Archive for March, 2014

Private mortgage loans can provide professional real estate investors with quick and more flexible access to funding for investment properties. While typical private mortgage loans often come with higher interest rates, these loans are often easier to qualify for, require less paperwork and are based on the value of the property versus the borrower’s credit.   I am reposting this interesting article by Don Konipol from February.

You’ve spent the last 4 months trying to get your client a mortgage on his investment property. You gathered all his personal, business and real estate financial information, for not only the property you’re trying to finance but for all his business and property interests. You’ve done projections, forecasts and read through 200 page appraisals. You’ve put together a loan package, sent it to numerous commercial mortgage lenders, only to find out each one needed the same information filled out on their particular unique forms. So you’ve spent dozens of hours more transferring the same information to tens of different applications. You’ve spent numerous hours obtaining “additional information” for each potential interested lender. And now you’ve exhausted all possible institutional mortgage sources and still no loan.

Sound familiar? Perhaps you’re new to the commercial mortgage field. You have been successful originating residential loans, took the NAMB Commercial Mortgage course and decided to expand your practice to include commercial and investment property mortgages. Or maybe you’re already a commercial mortgage broker, successful in obtaining financing for some clients, but feel you just spin your wheels trying to obtain financing for others. The key to spending your time more productively is to understand when institutional commercial mortgage money is NOT available for your client. The key to earning a commission from these same clients is to understand what type of financing may be available for this same client.

Private mortgage loans are loans secured by real estate made by a private lender instead of a bank, lending institution or government agency. Private mortgage loans are short-term (ranging from six months to three years) hard money or asset based loans made to the professional real estate investor for the purchase, rehabilitation or equity cash out of real property. This means that the decision to lend is based on the equity and value of the property being put up as collateral, not on the borrowers credit. The security for the loan is enhanced because the loan represents a maximum of 65% – 70% of the appraised value of the income producing property. On non-income producing property (raw land, lots, construction money) a maximum of 55% loan to value is lent. Investors can expect to pay interest rates of 12% to 14% on first liens and 16% to 18% on second liens in this current low interest rate environment. Historically first lien yield of six points over prime has been obtainable.

Why are real estate investors willing to pay high rates to borrow private money?

When interest rates of 14% to 18% are added to four-to-eight points, the real estate investor/borrower is paying 20% plus annually for the money borrowed. Its obvious why this is a good deal for the private mortgage lender, but why should real estate investors be willing to pay these high rates when conventional mortgage money costs 7% to 10%? There are many reasons, but all fall into four categories.

Qualifying Problems

The real estate investor/borrower and/or the real property does not qualify for an institutional mortgage loan. This can be anything from low borrower credit scores or too much borrower debt, to the borrower’s properties not producing a sufficient enough income. Further, the property itself may not support the type of loan the borrower wants. Many institutional lenders will not loan amounts under $500,000; many will not lend second lien money even if there is significant equity in the property. If major repairs or rehabilitation is necessary, institutional lenders will not be interested unless the project is very large and the borrower has an extensive track record. In these cases the private mortgage lender may be the only resource available for the real estate investor/borrower.

Institutional lenders are concerned with both the appraised value of the property and borrower and property credit. Private mortgage lenders are only concerned with the appraised value, as long as the appraised value represents a fair market price. Hence, if a property is producing or can produce sufficient income to pay the note and the value of the property will fully secure the note and provide sufficient equity, then the borrower’s credit is not an issue for the private mortgage lender.

The Need For Speed

Speed of closing the transaction. Mortgage money obtained from banking or institutional sources, called conventional mortgage money, usually takes between 60 and 90 days to fund. Institutional lenders need not only obtain appraisal of the value of the property, but also require detailed examination of the borrowers credit history and current financial status, as well as financial statements and tax returns, not only for the property collateralizing the loan but for all real property and business interests owned by the borrowing entity and the borrower himself.

Private mortgage lenders on the other hand can usually complete a transaction within seven-to-10 days. Since the property itself is the main criteria to be used to determine loan eligibility, much less information on the borrower and the borrower’s other properties are required, resulting in a much quicker approval process. The private mortgage lender can make a decision within 24 hours of receiving information; institutional mortgage money must be approved by a loan committee that may only meet twice a month, and that may send the loan request back to the loan officer for more information, necessitating a further two week delay until the committee meets again.

Privacy Concerns

Borrowers may not want or be able to provide personal financial information or go through the hassles of the application process associated with obtaining an institutional mortgage loan. The borrower may be going through a divorce or business separation and may not want his wife, partner, government, lawyers, etc. to obtain his personal financial statement. Additionally the borrower may not have all financial information on all his real properties and businesses up to date or complete; he may have filed for an extension on his latest tax return; his accountant may be behind in preparing his financial statements. While all these would negate or at least delay his getting an institutional mortgage, it should have no effect on the borrower’s ability to obtain a private mortgage loan.

More Money

The real estate investor may be able to borrow more from the private or hard moneylender and therefore have less of his own capital invested in the property. Institutional mortgage lenders lend based on the lower of the cost of the property or appraised value of the property; private mortgage lenders lend based on the appraised value only. Hence the real estate investor utilizing a private or hard money loan is not penalized for purchasing the property at a significant discount to market value. Additionally, most private mortgage lenders do not have onerous seasoning requirements to make the loan.

Investment Parameters

The investment parameters for private mortgage loans differ considerably from those of institutional mortgage loans, as we partially discussed in the previous section. The most important parameter to be considered when evaluating a private mortgage loan request is loan to value. This is the ratio of the amount lent expressed as a percentage of the properties value. For example if an office building is worth $100,000 and we lend $65,000 total secured by this office building, then our loan to value ratio, or LTV is 65%.

Private mortgage lenders will typically lend up to 50% on raw land or undeveloped property; 65% on commercial income producing property such as office buildings, shopping centers, warehouses, etc. and 70% on residential income property such as a duplex or apartment complex. The key words here are up to; the maximum amount will be lent if all additional criteria are met and if the lender feels good about the loan, lower amounts can be lent if the loan or borrower is considered less than ideal. This is a gut decision made by the lender with an in depth understanding of the criteria being used and the experience of looking at many lending proposals.

The second parameter is the type of properties to lend on. This is often determined by the comfort the lender has in disposing of this type of property in case of default. All other things being equal, single use property which would take a year to sell is obviously less desirable than a multi tenant office building which would not only sell quickly at 65%-80% of market value, but which would be producing income with tenants paying rents while the property is up for sale.

The third investment parameter the private or hard moneylender is concerned with is the cash flow or income potential of the property being put up as security for the note. Although many private mortgage lenders are liberal in this area, the monthly interest payments to keep the note current must come from somewhere. If the property is rented out and is producing a cash flow after all expenses of an amount at least equal to the note payment, the monthly payments can be covered by the property income alone without the borrower having to come out of pocket. This adds a great degree of safety to the note. Cash flow from other income properties or other sources can be substituted for cash flow from the property being placed as collateral; however, the income to pay the mortgage payments must be available from some source.

The fourth major investment parameter the lender must consider is exit strategy. Very simply, this is how the borrower plans to repay the loan. Since most private mortgage loans are short term the private mortgage lender has a keen interest in finding out the borrower’s exit strategy and in analyzing whether this exit strategy is viable, and the risk of this particular exit strategy. The particular exit strategy must have a reasonable chance of success.

Typical exit strategies include property sale before the note is due, refinancing the property with a long term mortgage loan, packaging the property with other properties owned or to be acquired by the borrower and obtaining a blanket mortgage on all the properties, borrowing on equity in other property owned by the borrower and selling a partnership interest in the property to an equity investor. Each of these strategies has numerous variations. The lender must determine the viability of any particular exit strategy.

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Rising Prices and Mortgage Rates Stall Home Sales
Home sales declined for the fourth consecutive month with sharp drops in West Coast markets, according to the latest Real-Time Price Tracker from Redfin, a national real estate brokerage. The brokerage reported a 10.3 percent decline in sales across the country year-over-year in February.

Only three of 19 markets tracked reported increases in sales over the year—Long Island (3.3 percent), Baltimore (1.9 percent), and Austin (1.9 percent).

“The combination of steep price appreciation and rising mortgage rates is likely coming as a shock to many prospective buyers,” Redfin stated in its survey.

With the spring selling season about to get underway, the company says March and April should offer insight into buyers’ willingness and ability to adapt to higher prices and mortgage rates—as well as sellers’ ability to price appropriately, a skill some are having to relearn to stay competitive.

“This time last year, sellers could name their price and still get 20 to 30 offers,” said Los Angeles-based Redfin agent Eric Tan. “This year, even homes that are priced competitively are only seeing two or three offers come in, often at or below list price.”

Home prices rose 13 percent over the year in February, with steep gains in the West Coast markets such as Las Vegas (25 percent); Sacramento (22.2 percent); and Riverside, California (21.7 percent).

East Coast markets demonstrated much tamer price gains, according to Redfin. For example, prices were up 2 percent in Long Island, 4.7 percent in Washington D.C., and 6.6 percent in Boston.

Housing inventory across Redfin’s 19 markets declined 5.6 percent over the year in February. However, in West Coast markets, where prices rose most, inventory also rose, according to Redfin.

Several markets posted double-digit inventory gains over the year in February, including Phoenix (38.5 percent); Sacramento (23.9 percent); Riverside, California (22.8 percent); Ventura, California (22.1 percent); San Diego (18.6 percent); and Los Angeles (17.8 percent).

Las Vegas, on the other hand, experienced a 35.3 percent decline in inventory.

Author: Colin Robins March 13, 2014 

First-Time Buyers Show Interest; Face Tough Market
More than 4 million first-time buyers want to enter the market, but they face some tough issues as market conditions aren’t exactly favorable to new buyers.

This conclusion came from the Zillow Housing Confidence Index (ZHCI), a new calculation released by Zillow and Pulsenomics.

The ZHCI is a measure of consumer sentiment; anything over 50 indicates a positive sentiment. The current national index is 63.7. Of the 20 metros surveyed, 11 had individual confidence levels above the national average.

In 19 of the 20 large metros surveyed, more than 5.0 percent indicated they wanted to buy a home in the next year. The report notes, “Among current renters, homeownership aspirations were particularly strong, with about 10 percent of all renters nationwide saying they would like to buy within the next 12 months.”

A vast majority of respondents said they were “confident or somewhat confident” they could afford a home in 2014.

If every respondent who indicated they wanted to buy a home actually purchased one, first-time home sales would total more than 4.2 million for 2014, more than double the roughly 2.1 million first-time buyers in 2013.

While this optimistic total from Zillow suggests interest is high, actually purchasing a home should prove to be a challenge in the upcoming year.

Market conditions are mixed: inventory, up 11 percent from a year ago, is still well below optimal levels, and has fallen year-over-year in 8 of 20 metros measured by the ZHCI. Mortgage rates, once a record low 3.3 percent in 2013, have risen to 4.2 percent, according to the Zillow Mortgage Marketplace.

A dearth of inventory coupled with rising mortgage rates could push homes out of a homebuyer’s price range, particularly for first-time buyers.

“For the housing market to continue its recovery, it is critical that homes are both available and remain affordable to meet the strong demand these survey results are predicting, particularly from first-time homebuyers,” said Zillow Chief Economist, Dr. Stan Humphries. “Even after a wrenching housing recession, this data shows that the dream of homeownership remains very much alive and well, even in those areas that were hardest hit.”

He added, “But these aspirations must also contend with the current reality, and in many areas, conditions remain difficult for buyers. The market is moving toward more balance between buyers and sellers, but it is a slow and uneven process.”

Areas indicated by the ZHCI with the highest interest in purchasing a new home come from metros that were hit hardest by the housing recession: Miami (67.5), Atlanta (62.9), and Las Vegas (64.1).

Each were near or above the national index of 63.7 for “Overall Housing Confidence.”

Author: Colin Robins March 12, 2014 
Total Foreclosures Fall; ‘Zombie Foreclosures’ Pose Challenges
Foreclosure filings are down to record lows, but a more sinister-sounding problem may be on the rise—”zombie foreclosures.”

RealtyTrac released its U.S. Foreclosure Market Report for February, reporting that foreclosure filings (default notices, schedule auctions, and bank repossessions) were 112,498, down 10 percent from January and down 27 percent from the previous year.

Foreclosure filings in the month of February represent the lowest monthly total since December, 2006—a more than seven-year low.

“Cold weather and a short month certainly contributed to a seasonal drop in foreclosure activity in February, but the reality is that new activity is no longer the biggest threat to the housing market when it comes to foreclosures,” said Daren Blomquist, VP at RealtyTrac.

“The biggest threat from foreclosures going forward is properties that have been lingering in the foreclosure process for years, many of them vacant with neither the distressed homeowner or the foreclosing lender taking responsibility for maintenance and upkeep of the home—or at the very least facilitating a sale to a new homeowner more likely to perform needed upkeep and maintenance,” Blomquist said.

As of the first quarter of 2014, a total of 152,033 properties in the foreclosure process had been vacated by the homeowner. These “zombie foreclosures” represent 21 percent of all properties in the foreclosure process.

Owner-vacated properties have been in the foreclosure process an average of 1,031 days, nearly three years.

“One in every five homes in the foreclosure process nationwide have been vacated by the distressed homeowner, but it is closer to one in three foreclosures in some cities,” Blomquist added. “These properties drag down home values in the surrounding neighborhood and contribute to a climate of uncertainty and low inventory in local housing markets.”

The state with the most owner-vacated foreclosures was Florida with 54,908, representing 36 percent of the national total. Illinois (15,512), New York (10,880), New Jersey (8,595), and Ohio (7,780) rounded out the top five states for owner-vacated foreclosures.

Foreclosure starts fell back to 51,842, their lowest level since December, 2005. A total of 47,715 U.S. properties were scheduled for a future foreclosure auction in February, down 15 percent from the previous month and down 21 percent from a year ago.

Bank repossessions (REO) were 30,307 in February, up less than 1 percent from January. Year-over-year, REO properties were down 33 percent.

States with the highest foreclosure rates in February were Florida, Maryland, Nevada, New Jersey, and Illinois.

Among metros with populations of 200,000 or more, Florida held nine of the top ten metros for foreclosure rates in February. The dubious honor of leader went to the Palm Bay-Melbourne-Titusville metro, where one in every 296 housing units were in foreclosure—nearly four times the national average.

Author: Tory Barringer March 11, 2014 
Millennials Grab Greatest Market Share of Home Purchases
 For all the discussion in the industry surrounding Millennials and their apparent lack of presence in today’s housing market, a new study from the National Association of Realtors (NAR) found they now account for the greatest market share of recent home purchases.

According to the association’s Home Buyer and Seller Generational Trends study for 2014, Millennials—aka “Generation Y” or “Generation Next”—comprised 31 percent of recent purchases, leading all other age groups. Following that were Generation X (defined as those born between 1965 and 1979), which made up 30 percent.

NAR chief economist Lawrence Yun said the increase isn’t that surprising, given that many in the younger generation are now in the peak period in which people buy their first home.

“Given that Millennials are the largest generation in history after the baby boomers, it means there is a potential for strong underlying demand,” Yun said. “Moreover, their aspiration and the long-term investment aspect to owning a home remain solid among young people.”

Indeed, about 87 percent of recent buyers age 33 and younger said they consider their home purchase a “good financial investment” compared to 80 percent of the total survey population.

Millennials were also among the age groups most likely to a simple desire to own a home of their own as their motive for purchasing—as opposed to senior generations, who relocated due to retirement or to be closer to friends and family.

Still, despite their evident interest, “the challenges of tight credit, limited inventory, eroding affordability and high debt loads have limited the capacity of young people to own,” Yun said.

Out of recent Millennial homebuyers, 20 percent said they had to delay their purchase because of difficulties saving for a down payment, with 56 percent of that group pointing to student loan debt as the greatest hurdle.

In purchasing characteristics: The median age of recent Millennial buyers was 29, according to NAR, while their median income was $73,600. The typical choice of homes among the group was a 1,800-square foot house costing $180,000.

Eighty-seven percent purchased an existing home, and they plan to stay in their homes for a median 10 years.

When it comes to shopping, all age groups typically began by looking online for for-sale properties and then contacting a real estate agent, though NAR found Millennials are more likely to also use the Internet to find information about the buying process. When it comes time to actually buy, though, it seems there’s no replacement for a human—according to the study, younger buyers relied more heavily than older groups on real estate agents to help them navigate the process.

Author: Tory Barringer March 10, 2014 

Declining Refinances Drive Increased Lending
After dropping slightly in the third quarter, borrower health bounced back to end 2013 on a high note, according to LendingTree.

Compared to the prior period, the nation’s average Borrower Health Score was up 2.8 percent to 82.2, rebounding from the third quarter’s 1.6 point drop.

The Borrower Health Score is calculated using the weighted average of credit score, loan-to-value ratio (LTV), and overall “lendability” of loan seekers in each state throughout the quarter.

According to LendingTree’s measures, the average credit score for all prospective borrowers in the United States in Q4 was 635, one point lower than in Q3. That slight drop in health was offset by a decline in the average borrower LTV to 88.6 percent, a decrease of a little more than a percentage point.

Meanwhile, the average loan amount rose nearly $3,750 to $168,747.

“Lenders are slightly more motivated to increase lending to homebuyers as refinancing activity drops,” said Doug Lebda, founder and CEO of LendingTree. “Borrowers still need to meet underwriting requirements, but for potential borrowers with less than perfect credit, there might be opportunities available to help them become homeowners.”

Looking at local data, the healthiest “state” in the country last quarter was actually not even a state: The District of Columbia beat all others with a health score of 97.9, based on an average credit score of 677 and an LTV of 86.2 percent.

Following the nation’s capital were Hawaii (with a health score of 92.7), New Jersey (92.6), California (92.4), and Utah (91.7).

The bottom states in terms of borrower health were concentrated in the South and Midwest, with West Virginia ranking 51 with a score of 69.6. It was followed closely by Mississippi (69.9), Alabama (71.6), Indiana (73.2), and Arkansas (73.5).

Colin Robins March 7, 2014
Should States Fast-Track Foreclosures?
A new study released by the Federal Reserve Bank of Cleveland suggests that fast-tracking foreclosures on vacant properties could provide states with substantial savings. Researchers Kyle Fee and Thomas J. Fitzpatrick used two judicial states, Ohio and Pennsylvania, to show that savings from fast-tracking could save at least $24 million annually.

The report notes, “In Ohio, the annual savings from a foreclosure fast-track is estimated to be between $24,000,000 and $129,000,000,” and that savings are “an elimination of deadweight losses, rather than a shifting of costs. That is, these costs already exist and benefit no one.”

Pennsylvania could have saved an estimated $24 million to $54 million.

States that require foreclosures to be conducted through the courts “have decided that protecting the rights of property owners is worth the higher cost of judicial foreclosure relative to nonjudicial foreclosure,” Fee and Fitzpatrick said.

Costs are incurred when properties are left vacant, leaving them more susceptible to be vandalized and stripped of valuable items, like metal. Repairing these homes to sell is a costly endeavor, and by speeding up the foreclosure process, properties would be left vacant for smaller periods of time, resulting in less damage.

Additional concerns arise as unoccupied homes create health and safety hazards, and cause homes in neighboring areas to decrease in home value.

The report notes that the costs of vacant properties provide no value, and “these costs are born primarily by the lender through rehabilitation costs or lower sales prices.”

By fast-tracking homes through the judicial process, researchers Lee and Fitzpatrick found that Ohio could have lowered its foreclosed inventory by .5 percentage points, to less than 2 percent instead of the current figure of just under 2.5 percent. Pennsylvania would have seen similar results, according to the report.

In the study, Lee and Fitzpatrick found that fast-tracking foreclosures could shave off between 8 and 43 days in Ohio, and 9 to 20 days in Pennsylvania.

However, creating legislation to hasten the judicial process is likely to be difficult.

“Crafting legislation that adequately balances the interests of creditors and homeowners while meaningfully fast-tracking foreclosures is no simple task, and would likely require the input of creditors, communities, foreclosure attorneys, and the judiciary,” the report said.