Sunday, September 18, 2011

Uncle Sam stuck with 248,000 homes

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Uncle Sam stuck with 248,000 homes

This article was reported by Lorraine Woellert and Clea Benson for Bloomberg Businessweek.
September 14 2011

Thanks to soaring defaults on federally backed mortgages, the US government is swamped with repossessions. Its challenge: Unload them without driving down prices.

For sale or rent by distressed owner: 248,000 homes. That's how many residential properties the U.S. government now has in its possession, the result of record numbers of people defaulting on government-backed mortgages. Washington is sitting on nearly a third of the nation's 800,000 repossessed houses, making the U.S. taxpayer the largest owner of foreclosed properties.

With even more homes moving toward default, Fannie Mae, Freddie Mac and the Federal Housing Administration are looking for a way to unload them without swamping the already depressed real-estate market.

Trouble is, they haven't figured out how to do that. The government admitted as much in August, when Fannie, Freddie and the FHA issued a joint plea to the public for ideas about how to solve the problem.

"They're stuck," says Karen Shaw Petrou, a managing partner of Federal Financial Analytics, a Washington, D.C., consulting company that advises banks and other clients on government policy. "They don't know what to do."
Since the 2008 financial collapse, the government has spent billions of dollars trying to extricate borrowers from high-cost loans, aid delinquent homeowners and stabilize neighborhoods. The results have been disappointing.

The Obama administration's signature loan-modification program has helped about 657,000 homeowners -- far short of its goal of 3 million to 4 million. The program was a victim of its complexity and its inability to cope with overwhelming demand. Many families hit hardest by the housing downturn are concentrated in states that are having the most difficulty recovering from the recession, including Florida, Ohio and Nevada.

The government's call for ideas is a sign it is deluged with repossessions, commonly known as real-estate-owned properties, or REOs. "It's almost like having the captain of the Titanic go on the public address system and say, 'Does anybody have an idea?'" says Mark Wiseman, a former director of Cleveland's foreclosure-prevention program. "It's not a confidence builder."

Fannie Mae, Freddie Mac and the FHA made progress in the first half of this year, reducing their combined backlog from 295,000 single-family homes in December to about 248,000 in June, according to the Housing and Urban Development Department. The nation's total number of repossessions also fell during that period, from nearly 981,000 to about 817,500. The government's share has remained steady at around 30%.

In coming months, however, as lenders and the courts clear up the "robo-signing" scandal that slowed new disclosures, the number of government-owned properties will likely grow. More than a fifth of the 3.65 million homes for sale at the end of July were foreclosures, according to RealtyTrac, a housing-data provider.

"It isn't necessarily our preference that FHA is going to itself continue to hold these properties," says FHA acting Commissioner Carol Galante. "We want to move homes through the system so we can recover."
The agency has to be careful as it goes about it, Galante says. "If you're putting too much through that system, you are helping to drive down prices." That's especially true in regions congested with government properties.

Shielding the market from a flood of government homes might be good for property values and the economy. It's not such a great deal for taxpayers, who bear the costs when government-guaranteed loans go bad and who pay for maintenance on vacant homes the feds take over. One idea the administration is exploring: allowing Fannie, Freddie and the FHA to keep an ownership stake in the properties by converting them to rentals in partnership with private investors. When the market recovered, the government would sell the homes for more than it could get now and not risk glutting the market. Structured properly, such joint ventures could reduce the impact of foreclosures on struggling neighborhoods.
It's not at all clear whether that would work on a large scale. The government would have to spend money to bring the rental properties -- many of them old and dilapidated -- to code, pay still more to insure the rentals and build a bureaucracy to manage and maintain them. Even if it does all that, there might not be people willing to move in. In parts of Cleveland and Detroit, for example, some houses are stripped and vandalized the minute they're vacant.

"Some of the neighborhoods, you can't move into,'' Wiseman says. "There are so many empty houses, it's just not safe."

In places like that, it's sometimes difficult to persuade people to stay in their houses. Freddie Mac allows occupants of foreclosed homes to remain on month-to-month leases until the homes are sold. Few do, spokesman Brad German says. "People prefer to take cash for keys and move on."

This article was reported by Lorraine Woellert and Clea Benson for Bloomberg Businessweek.

Friday, September 2, 2011

Cashing in on rental property

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By Jeff Wallach @Money September 2, 2011: 6:07 AM ET

(MONEY Magazine) -- Most of the news lately about real estate has been dismal: Home prices are swooning, foreclosures ballooning.

There is, however, one bright spot: the rental market, where demand is up and rents are rising. That's partly because those foreclosures have turned more than 4 million former homeowners into renters, but also because many other prospective homeowners, worried about losing their jobs or housing prices falling a lot further still, are reluctant to buy now.

As with many investments, the best time to get in is when most others are sitting on the sidelines. To figure out whether you can benefit by investing in rental property, here's what you need to know.

THE CASE FOR BUYING NOW

Many factors make this a great time to invest. Mortgage rates are at a 40-year low, and homes in many areas are ultra-cheap. Meanwhile, demand for rentals has risen in more than 500 cities, according to recent Census data. That, in turn, has enabled landlords to charge more. Hotpads.com, a real estate research firm, reports that rents nationwide jumped 11.6% in 2010, to $1,320 a month.

You'll need that rental income to tide you over until home prices bounce back; in fact, the typical investor today plans to hold for 10 years, according to a survey by the National Association of Realtors.

Send The Help Desk your real estate questions.

If you can hang on that long, you've got a good shot at solid gains, especially if you're financing the home purchase. "Whereas leverage is dangerous when buying stocks, it can be a good long-term strategy with real estate," notes real estate investor and Columbia University adjunct finance professor Marshall Sonenshine.

The big catch: "Can you afford to hold the property that long and not need the equity for your kid's college fund?" says Sonenshine. Or whatever other pressing need might crop up.

You'll also face some tough financing rules. Most banks now require a down payment of at least 20% to 25% and evidence you have enough cash to cover six months' worth of mortgage, tax, and insurance payments.

HOW TO FIND A GOOD DEAL

Investment real estate is like produce: It's best bought locally. "Buy something you can get to in 10 minutes," says Seattle real estate investor Bill Snyder.

Familiarity with the neighborhood also limits nasty surprises like a noisy bar or a nearby development competing for renters.

Work with a local realtor who has experience with rentals and can help you assess how attractive a given home will be to tenants.
10 Best cities to buy a rental property

And while prices on multifamily dwellings haven't dropped as much as they have on single-family homes, don't ignore plexes: Intake from a few rents instead of just one will boost your cash flow; a single vacancy won't hurt as much; and you could benefit from economies of scale for things like appliances and painting. But stick to buildings with four units or fewer to avoid stricter financing requirements, such as a bigger down payment and higher mortgage rates.

Once you've identified candidates, crunch the numbers. The goal: to make sure your rental income will at least cover your loan payments, plus a 20% cushion to handle repairs, vacancies, and property management.

To figure out what you'll garner in rent, ask sellers for recent leases, says Snyder, and double-check their numbers by perusing sites like Rentometer and Craigslist for similar rentals in the neighborhood.

Assume your mortgage rate will be at least a half-point higher than rates on owner-occupied properties. Factor in insurance and property taxes, and bank on a 5% vacancy rate. Otherwise, "one empty month can kill you," says Ellie Berlin, a broker with Houlihan Lawrence in Larchmont, N.Y.

KNOW WHAT YOU'RE IN FOR

Brush up on your people skills: Owning rentals also means responding to tenant complaints, like the 2 a.m. phone call about a broken toilet. Want to palm off the grunt work? You can hire a handyman (around $45 an hour) or a management company (8% to 10% of monthly income plus a half-month's rent for filling vacancies), but the luxury will eat into cash flow.

To find your own tenants, creative ads on Craigslist are your best bet. Run credit and reference checks. And invest in small touches to make your place stand out, such as cool lighting fixtures or antique door hardware. Those will pay off when it's time to sell too.

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