FORECLOSURE INFORMATION PAGE

Texas Foreclosures

As you are probably aware, the Dallas Fort Worth market is currently at the highest foreclosure rate in its history and that number is expected to continue to swell. One would think that the lenders would be motivated to get these off their books and sale them cheap. Well, not quite the case so far. The primary reason for all these foreclosures has been brought on by the lenders themselves who obviously didn’t learn their lesson in eighties when the exact same thing happened and the RTC(Resolution Trust Corporation) was created by the government. The RTC was created to dispose of foreclosed properties as a result of bad loans made by the savings and loan banks which were backed by the federal government.

Over the past several years lenders have created programs for those who could not qualify for a standard conventional full documentation loan because they either had no money down or were unemployed in many cases but had a decent credit score. One form of these types of loans is called “stated income no doc loans,” which means if a prospective buyer/s have a FICO score over 675, depending on the lender, one could get a loan by just making up a figure of how much they earn annually, even if that was nothing, and not providing any documentation to the lender: i.e. bank statements or tax returns. Even better, a buyer/s could simply increase the price of the home and have the seller pay all of the buyer/s pre-paids and closing costs, thus making it possible to purchase a home with very little or no money from they buyer/s.

Another popular loan type contributing significantly to the increased foreclosures is the ARM(Adjustable Rate Mortgage), this instrument allows for loans where the initial interest rate begins significantly lower than a 15 to 30 year fixed rate mortgage, then the rate that is usually tied to some index like the 3/5 year T-Bill changes at the end of the adjustment period, which is typically 3/5 years. This was very appealing to buyers because it allowed them to purchase more of a home than they could otherwise afford on a conventional fixed rate mortgage. At the end of the adjustment period the interest rate of the ARM is re-adjusted to the new current 3/5 year T-Bill. The other option is to refinance into a fixed rate mortgage. What a great instrument if interest rates never increase. Well, they have increased and this results in the monthly mortgage payments increasing to a level that the homeowner can no longer afford. Now that we have been experiencing an inverted yield curve, meaning that the long term lending rates are higher than the short term lending rates, there are no other financing options to keep payments from increasing significantly.

As a result, the home purchased on a “stated income no doc” was significantly more than the buyer could afford or the ARM has reached the end of its adjustment period and the payments are more than the buyer can afford to pay. Home prices have flattened out and the market is no longer experiencing double digit appreciation in house values and there is no equity resulting in the buyer being “upside down.” Now, the buyer cannot sell the home without carrying a large amount of money to the closing to cover the fees and closing costs. Inevitably, the lender initiates foreclosure proceedings against the home and the buyer simply abandons the home since nothing was invested, and the lender has to take it back. Now the lender has an REO (Real Estate Owned) home on the books where they lent more money against it than they can sell it for after legal proceedings, fees and closing costs.

A few years ago I saw really good deals in the foreclosure market but deals seem to be fewer now. In the past, the lenders would re-key the locks and sale them as-is without cleaning out the trash or replacing broken and/or stolen items in the home. I have seen more and more over the past 2 years lenders rehabilitating homes by repainting, replacing appliances, adding new carpet, etc. - Then pricing the home at fair market value.

I believe that as time goes on and the lenders get their balance sheets piled up with bad debt, they will be more inclined to make deals on these properties. I am not saying there are not good deals on foreclosures, it’s just that they have gotten much harder to find and lenders are currently not as motivated as people think. In my years of working with and purchasing foreclosures, a 20% margin with minor repairs was considered good. Yes, I hear all the time (usually infomercials) but never see properties that were bought for pennies on the dollar, maybe a burnout. Sure, I can find you houses that are 50% of market but they are better suited for demolition than rehabilitating. I am still waiting to see a “diamond” at 50% that is not in need of serious repair. I would love to talk to you, if you have it!

Please note, if you are interested in pursuing foreclosures:

The window of opportunity is very narrow to seize a deal as the market is highly competitive and one must be positioned financially and emotionally to take advantage of these deals. I don’t mean have cash, but the means to actually qualify for and quickly obtain a loan when the opportunity arises. Let’s face it, foreclosure properties are not for everyone; they are for a select few who have the intuition and confidence to make the purchase quickly. We are ready to create relationships with those who are truly interested in making money in real estate. We cannot afford to spend the amount of time that we do working with foreclosures and put someone on it if he is not able to make a quick decision, or is not pre-approved. Please consider these factors if you decide to become a buyer in this fast moving, competitive field. We look forward to working with you in the future.

Sincerely,

Kipp Butler

Foreclosure Specialist