Sunday, September 26, 2010

Featured Article - August 2010: How Wall Street Reform Benefits Foreclosure Buyers

By Peter G. Miller

With the passage of Wall Street reform now a done deal in Washington there are probably few people who did better than real estate investors. Stricter mortgage standards plus less federal emphasis on homeownership means there will be a new and growing demand for rental housing.

'In previous eras, we haven't seen people question whether homeownership was the right decision. It was just assumed that's where you want to go,' Raphael Bostic, a senior official with the Department of Housing and Urban Development, told the Washington Post. 'You're not going to hear us say that. What we've seen in the last four years, is that there really is an underside to homeownership.'

The change in government policies impacts the demand for investment real estate because a growing population combined with a smaller percentage of owner-occupants means more demand for rental property.

The Wall Street reform legislation homogenizes the mortgage marketplace and assures that there will be no shortage of conventional, VA and FHA loans. Lenders are entirely free to offer more exotic financial products, but only if they're willing to set aside reserves, eliminate prepayment penalties and face potent lawsuits from borrowers and mortgage investors enabled by the new standards.

For buyers and investors with proper paperwork and visible finances the new loan requirements will be a low hurdle, however, for many borrowers mortgage applications will suddenly become more difficult. Application reviews will stiffen and lender standards will rise, meaning that many loan applications will be declined. We're already seeing this with the new devotion to higher credit scores.

The tougher financing standards will create two results. First, there will simply be fewer buyers than might otherwise be the case. Second, there will be fewer buyers who can 'stretch' and afford a bigger mortgage for a given income. In the end these two factors will create less pressure to push up home prices.

Rentals & Foreclosures:
Since the end of World War II, we have had a steady need for additional rental units to accommodate a growing population. In 1950 we had a population of 153 million, a figure that will soon top 310 million. Now we have massive numbers of foreclosures adding to demand.

'For 2010, the midyear numbers put us on pace to exceed three million properties with foreclosure filings by the end of the year, and more than one million bank repossessions,' said James J. Saccacio, chief executive officer of RealtyTrac. 'The roller coaster pattern of foreclosure activity over the past 12 months demonstrates that while the foreclosure problem is being managed on the surface, a massive number of distressed properties and underwater loans continue to sit just below the surface, threatening the fragile stability of the housing market.'

Marketplace Changes:
Although there's plenty of property demand, that demand is not actionable. Individuals who might once have bought are effectively being shut out of the marketplace by such issues as tougher loan standards, unemployment, reduced wages, credit reports with major black marks and changing federal policies. And while such individuals may not have the financial muscle to buy a home, they often have sufficient income to afford a good rental.
Time & Place:
So is this the time to buy investment real estate, especially short sales and foreclosures? In many markets there's a fusion of discounted acquisition costs, historically-low interest levels, falling vacancy rates and rising rental rates. This doesn't mean specific real estate investments are attractive everywhere or for all buyers, but in areas where such trends exist and seem likely to continue this may well be an unusually good time to consider short sales and foreclosures, two ways to acquire discounted real estate.

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