December 13, 2007 by Mimi Miller.

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With this housing scene, it’s a rentals market
Financial editor Jean Chatzky on using the bleak market to your advantage
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updated 3:39 p.m. MT, Wed., Dec. 12, 2007

Jean Chatzky
TODAY Financial Editor

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This past week, Robert Kiyosaki, author of “Rich Dad, Poor Dad,” one of the best-selling personal finance books of all time, dropped by my radio show to talk real estate.

Yes the waters are rocky, the mortgages may be harder to come by, but particularly if you’re interested in buying rental properties with an eye toward becoming a bit of a mogul yourself, Kiyosaki says now is as good a time as any.
The stats seem to bear him out. Home prices fell 1.7 percent in the third quarter of this year, according to the S&P Case/Shiller Home Price Index and many experts, including Kiyosaki, are predicting a continued decline. He says to people like him and Donald Trump, his co-author on a volume called “Why We Want You To Be Rich,” (Rich Press) the fact that prices are going to plummet even further is good news: It makes buying even more lucrative.

But investing in rental properties isn’t a decision to be taken lightly. It requires a whole lot of know-how and (preferably) a shining credit report. You also need a firm understanding of exactly what you’re signing up for, which means knowing your local market inside and out.
Here’s how you can turn today’s bleak market to your advantage:

Get your credit in shape
True, you can probably purchase a property with a middle of the road credit score. But do you want to? A low credit score means a high interest rate on your mortgage, and that increased expense is going to cut into your overhead pretty dramatically.

So, take the next 12 months to improve your credit score before diving in. Pay your bills on time, turn down offers of new credit and reduce your outstanding balances. Based on Kiyosaki’s prediction, you’ll still have time to get in while the getting is good.

Study up
Jumping in without knowing the basics is the wrong move. Before you sign on any dotted lines, take the time to read a few solid (and up-to-date) books on real-estate investing. Once you feel you have a pretty good — albeit broad — handle on the subject, you can start scoping out the market where you plan to buy.

“You need to go out and see the area for yourself. Look at a lot of properties, get a handle on what they are renting for, and how much insurance and property taxes will be so you don’t have any surprises,” advises Thomas Lucier, an investor in Florida and author of “The No-Nonsense Real Estate Investor’s Kit,” (Wiley, 2006). Do it in person, but also check out the classified sections of your local newspapers to get a feel for the rents.

Spot a good investment
Location is key, obviously, and a good rule of thumb is to not buy rental property in an area where you yourself wouldn’t be willing to live. That means looking at crime rates, as well as walking the neighborhood during the day and after dark. It also means looking at things like the age of the property (an older building can mean more repairs), and enlist the help of a good inspector who will spot any structural problems. If your inspector finds something, you can then weigh your options — often, these kinds of issues can be used as bargaining chips to lower the price, but if they’re severe, you may want to just move on.

Start small
Lucier suggests a duplex that will allow you the ability to live in one side and rent out the other. Even Kiyosaki, who says he now only buys apartment buildings with more than 300 units, started with a small condo on the island of Maui, Hawaii. “I’ve ridden the market up and down, and that’s how I got smart,” he explains. As you gain experience, you can slowly begin to expand your portfolio.

Focus on cash flow
The key to making money off of your investment properties is thinking in terms of cash flow rather than capital gains, says Kiyosaki.

“When I buy a piece of real estate, my first question is what’s my cash flow? What’s my rental income from the property? A property is only worth its rent.” That means adding up your mortgage payments, property taxes, insurance costs and maintenance, and subtracting that figure from what you can reasonably charge for rent. The amount that’s left? It’s your salary. Increase it by becoming a do-it-yourselfer, if you have the time and skill to fix a leaky faucet.

With reporting by Arielle McGowen.

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December 13, 2007 by Mimi Miller.

Tougher Standards Drive Up the Cost of Homeownership
Even borrowers with decent credit are beginning to feel the mortgage crisis pinch.

Fannie Mae, soon to be followed by Freddie Mac, has imposed an extra 0.25 percent upfront charge on all new mortgages that it buys or guarantees.

In a statement, Fannie said the new fee is needed “to ensure that what we charge aligns with the risk we bear.” The National Association of Home Builders labeled the fee “a broad tax on homeownership” because more than 40 percent of all mortgages outstanding are owned or guaranteed by Fannie or Freddie.

Mortgage insurers have raised premiums for certain borrowers and tightened standards. PMI Group Inc. has stopped writing mortgage insurance for borrowers with credit scores below 620 who are financing more than 95 percent of their home’s value. Triad Guaranty Insurance Corp. has stopped providing mortgage insurance on option adjustable-rate mortgages, which carry low introductory rates but can lead to a rising loan balance.

The bar for credit scores is rising, too. “Historically, lenders would consider top-tier credit [a score of] 680,” says David Soleymani, a mortgage broker in Los Angeles. “Now, many of those lenders want to see a 720,” but are rewarding such borrowers with better rates, he says.

Source: The Wall Street Journal, James R. Hagerty and Ruth Simon (12/11/07)

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December 10, 2007 by Mimi Miller.

Subprime freeze plan: Who’s left out
The new foreclosure prevention program may leave out most distressed subprime borrowers.
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Special Reportfull coverage

Subprime freeze plan: Who’s left out
Bush subprime plan offers help to 1.2M
Hope Now faces big challenges
Foreclosures reach record high

NEW YORK (CNNMoney.com) — Distressed borrowers looking for relief from the recently announced White House foreclosure prevention plan may be in for a disappointment.

In announcing the Administration’s plan, which includes a five-year freeze on interest rate hikes for some subprime borrowers with adjustable-rate mortgages (ARMs), the White House estimated it would offer relief to 1.2 million families out of the 1.8 million facing higher interest rates. The initiative comes at a time of record high foreclosure rates.

But there are very strict limitations.

Sharon Reuss, a spokeswoman for the Center for responsible Lending, estimated it would help 7 percent of those stuck with unaffordable subprime loans, or 145,000 borrowers.

“This is so limited in scope,” she said.

The guidelines on who can be helped are spelled out by the American Securitization Forum (ASF), which represents the players in the securitization process, including lenders, those who service the loans and investors who hold the debt.

The ASF guidelines limit the interest rate freeze solely to those borrowers who are unable to afford payments if they rise above their introductory rates. These normally adjust higher after the first two (2/28 ARMs) or three (3/27 ARMs) years of the loans.

Left out are both the people who can afford to continue payments even after rates adjust higher and those who cannot afford the loan even at the low initial rates.

Further limitations are that the loans must have been made between Jan. 1, 2005 and July 31, 2007 and have been included in securitized pools. Rates must be scheduled to reset no earlier than Jan. 1, 2008 and no later than July 31, 2010 and the restructuring process must begin before the loans reset.

To determine affordability, the plan would use readily available criteria, especially credit (FICO) scores. These must not exceed 660 or have gained more than 10 percent since the origination of the mortgage.

In either of those cases, borrowers have failed the FICO test and must apply for another type of rework. “It’s very likely these people will be able to refinance into a fixed rate loan,” said Tom Deutsch, Deputy Executive Director of the ASF. Deutsch helped write the guidelines.

Even if loans qualify for a freeze, servicers, according to the ASF guidelines, will not take any actions that violate contracts or applicable laws.

Additionally, the loan-to-value-ratio of the mortgage must be less than 97 percent. That is, the face amount of the loan must be less than what the home is actually worth.

Servicers of any second mortgages on the homes must agree to cooperate.

And candidates for a freeze must be current on their monthly payments; they cannot be more than 30 days late nor have been 60 days late more than once in the previous 12 months.

Also, if borrowers qualify for an FHASecure loan, the freeze is not available to them. Borrowers must also be owner/occupiers as opposed to speculators.

And the reset has to send payments up by at least 10 percent, which should not be a difficult hurdle; typically, these loans will reset from around 7 or 8 percent to at least 9 or 10 percent.

Any modifications must maximize profits for investors and be in their best interests. Especially in a falling market, investors are usually better off taking smaller profits of modifications than major losses brought on by foreclosures.

Some critics wonder individual reworks will need to gain approvals from investors. That would be a monumental task. The loans are often carved up and sold in pieces to investors all over the world.

According to Deutsch, however, mortgage servicers have the authority to make the modifications. “A key point,” he said, “is that servicers are responsible for making these decisions based on the entirety of the interest of the trust,” (the investors).

According to Mary Moore, of the Center for Responsible Lending, however, servicers may have reasons of their own to pursue foreclosure rather than working with borrowers to keep them in their homes.

“Servicers can have incentives to foreclose,” she said. “They sometimes have affiliates who work on foreclosures - that generates a lot of income for the affiliates.”

As for the Bush plan, Moore welcomes it, but with no great enthusiasm. “We would love to see further steps,” she said, “but we have no indication that more is coming

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December 9, 2007 by Mimi Miller.

Survey Says: Delinquencies and Foreclosures Increase

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RISMEDIA, Dec. 10, 2007-The delinquency rate for mortgage loans on one-to-four-unit residential properties stood at 5.59% of all loans outstanding in the third quarter of 2007 on a seasonally adjusted (SA) basis, up 47 basis points from the second quarter of 2007, and up 92 basis points from one year ago, according to MBA’s National Delinquency Survey.

The delinquency rate does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process was 1.69% of all loans outstanding at the end of the third quarter, an increase of 29 basis points from the second quarter of 2007 and 64 basis points from one year ago.

The rate of loans entering the foreclosure process was 0.78% on a seasonally adjusted basis, 13 basis points higher than the previous quarter and up 32 basis points from one year ago.

The total delinquency rate is the highest in the MBA survey since 1986. The rate of foreclosure starts and the percent of loans in the process of foreclosure are at the highest levels ever.

The increase in foreclosure starts was due to increases for all loan types. From the previous quarter, prime fixed rate loan foreclosure starts increased 4 basis points to 0.22%, prime ARM foreclosure starts increased 40 basis points to 1.02%, subprime fixed foreclosure starts increased 3 basis points to 1.38%, subprime ARM foreclosure starts increased 88 basis points to 4.72%, and FHA foreclosure starts increased 16 basis points to 0.95%.

Since the third quarter of 2006, the foreclosure start rates for prime ARMs increased from 0.30% to 1.02% and the rate for subprime ARMs increased from 2.19% to 4.72%. The foreclosure starts rate for prime fixed loans increased from 0.13% to 0.22% and the rate for subprime fixed loans have increased from 0.97% to 1.38%.

As can be seen in the chart below, while subprime ARMs only represent 6.8% of the loans outstanding, they represent 43.0% of the foreclosures started during the third quarter.

Florida and California are the two largest states in terms of mortgages outstanding and are the key drivers of the increase in the national foreclosure rates. While California and Florida together have 36.4% of all of the prime ARM loans in the country, they had 42.4% of the nation’s foreclosure starts for prime ARMS. Similarly, California and Florida together have 28.1% of the subprime ARMs and 33.7% of foreclosure starts for subprime ARMs.

Florida, Ohio, Michigan and Indiana have 16.4% of the prime fixed loans in the country but 29.3% of the foreclosures started on prime fixed loans, and 18.9% of the subprime fixed rate loans and 26.3% of the foreclosure starts.

Doug Duncan, MBA’s Chief Economist and Senior Vice President of Research and Business Development, said,

“As conditions in the housing finance market continue to deteriorate, several factors are clear:

- This is the first quarter which registers the full combined effects of the seizure of the nonconforming securitization market, broad-based home price declines, continued weakness in some regional economies and rate adjustments on monthly payments. The predictable results are increased delinquency and foreclosure.
- In areas where the supply of homes far exceeds demand at current prices, home prices are falling and leading to more foreclosures. In Michigan and Ohio the problem continues to be the declines in demand due to drops in employment and population that have left empty houses in cities like Cleveland, Detroit and Flint. In states like California, the problem is excess supply due to speculative over-building and properties coming back onto the market.
- While subprime ARM delinquencies and foreclosures are climbing in all states, in most states the actual number of loans involved is fairly modest. For example, the number of subprime ARM foreclosure starts in California during the third quarter equaled the starts in 35 other states combined.
- While this quarter’s numbers show the highest level of foreclosure starts (on a seasonally adjusted basis) for prime fixed rate mortgages in the last 10 years, that increase is largely due to increases in Florida, Ohio, Michigan and California. In most states the increase in prime fixed rate foreclosure starts is due to borrowers who will fall behind on their payments for the traditional reasons (employment, medical, marital, etc.) but who cannot sell their homes due to market conditions.”

Change from last quarter (second quarter of 2007)

The SA delinquency rate increased 39 basis points for prime loans (from 2.73% to 3.12%), 149 basis points for subprime loans (from 14.82% to 16.31%), 34 basis points for FHA loans (from 12.58% to 12.92%), and increased 43 basis points for VA loans (from 6.15% to 6.58%).

The foreclosure inventory rate increased 20 basis points for prime loans (from 0.59% to 0.79%), and increased 137 basis points for subprime loans (from 5.52% to 6.89%). FHA loans saw a seven basis point increase in foreclosure inventory rate (from 2.15% to 2.22%), while the foreclosure inventory rate for VA loans increased one basis point (from 1.02% to 1.03%).

The SA foreclosure starts rate increased 10 basis points for prime loans (from 0.27% to 0.37%), 40 basis points for subprime loans (from 2.72% to 3.12%). The foreclosure start rate increased 16 basis points for FHA loans (from 0.79% to 0.95%) and two basis points for VA loans (from 0.37% to 0.39%).

The seriously delinquent rate, the non-seasonally adjusted (NSA) percentage of loans that are 90 days or more delinquent, or in the process of foreclosure, was up from both last quarter and from last year. This measure is designed to account for inter-company differences on when a loan enters the foreclosure process. During the third quarter, the seriously delinquent rate increased for prime, subprime, FHA, and VA loans. The rate increased 33 basis points for prime loans (from 0.98% to 1.31%), 211 basis points for subprime loans (from 9.27% to 11.38%), 36 basis points for FHA loans (from 5.18% to 5.54%) and 21 basis points for VA loans (from 2.35% to 2.56%).

Change from last year (third quarter of 2006)

On a year over year basis, the SA delinquency rate increased for prime, subprime, and FHA loans and was unchanged for VA loans. The delinquency rate increased 68 basis points for prime loans, increased 375 basis points for subprime loans, and increased 12 basis points for FHA loans.

The foreclosure inventory rate increased 35 basis points for prime loans and 303 basis points for subprime loans. The foreclosure inventory rate decreased six basis points for FHA loans and nine basis points for VA loans.

Over the year, the SA foreclosure starts rate increased 32 basis points overall, 18 basis points for prime loans, 130 basis points for subprime loans, 16 basis points for FHA loans, and seven basis points for VA loans.

The seriously delinquent rate was 52 basis points higher for prime loans and 460 basis points higher for subprime loans. The rate decreased 12 basis points for FHA loans and 8 basis points for VA loans.

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