Realtor Coaching & Training: real estate boom
Harris Real Estate University students (and future students) we have been reporting on the expected increase in the so-called strategic defaults for nearly 3 years…
A strategic default occurs when a homeowner defaults on their mortgage because they deem the default to be financially prudent. In many cases the home has negative equity and couldn’t be sold without the seller coming to closing with a check to cover the negative equity.
Traditionally, homeowners would avoid a mortgage default at all costs…because of the perceived financial and moral implications.
Not now. Now, all the rules are changing and homeowners are catching on to the fact that they don’t have to keep their upside down homes. Homeowners have seen the major banks doing strategic defaults on commercial properties etc…so, why the double standard?
In a housing market where many homeowners are thousands (if not hundreds of thousands) upside down…and many economists are predicting that homes wont ‘re-inflate’ to bubble prices for 10 years+…does it make sense for a homeowner to keep their upside down home?
So, the question is…is doing a strategic default…Immoral? Read this article and let us know what you think.
You already know our stance on this. Homeowners will ultimately do what makes the most sense…personally and financially. If we are ever going to truly end this seemingly never ending foreclosure crisis the only clear solution is a short sale. We have been advocating short sales as the solution since 2007 when we were the first to offer short sale training. The HREU CDPD (Certified Distressed Property Designation) is held by literally thousands of agents nationwide. In this market…at least for the next 3-5 years…do you have an option other than knowing how to list and sell short sales?
Julie and I watched the major subprime lenders blow up in late summer of 2007 we knew that the great real estate boom was bust. It seems that now…finally…the brokers, the banks, the government…have come around to realizing that streamlined short sales are the best option. If you want to avoid foreclosures give homeowners an option.
2010 IS the year of the short sale. Starting in April of this year the Treasury Departments new short sale guidelines will be in full effect. Everything you think you know about short sales is about to change. Watch the FREE Agent Short Sale Secrets video and download the FREE Agent Short Sale Secrets Book.
Arizona law professor Brent White says the only thing standing between many “underwater” homeowners and a better financial future is a misguided sense that walking away from a commitment is morally wrong.
White, an associate professor at University of Arizona’s James E. Rogers College of Law, has spent the past few months presenting his argument to other lawyers, real-estate professionals and the national media.
White argues that underwater homeowners, those whose unpaid loan balance exceeds the value of their home, are being manipulated into picking up the tab for a real-estate crash that borrowers and lenders created equally.
Agents, do you agree with this statement? Do you feel that you and your homeowners are being manipulated to keep their underwater homes? I am not so sure. Frankly, many homeowners have figured out how to game the system and are perhaps taking full advantage of their new found knowledge of mortgage contracts….we hear from students every day how they have listings where the homeowners have not made a house payment in 1-2 years! Homeowners are becoming increasingly aware of the negative ramifications of doing strategic defaults yet are making the personal and financial decisions to bail…
“I’m all for a society where people must take personal responsibility, but that should also apply to the banks and financial institutions,” he said.
Although he stops short of advocating for underwater mortgage holders to walk away from their loans, White does argue that banks might be more inclined to lower the principal balance on inflated home loans if more borrowers did just that.
That has to be true. If banks knew that homeowners were going to look out for their own personal and financial best interests ahead of their mortgage obligations more banks would be willing to do significant mortgage balance reductions.
White is quick to admit that the concept of “strategic default,” when a borrower with the means to continue paying defaults on a loan by choice, is distasteful to many Americans.
His critics have argued that a tidal wave of strategic defaults would wreak untold havoc on an already fragile financial system and promote a lawless society in which contracts are essentially meaningless.
White said his argument is mostly academic. Despite all of the attention strategic default has received, statistics indicate that only a tiny fraction of the country’s more than 5 million homeowners whose loans are upside-down have stopped making payments by choice.
Still, he said it’s quite reasonable to believe that a wave of strategic defaults would spur a faster recovery in the housing market by creating stronger incentive for banks to lower the principal value of upside-down home loans, thus making it more attractive for borrowers to continue paying.
White said his primary aim is to give borrowers a rational alternative to the rhetoric of guilt and shame coming from financial leaders and politicians, which labels a practice that is perfectly acceptable in the business world as immoral and irresponsible if tried at home.
Agents…especially those of your who don’t sell any commercial property…strategic default is seen completely differently in the commercial world. If a commercial property stops making financial sense..and the lender won’t modify the mortgage….commercial investors will walking from the obligation and a prudent financial move.
His discussion paper, titled “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis,” points out that lenders and other businesses are not saddled with the same moral constraints that would prevent most individuals from defaulting by choice.
“It’s a double standard that says corporations can look out for their best interests, but individuals can’t,” White said in an interview Thursday.
Arizona law professor Brent White says the only thing standing between many “underwater” homeowners and a better financial future is a misguided sense that walking away from a loan commitment is morally wrong.
A number of metro Phoenix real-estate professionals said they see merit in White’s argument that lenders should meet borrowers halfway by writing down a portion of upside-down loan balances, but they were far less comfortable with the notion that strategic default is a valid solution to the housing problem.
Here is the problem….who decides if YOU get a principal mortgage balance reduction? What happens if your neighbor has their negative equity wiped away all the while you are still underwater in your home. Needless to say, a never ending slippery slope.
“I don’t think we should be encouraging people to walk away,” said Bob Stahl of Keller Williams Realty in Scottsdale, who also writes a real-estate blog that has focused heavily on the discussion of strategic default in recent months. “I think people do need to be responsible. … I think it is a moral issue.”
Stahl said he’s concerned a wide-scale walkout would damage the mutual sense of trust and confidence in contracts that makes it possible to do business.
I do agree with his point. However, that ship has already sailed.
He added that walking away from a mortgage loan can have severe consequences that borrowers need to understand before making any decisions.
Controversial though it may be, White noted that his argument is not merely a philosophical one, and that there actually is a solid legal basis for his conclusion that it’s OK to walk away.
A legal concept known as “efficient breach” holds that it is ethical to breach a contract in cases where the ramifications for doing so are less harmful to the party than adhering to the contract would be.
White said he’s in the process of crafting another legal argument, based on Arizona’s non-deficiency statute, that says lenders don’t have the legal right to report mortgage defaults to the credit bureaus, and that walking away should not have any negative effect on the borrower’s credit score.
Scottsdale civil-rights attorney Donald Loeb said he thinks White is absolutely correct.
Non-deficiency statutes such as the ones in Arizona and California essentially say that lenders trying to collect on an unpaid mortgage loan have a right to foreclose on the home but cannot pursue any other legal claim against the former borrower.
For instance, the lender can’t sue for the difference between the original loan value and the proceeds from a foreclosure sale of the home.
The reason it’s called a “non-deficiency” statute, Loeb said, is that it establishes default and subsequent foreclosure as a valid means of fulfilling a mortgage contract, as opposed to being a breach of contract in which one party’s actions are considered “deficient.”
The fact is that virtually all of the negative ramifications of doing a strategic default can be mitigated if a homeowner decides to do a short sale vs a foreclosure. Assuming the agent (or attorney) who is doing the short sale gets the mortgage lenders (and PMI companies) to waive their right to pursue a deficiency judgment….and the home was the borrowers principal residence…there is little downside in doing a short sale. Agents, have you learned the new 2010 Treasury Department Short Sale guidelines. Everything about short sales is about to change…and change for the better. Watch the FREE Agent Short Sale Secrets video and download the FREE Agent Short Sale Secrets book NOW.
Loeb said he thinks much of the criticism aimed at homeowners who default is based on a poor understanding of what a contract is.
A contract is nothing but a legally binding agreement between parties with competing interests that sets forth mutually acceptable terms for their interaction.
Loeb said every mortgage loan agreement includes default and home repossession as a possible outcome.
“If you stop making payments, you’re not breaching the contract, because default and foreclosure are valid means of fulfilling the contract,” he said.
White said it’s not uncommon for commercial-property owners or investors to default on loans that they no longer consider beneficial, and while it might affect their ability to obtain future loans, no one is calling them immoral.
Traditional business ethics, which weigh heavily the fiduciary responsibility to shareholders, practically require commercial-property owners to consider strategic default if a mortgage loan is costing the business more than the mortgaged property is worth, Valley commercial real-estate experts said. To do otherwise would be considered irresponsible.
That’s interesting…at present in the commercial real estate world..default is seen as the desired option when the investment no longer makes financial sense.
Jim Achen, senior vice president of commercial real-estate services firm Transwestern, in Phoenix, said many underwater commercial-property owners are expected to walk away from mortgage debts this year, as a large number of those loans reach maturity and must be repaid or refinanced.
It is also expected that lenders in some cases will significantly reduce the balance of commercial borrowers’ mortgages to keep them in those loans, he said.
That’s a concession most banks have not made to homeowners.
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New Programs Wont Slow Foreclosures.
The new federal programs to aid the U.S. financial markets will likely not fend off the impending wave of foreclosures on U.S. commercial real estate loans, experts said.
U.S. Treasury Department officials unveiled this week more specifics of a program that will enable the federal government to help private buyers purchase toxic loans and asset-backed securities, including commercial mortgage-backed securities (CMBS).
While there is much public debate about whether it will get the banking industry back on its feet, many real estate experts said that it won’t prevent an approaching wave of defaults of current loans in the U.S. commercial real estate sector
“This isn’t designed to head off foreclosures,” said Thomas Barrack Jr, head of real estate private equity firm Colony Capital, which has $36 billion of assets under management. “This is designed to start the banks lending.”
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The U.S. commercial real estate boom that started around 2004 and peaked in 2007 was fueled by cheap debt. Banks and other lenders were often willing to lend up to 90 percent or more of the purchase price. The loans often assumed optimistic rent growth and rising occupancies in the future.
Borrowers and lenders assumed that the loans, often interest-only, would be repaid by property sales or by new loans that would more than cover the principal due.
But the market began to collapse in the second half of 2007, when the credit markets froze. Now borrowers are finding themselves squeezed as older loans come due and there is little lending to support sales or refinancing.
About $814 billion in commercial mortgages — for apartment houses, office buildings, shopping centers, warehouses and hotels — are expected to mature this year through 2011, with $250 billion due this year, according to Foresight Analysis.
That means borrowers will have to raise more equity, which is expensive, or lenders will have to foreclose or extend loans, hoping values will rise again.
“The myth has been that commercial is far more solid than residential,” said Robert White Jr, president of Real Capital Analytics. “We were all patting ourselves on the back, that we weren’t overbuilding.”
AS BAD AS THE HOUSING BUST
Those cheery days seem long past.
U.S. commercial real estate prices are falling at a similar rate to residential, down about 17 percent year over year, according to Real Capital Analytics.
Sales volume for commercial real estate was down 80 percent in February because of the inability to get a loan and the wide gap between the prices buyers and sellers want.
U.S. commercial real estate prices may fall 35 to 45 percent from their peak, exceeding the declines of the painful downturn of the early 1990s, according to Richard Parkus, head of CMBS research for Deutsche Bank. Rent declines and vacancy rates may approach those of the early 1990s.
The aim of the U.S. Treasury plan is to get banks to start lending again by clearing away bad commercial real state loans. When pension funds, private equity firms and life insurance companies are able to sell off their devalued CMBS bonds, they will be willing to buy newer, better-quality loans.
The plan’s specifics sent the CMBS on a three-day rally, and helped boost the overall stock market.
“By clearing out some of the inventories, the theory is they will have more capacity to make new loans … probably,” said Fredric Leffel, senior vice president of the U.S. arm of real estate advisory firm Savills Plc.
But by the time the banks start lending again, they are likely to be more conservative. The loans will likely cover less of the value of the property to be acquired and that value is likely to be lower, leaving much of the expiring principal uncovered.
“The problem with the foreclosures is that anyone with any real estate today may own it at less than 50 percent of the value that it was two years ago,” Barrack said. “That problem isn’t going to go away.”
The delinquency rate among CMBS loans, which hit 1.8 percent in March, could rise to 3.5 percent by the end of the year, and 6 percent next year. CMBS loans comprise about 20 percent of the outstanding U.S. commercial real estate loans.
Among banks and other institutional lenders, the default rate was 1.8 percent in the fourth quarter of 2008, according to Real Estate Economics. The research firm expects that to jump to 3.9 percent by the end of the year, 4.7 percent by the end of 2010, and peak at 4.8 percent in 2011.
In addition to the refinancing problem, U.S. commercial real estate owners are wrestling with the recession and rising vacancy rates, lower demand and decreasing rents that have accompanied it. But those concerns, however great, are dwarfed by the shortfall funding available to refinance past loans.
“While obviously fundamentals have deteriorated, the much bigger problem is the maturity problem,” Leffel said.
So what will the federal program do for the commercial real estate industry?
“It will lessen the erosion of values,” Leffel said. “It will smooth things out, particularly if you can get financing back into the market, and to that extent it does help the industry.”
Source: Reuters
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Online real estate brokers now have the playing field leveled…
The Justice Department gave online real estate brokers a boost Tuesday by forcing the NAR to open access to the MLS.
The National Association of Realtors could no longer discriminate against Internet-based agents by blocking them from the MLS.
Online agents often charge lower fees and allow consumers and/ or give legal kick backs to buyers. In the previous real estate boom it wasn’t unusual to see a internet broker advertising up to 2% back to the buyer at closing for using their service. On the listing side its common that internet based brokers will list homes for a flat fee vs the traditional commission.
How do they do this and afford to stay in business? Dramatically lower over head. Also, consumers desire to get the reduced sales fees or cash back at closing.
“When there is unfettered competition from brokers with innovative and efficient approaches to the residential real estate market, consumers are likely to receive better services and pay lower commission rates,” said Deborah A. Garza, deputy assistant attorney general for the Justice Department’s antitrust division.
“Today I can say with the clear knowledge — reinforced and underscored by DOJ’s settlement compromise — that the real estate industry is dynamic, entrepreneurial and fiercely competitive,” NAR President Richard F. Gaylord said in a statement. “Thanks to Realtors, consumers can access detailed information about millions of properties for sale across the country.”
The Justice Department and Federal Trade Commission released a report last year that said limits on discount brokers’ access to Web listings of for-sale properties has prevented consumers from receiving the cost savings and other benefits that online competition has brought to other industries.
What does all of this mean to you?
You tell us…what do you think about all of this…how will this effect your business…your market?
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