August, 2015

CoreLogic: Underwater mortgage share down to 10.2% in 1Q15

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More than 254K properties regained equity

New analysis shows 254,000 properties regained equity in the first quarter of 2015, bringing the total number of mortgaged residential properties with equity at the end of Q1 2015 to approximately 44.9 million, or 90% of all mortgaged properties, CoreLogic (CLGX) reports.

Nationwide, borrower equity increased year over year by $694 billion in Q1 2015. The total number of mortgaged residential properties with negative equity is now at 5.1 million, or 10.2% of all mortgaged properties. This compares to 5.4 million homes, or 10.8%, that had negative equity in Q4 2014, a quarter-over-quarter decrease of 4.7%. Compared with 6.3 million homes, or 12.9%, reported for Q1 2014, the number of underwater homes has decreased year over year by 1.2 million, or 19.4%.

This report diverges with a report last week from Zillow (Z), meanwhile, which released its 2015 Q1 Negative Equity Report, saying that negative equity fell in the first quarter of 2015 to 15.4% from 16.9% in the fourth quarter of 2014, and 18.8% during the same time period a year ago.

Negative equity, often referred to as “underwater” or “upside down,” refers to borrowers who owe more on their mortgages than their homes are worth. Negative equity can occur because of a decline in value, an increase in mortgage debt or a combination of both.

For the homes in negative equity status, the national aggregate value of negative equity was $337.4 billion at the end of Q1 2015, falling approximately $11.7 billion from $349.1 billion in Q4 2014. On a year-over-year basis, the value of negative equity declined overall from $388 billion in Q1 2014, representing a decrease of 13% in 12 months.

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(Source: CoreLogic)

Louisiana, Maine, Mississippi, South Dakota, Vermont, West Virginia and Wyoming have insufficient equity data to report at this time.

Of the more than 50 million residential properties with a mortgage, approximately 9.7 million, or 19.4%, have less than 20% equity (referred to as “under-equitied”), and 1.3 million, or 2.7%, have less than 5% equity (referred to as near-negative equity). Borrowers who are “under-equitied” may have a more difficult time refinancing their existing homes or obtaining new financing to sell and buy another home due to underwriting constraints. Borrowers with near-negative equity are considered at risk of moving into negative equity if home prices fall.

“The CoreLogic Home Price Index for the U.S. was up 2.5% during the first quarter of 2015, which has improved the equity position of homeowners,” said Frank Nothaft, chief economist for CoreLogic. “About 90% of homeowners now have housing equity and, as a result, have experienced an increase in wealth, which can spur additional consumption and investment expenditures. The remaining 10% of owners with negative equity will find their home value rising while they continue to pay down principal on their amortizing mortgage loan.”

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(Source: CoreLogic)

“Many homeowners are emerging from the negative equity trap, which bodes well for a continued recovery in the housing market,” said Anand Nallathambi, president and CEO of CoreLogic. “With the economy improving and homeowners building equity, albeit slowly, the potential exists for an increase in housing stock available for sale, which would ease the current imbalance in supply and demand. There are still about 5 million homeowners who are underwater and we estimate that a further 5% appreciation in home values across the U.S. would reduce the number of owners with negative equity by about one million.”

Highlights as of Q1 2015:

  • Nevada had the highest percentage of mortgaged residential properties in negative equity at 23.1%, followed by Florida (21.2%), Illinois (16.8%), Arizona (16.8%) and Rhode Island (15.7%). Combined, these five states accounted for 31.4% of negative equity in the U.S.
  • Texas had the highest percentage of mortgaged residential properties in positive equity at 97.7%, followed by Hawaii (96.9%), Alaska (96.8%), Montana (96.8%) and North Dakota (96.2%).
  • Of the 25 largest Core Based Statistical Areas (CBSAs) based on mortgage count, Tampa-St. Petersburg-Clearwater, Fla. had the highest percentage of mortgaged residential properties in negative equity at 23.1%, followed by Chicago-Naperville-Arlington Heights, Ill. (19.1%), Phoenix-Mesa-Scottsdale, Ariz. (16.9%), Riverside-San Bernardino-Ontario, Calif. (13.9%) and Warren-Troy-Farmington Hills, Mich. (13.4%).
  • Of the same largest 25 CBSAs, Houston-The Woodlands-Sugar Land, Texas had the highest percentage of mortgaged properties with positive equity at 97.9%, followed by Dallas-Plano-Irving, Texas (97.6%), Denver-Aurora-Lakewood, Colo. (97.1%), Portland-Vancouver-Hillsboro, Ore-Wash. (97%) and Anaheim-Santa Ana-Irvine, Calif. (97%).
  • Of the total $337 billion in negative equity, first liens without home equity loans accounted for over half at $181 billion, or 53%, in aggregate negative equity, while first liens with home equity loans accounted for $157 billion, or 47%.
  • Approximately 3.1 million underwater borrowers hold first liens without home equity loans. The average mortgage balance for this group of borrowers is $229,000. The average underwater amount is $58,000.
  • Approximately 2 million underwater borrowers hold both first and second liens. The average mortgage balance for this group of borrowers is $295,000. The average underwater amount is $78,000.
  • The bulk of positive equity for mortgaged properties is concentrated at the high end of the housing market. For example, 94% of homes valued at greater than $200,000 have equity, compared with 85% of homes valued at less than $200,000.

Reprinted from Housingwire.com- Trey Garrison

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“What is FHA’s 90 Day Anti-Flip Rule?” – ASK THE PIG [VIDEO]

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Question: What is FHA’s 90 Day Anti-Flip Rule?

For a number of years now, FHA has enforced a 90 day anti-flipping rule which prevents an investor from reselling a home to a buyer using FHA financing until that have owned the property for at least 90 days.  While some investors might think this is a moot point, since most renovation properties take at least 90 days to rehab and sell, that is certainly not always the case.  There have been numerous occasions in which I have purchased and resold in less than 90 days, because the property was a very LIGHT rehab, or need nearly no renovation whatsoever.  

While most deals do involve BOTH a distressed property AND a distressed seller, that is not always the case, and some times the property will need very little to no work.  Just last year, I purchased a home in Pensacola for $50,000 and resold it THE NEXT DAY for $79,900 after spending just $400 to trim the bushes, mulch the beds, and stage the home.  Thankfully I had a cash buyer, but had it been someone using FHA financing, I would have had a LONG wait before I could close and realize my profits.

This “anti-flipping” rule wasn’t as big of an obstacle for investors in the past, as FHA financing was a very small part of the overall mortgage market.  However, when the market crashed and banks were reeling, government insured loans through FHA began to take on a much larger share of the market and so it became a bigger issue for those who were looking to flipping to buyers in less than 90 days.

Thankfully, someone at FHA had a massive “A-HA!” moment back in 2010, and they issued a waiver of the anti-flipping rule.  They understood that investors were a huge BENEFIT to the overall real estate market, and that their role of buying distressed home, fixing, and re-selling to strong buyers was a stabilizing force in the market the would help expedite the recovery.  Unfortunately, many of the lenders who were issuing these loans were skittish and uncomfortable with the new rule after numerous threats of “buy-backs”, penalties, and fines from the government regulatory agencies, and so they added what are known as “overlays” to the FHA guidelines.  So, they effectively ignored the anti-flipping waiver, and continued to require sellers to be on title for 90 days, sometimes not even allowing a CONTRACT to be written until the 91st day.

Sadly, this social awareness of the necessity of investors in the marketplace, and their benefit as a force to help recycle old dilapidated real estate into good, quality, affordable housing has disappeared from the minds of the powers that be at FHA.  As a result, the decided not to extend the anti-flipping waiver last year, and investors became evil once again on January 1st of 2015, and now have to be punished with an extra long wait to re-sell if they happen to buy a good deal.  

So, what’s the lesson to be learned for active real estate investors?  

Number 1 – Multiple offer situations – If you receive multiple offers on a house, you may want to take extra care to review all of the TERMS of the deal, including the type of FINANCING.  Though one offer might be higher in purchase price, if it’s an FHA offer that requires you to wait an extra 30-60 days before you can sell, you may end up netting less money due to increased holding costs such as debt service, utilities, insurance, property taxes, etc.

Number 2 – Review Sales Data BEFORE Purchasing or Marketing – As I mentioned in our recent meeting entitled “The Gatekeepers”, Realtors have access to data on the MLS that can you provide you with which types of financing are more popular in a certain area, whether cash, conventional, FHA, or VA.  If an area is heavy with FHA buyers, you may decide to market to a different area, or at least be aware of it going in to the project so you can estimate your holding costs accordingly. 

What’s your experience with FHA buyers and/or the 90 day anti-flipping rule?  Let me know your thoughts below!

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