Featured Article - September 2010: Favorable Financing on Fannie, Freddie

By Daren Blomquist, Staff Writer

A growing number of delinquencies and foreclosures on government-backed loans - combined with generous incentives for purchasing foreclosed homes owned by Fannie Mae, Freddie Mac and HUD - means buyers and investors will have plenty of opportunities in the coming months to pick up properties at bargain prices with low down payments and preferred financing.

The two government sponsored enterprises (GSEs) - Fannie and Freddie - are acquiring real estate owned (REO) properties through foreclosure at a significantly faster pace than overall growth in REO activity based on RealtyTrac data from the second quarter.  Fannie Mae took ownership of 68,838 REO properties in the second quarter, an increase of 114 percent from the second quarter of 2009, while Freddie Mac took ownership of 34,662, a 58 percent increase from the previous year.

Overall, REO activity was up 38 percent over the same time period, according to RealtyTrac, and the two GSEs together accounted for 38 percent of the total 269,962 REOs reported by RealtyTrac in the second quarter.  Throw in the 23,435 foreclosed properties acquired by the Department of Housing and Urban Development (HUD) through Federal Housing Administration-backed loans gone bad, and the three "Fs" accounted for 47 percent of all REO activity in the second quarter.

That's good news for homebuyers and residential real estate investors.

Indeed, both Freddie Mac and Fannie Mae have acknowledged that these delayed foreclosures will increase in the months ahead. Moreover, Fannie, Freddie and the FHA all reported spiking pre-foreclosure sales, or short sales, over the past year - although the numbers of sales are still relatively low.  FHA reported a 161 percent increase, Fannie a 171 percent increase and Freddie a 179 percent increase.

Favorable Financing

Both the FHA and Fannie Mae have favorable financing for homebuyers and investors.

FHA financing is available on the HUD properties, including programs that benefit borrowers with less- than-ideal credit and require only a 3.5 percent down payment.  In addition, buyers may be able to take advantage of the FHA 203(k) rehab loan program, which allows an owner-occupant borrower to get one loan that covers both the acquisition and rehabilitation of a foreclosed property that is need of repair.

Fannie Mae offers special financing for both buyers and investors for many properties it lists for sale.  The special financing includes down payments as low as 3 percent, no mortgage insurance and no appraisal requirements.

And Fannie Mae and FHA have programs in place to encourage buyers and renters using a local Neighborhood Stabilization Program (NSP), a federally funded initiative that provides grants to state and local governments, as well as non-profit developers, to purchase and rehabilitate foreclosure properties and offer down payment and closing cost assistance to low- to middle-income homebuyers.

Fannie Mae waives the 5 percent earnest money deposit requirement for individual homebuyers using public funds to purchase a Fannie-Mae owned property. Deposits can be as low as $500. In addition, buyers using NSP programs have 15 extra days for closing and the ability to renegotiate their offer after obtaining an NSP-required appraisal.

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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.

Mortgages:

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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