You’ve probably heard that the nation’s banks had a $21.6 billion profit during the second quarter, reason enough to celebrate with big executive bonuses for our financial leaders. But before we break out the champagne it might be good to mention that the profits enjoyed by our bankers are no more believable than Bernie Madoff’s sworn testimony.

To untangle what’s going on we have to start with the idea that a sound financial system is crucial to the economy and thus to everyone. If that means a few rules must be bent to create the fiction of bank stability, so be it. Unfortunately, the financial system remains painfully and deeply unsettled, a reality which impacts home prices and foreclosure practices nationwide.

In The Beginning
In 2008 the government created the TARP program, $700 billion largely set aside to prop up big lenders. Happily, most of the money was unneeded, “only” $190 billion remains outstanding and much of what’s unpaid is related to non-banks such as GM and AIG.

However, less visible and perhaps equally important was a quiet accounting change.

“Rule 157” used to say that assets on lender books should be appraised as if they were being sold today, the “mark-to-market” valuation method. This was a great rule when values were increasing, but if left in place during down times it would force banks and others to show huge mortgage and property losses. So, of course, the rule was changed, replaced by what the Wall Street Journal calls the “mark to wish” standard.

Bankers certainly knew what was going on. As Sheila Blair, head of the Federal Deposit Insurance Corporation explains, “the difficulty in determining the value of mortgage-related assets and, therefore, the balance-sheet strength of large banks and non-bank financial institutions ultimately led these institutions to become wary of lending to one another, even on a short-term basis.”

Mortgage Relief
Almost 435,000 homes have been saved from foreclosure under the government’s Making Home Affordable program. This is certainly good news for legions of borrowers and there’s another beneficiary as well: Lenders have been helped because nearly 435,000 once-distressed loans are now performing.

Under the Making Home Affordable program lenders cut rates, stretch loan terms and sometime forgive principal so that monthly mortgage payments will total no more than 38 percent of a borrower’s monthly income. Uncle Sam then chips in with a subsidy so that borrowers only make payments equal to 31 percent of their monthly income. The result: Lower monthly costs for borrowers, fewer foreclosures, better-looking lender books, and higher stock prices.

The Profit Illusion
Given the unprecedented level of federal assistance, it’s hardly a surprise that the fortunes of the lender community have begun to improve, even if much of the “improvement” does not reflect marketplace realities.

Here’s an example: Smith took out an option ARM loan in 2006 which allowed negative amortization. The interest not paid each month was added to the loan amount. For accounting purposes such interest was treated as taxable “income” even though it was not actually collected. With “higher” income lenders could also report “higher” profits.

Now we have the reverse situation. When an option ARM is foreclosed the principal balance is likely to be larger than the original loan amount, meaning the loss is magnified. This is a major problem because Fitch Ratings reports that “start” periods for option ARMs worth $134 billion will end in 2010 and 2011. Fitch also reports that the average monthly payment will rise 63 percent, an increase many borrowers will be unable to afford. The result is that the value of such loans on lender books is now greatly overstated.

Delayed Foreclosures
When a home is sold at foreclosure the loan is retired at the value the lender is able to get from the transaction. For example, a home with a $200,000 mortgage balance might be sold at foreclosure with the lender getting $150,000 from the sale. In today’s market foreclosure losses can be substantial, especially in major foreclosure centers such as Nevada, Arizona and Florida.

If a borrower is delinquent but not foreclosed then there’s no lower value to report, a $50,000 “savings” in our example. Lenders thus have a financial incentive to carry delinquent borrowers and support state rules which delay foreclosures.

Second Liens
If you look at the latest numbers for the Making Home Affordable program you can see that there were 1.5 million eligible borrowers. That compares with 3.1 eligible million mortgages — or better than two per borrower. In other words, many of the homeowners now in trouble purchased real estate with “piggyback” financing. This meant they could buy with less down and also avoid the cost and bother of mortgage insurance — good news, as it turns out, for the mortgage insurance companies.

Laurie Goodman, a leading analyst with the Amherst Securities Group, tells us that second liens worth $1.01 trillion are outstanding according to Federal Reserve data. Of these liens, says Goodman, $751 billion are held by commercial banks and $435 billion are owned by the top four commercial banks.

In a foreclosure situation the rule is that the first lender must be paid off entirely before a dime is paid to second lien holders such as those who own second mortgages or home equity lines of credit (HELOCs).

Given that the value of many homes is less than the balance of the first mortgage, just how many second-lien holders will get paid in the event of foreclosure? Or, to put this another way, is the $751 billion in second liens held by the nation’s banks really worth reported values?

Many of the largest banks are also the largest servicers, an arrangement which can create a considerable conflict.

“Often,” says Gretchen Morgenson, writing in The New York Times, “the same bank that services a primary mortgage owned by another institution also owns a second mortgage or home equity line of credit on the same property. When that borrower has trouble meeting both payments, the servicer has an interest in making sure that amounts owed on the second lien, which it owns, continue to be paid even if the first loan, which it has no interest in, slides into delinquency.” (See: In This Play, One Role Is Enough, August 14, 2010)

How does a servicer protect the second lien holder? According to Naked Capitalism, servicers don’t foreclose on borrowers with second liens at the same rate as they foreclose on borrowers without a second lien. If all borrowers were foreclosed equally, lenders would be forced to immediately write off large numbers of second liens.

Reserves
Lenders are required to set aside money for loss reserves. How much to set aside is a matter of discretion, there’s no absolute rule. Curiously, in the second quarter when lenders had profits of $21.6 billion they also reduced loan reserve contributions by $27.1 billion when compared with a year earlier.

Lenders might argue that credit quality has improved and thus less money should be set aside for losses, but the reality is that foreclosure filings have been above 300,000 per month for nearly a year and a half according to Jim Saccacio, Chairman and CEO at RealtyTrac.com.

“Like an iceberg, a large portion of the foreclosure problem is hidden from view,” says Saccacio. “But the problems are there, they’re real, and everyone has to understand that they have yet to go away.”

The Bottom Line
Despite glowing profit reports, the lending system remains troubled. At best, what we have is a holding operation which has prevented the financial system from appearing significantly worse. That’s a victory — consider the alternative. Unfortunately at some point real values will have to be shown on lender books and those values are not what we see today.

The hope is that the national fudging process can continue until property values increase for real, raising the value of lender loan portfolios no matter what accounting system is used. The good news is that some increases in home values have begun to be reported. The National Association of Realtors says July home prices were 0.9 percent higher than a year ago. TheCase-Shiller Index shows that home prices across the country rose 4.4% in the second quarter. The Federal Housing Finance Agency says home prices increased .9% in the second quarter when compared with the first three months of the year.
So the race is on: Will higher real estate values take hold before lender accountants have to fess up? Stay tuned.

Is the Recession Over

Is the Recession Over, and more importantly have you missed the boat on the perfect opportunity to make a killing in the real estate market.

Here’s what Chris McLaughlin the noted distressed real estate attorney and short sale expert has to say on the current state of the economy, the real estate market and the stock market:

I’ve heard it all. But the 3 biggest whoppers keep coming
back, over and over again.

#1: The recession is over. Right. We believe the media
about as much as we do the politicians. It ain’t
over with unemployment numbers still piling up new
bodies on the heap every week. And foreclosures
still hitting record highs (no, “slowing slightly”
doesn’t count – they’re still growing every day!).

#2: The stock market’s recovering. If so, it’s the worst
“recovery” in history. Stock markets in China and
Europe are delivering up to SIX DOLLARS IN PROFIT
for every ONE ours is! Why? Our economy still has tons
of bad subprime loans and are gonna go South.

Other economies may be saddled with dunderhead politicos
too, but not subprime defaults. Our stock market is
limping along like an anemic bum in the gutter, looking
for bottles to turn in for change.

#3: Foreclosures are down. What a spin-job that was!
We simply threw a few less houses on the bonfire this
month than last. Does that mean there are less? No!
In fact, if you compare it with the same month of the
previous year, when the economy was crashing big-time,
the rate is UP 18% this year!

If you search out media stories in the Great Depression,
they also constantly broadcasted “recovery is just around
the corner.”

For 8 miserable years.

Look, you can actually make a ton of cash in these bad times
and the worse ones to come. Truth is, there are more
millionaires made in recessions than any other times. The
main reason being, when things fall apart, there are smart
people positioned to pick them up…

…for pennies on the dollar. But there’s even more money
being made by spotting these opportunities and flipping
them to other investors.

There where over 95, 000 homes foreclosed in the month of August 2010 alone, what this means is that it is not too late to consider entering the property market in search of a bargain property. The old adage goes something like this: Don’t wait to buy real estate, Buy real estate and wait!!

Don’t loose this once in a lifetime opportunity to ensure your financial future. If you don’t know how to avail of this opportunity then check out the info offered by the expert Chris McLaughlin here. Click Here For Real Estate Info.

How is the Housing Market Doing

Bipolar is what comes to mind when diagnosing the post-homebuyer tax credit market. There are two separate forces pulling it in opposite directions, and experts aren’t yet sure which path the market will take.

On one hand, sales and prices are rising, indicating recovery. On the other hand, so are interest rates and repossessions, which most certainly do not. And then there are the millions of foreclosures that need to be sold but haven’t yet been listed — so-called shadow inventory — that could derail a real recovery if they hit the market in floods.

The prognosis? Negative short term but turning positive by the end of 2010.

“In the short run, I see a mini-collapse,” said Richard DeKaser, an independent housing market analyst and founder of Woodley Park Research who correctly predicted a downturn back in 2005 when he was chief economist for National City Corp.

One of market’s biggest hurdles is getting beyond the lapse of the $8,000 homebuyer tax credit. Thanks to the incentive, buyers scrambled to beat the April 30 deadline, pushing new home sales up nearly 30% in March.

But that just borrowed buyers from later months. And now we face the hangover effect.

“In the months immediately following the expiration of the tax credit, we expect measurably lower sales,” said Lawrence Yun, chief economist for the National Association of Realtors (NAR).

Industry insiders believe the hangover is worthwhile, however, because the credit helped stabilize housing when it most needed help. Home prices have been steadier in recent months, recently experiencing their first year-over-year rise in more than three years.

Still, there are some strong negatives dragging on the market.

1. Interest rates have been intermittently creeping up. Although nobody expects 6% until at least 2011, the days of 4.5% mortgages are behind us.

2. Bank repossessions are on track to surpass a million homes in 2010. But at least foreclosure filings fell in April, the first time since RealtyTrac began reporting.

3. More than a quarter of borrowers are “underwater,” meaning they owe more than their homes are worth.

4. “Strategic defaults” — where underwater homeowners walkway even when they can still afford to pay — accounted for 31% of all foreclosures in March, according to a recent study.

But there is one factor that has experts really scared: homes that are ready to be sold but haven’t been put on the market. Right now, there could be more than 4.5 million homes in “shadow inventory,” according to a recent report by Barclays Capital.

This so-called shadow inventory is a recent phenomenon. In the past, inventory was either tight or it wasn’t. But now, with home prices so low and so many foreclosures on the market, both homeowners and banks have been waiting to put properties on the market.

“These sidelined sellers closely watch the market for signs of a possible turnaround and rush in if there’s a hint of good news,” said Leslie Appleton-Young, chief economist for the California Association of Realtors.

But as more sellers put their homes up for sale, supplies increase, which will depress prices again. Rinse and repeat ad infinitum.

That vicious cycle could cause prices to bounce up and down for years. “I see a saw tooth bottom,” Humphries said. “Prices go up; inventory rises, which sends prices down again. That plays out for three to five years of no appreciation. … Without price appreciation, it leaves more homeowners in negative equity. That’s toxic. Any setback, like a job loss, they go into foreclosure.” 

In wholesaling (short term flip without rehab), you want the type of house that your buyers will want, the ones that, for them, sell the fastest, and, of course, ones they can make a profit on. Following are some tips on what you should be looking for.

In general, especially if you are just starting out, avoid houses in the high end of the market. Yes, they can look beautiful,and clean up real nice, but most retail buyers will not be able to afford to live in them. And as rentals, they are murder when investors are trying to cover the mortgage payments.

You want to work mainly with houses in working class neighborhoods. Investors will be interested in these types of homes for rental purposes. And a majority of reliable renters will want to live in these neighborhoods.

Look for houses in need of repair. Look for peeling paint, broken windows, unmowed grass, general disrepair.

Especially in the beginning of your career, deal mainly with houses that do not need structural repairs, like foundation work. You will receive your fees quicker because any needed repair work can be done relatively quickly.

In the neighborhood you are working in, you want houses that are most affordable for first-time buyers. Those are the houses your buyer will want to rent out.

Put another way, you want houses in the median price range for your area.

The ideal house investor will want to buy will have 3 bedrooms and 2 baths, although you can get away with 1 baths. This is the bread and butter rental house for your buyers. If your area has only 2 bedrooms and 1 bath, you may have to go with that. Or, go farther afield to do your hunting.

What about war zone houses? Generally, you will do better in working class neighborhoods. However, if you have buyers on your buyer’s list who want war zone types of homes, go for it.

Avoid houses with weird floor plans. For example, houses where one is required to go through a bedroom to get to a kitchen, etc. They will be harder for your buyer to rent or retail.

Avoid houses that are too small. Medium size houses are what you are after. Medium for your area, that is.

The more equity a house has in it, the better your chances of making a deal with your buyer. More equity means there is plenty of room for your buyer’s profit, not to mention your fee.

You, of course, want to be dealing with motivated sellers who are willing (or forced) to take a discount from their asking price.

You are always looking for bargain properties where there is plenty of room for profit.