firm announced it would take additional write-downs of $8 billion to $11 billion in the fourth quarter, a large and unexpected loss that could wipe out profit for the entire period. Merrill Lynch also reported in November that it had suffered an $8.4 billion loss in the subprime mortgage sector — the biggest loss in the brokerage’s 93-year history. This significant loss ended up bringing down the firm’s chief executive officer Stan O’Neal.
Just how long the banks and Wall Street firms will need to flush out the remaining sediment left from sour subprime loans probably won’t be known until some time next year. In the meantime, investors and wannabe home buyers will have to deal with tightened lending standards that make it more difficult to get a loan in order to purchase a property.
#6 Federal Reserve Lowers Interest Rates
After 17 straight upward “adjustments” to interest rates and a year of unchanged rates, Ben Bernanke and the Federal Open Market Committee finally took the advice of real estate professionals and others, lowering the federal funds rate (the FFR is the short-term rate banks charge each other to borrow money) twice in a row starting in September 2007.
Combined, the downward adjustments totaled a decrease of 0.75 percent (or 75 basis points) in the FFR. The Fed cited a steeper than anticipated housing “correction” as a catalyst for the downward adjustments, but pointed to the continued threat of inflation to justify their caution in making the adjustments.
“Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time,” the FOMC said in a statement published October 31.
#7 Politicizing of Foreclosures
Believe it or not, enough noise has been made about the mortgage meltdown and soaring foreclosure activity around the nation that even the presidential candidates have sat up and noticed to the extent of coming out with their own policy statements on how to handle the crisis.
In August, Bob Pisani, Wall Street correspondent for CNBC, called foreclosures “the hot potato of the political season.” The five states with the most foreclosures in the country that month also represented 25 percent of the available electoral votes, or roughly half of the electoral votes it will take to elect our next president.
But more significant than the posturing from presidential candidates was action taken on the local level from politicians coming out of the woodwork to “rescue” their constituents from a bad situation.
Many governors, mayors, city treasurers, city council members and eventually Congress members were interested in setting up some sort of task force to explore and examine the local foreclosure problem and to make procedural recommendations during 2007.
A number of bills were introduced at all levels of government to deal with fears over foreclosures. Many of them had “protection” somewhere in the title, whether it was consumer protection, borrower protection or mortgage loan protection. Some had mortgage “fraud” prevention or “scam” in the title.
With the mortgage meltdown far from over, investors and potential home buyers interested in purchasing property in any particular part of the country should keep tabs on proposed legislation coming down the pike in 2008 because some of these bills, if passed, may have a direct impact on how and whether pursuing property in that part of the country in worth the effort.