The vast majority of the distressed housing opportunities are being made available from foreclosures and short sales. What was it that helped create this huge opportunity to buy houses far below what they are actually worth? The greed associated with the sale of mortgages led to loose credit and the new industry of sub-prime mortgages was created in the early 21st century. The mortgage lending industry had unlimited funding available as a result of Fannie Mae, Freddie Mac and others wanting to originate and then sell as many mortgages as possible.
This greed then spiraled into a new breed of mortgages being offered that included no documentation loans that would not loosely qualify borrowers based on their own stated income levels. On top of the no-documentation requirements and stated income the mortgage industry began to allow 100% financing and simultaneously lowered credit score requirements for borrowers. Essentially borrowers could buy houses with no money down, no income to support the payments and low credit.
This helped lead the charge of many people buying homes that they could not afford which resulted in hyper demand of houses and a surge in prices and appreciation in many markets across America. Those were the days when houses sold super fast regardless of condition and often times the best homes would receive multiple offers. Realtors began to exploit the use of escalation clauses on their offers on a regular basis.
These toxic loans helped to over-inflate the housing market with extreme appreciation in cities such as Las Vegas, Phoenix and throughout Florida. As the credit situation began to unravel and credit started to tighten with the reduction in mortgages being originated, the value of Fannie Mae, Freddie Mac and others began to plummet. The leaders of these organization attempted to assure the public that they would get everything back on track; but obviously that did not happen. The housing market began to pop, values on wall street began to plummet and unemployment began to increase.
It is the combination of these and many other factors that created the opportunities of today. It is at the expense of jobs, lost value on the stock market, lost value of housing and more importantly the lost opportunity of home ownership as banks began foreclosing on the very mortgages they should have never originated in the first place.
Financial institutions quickly learned what was involved with a non-performing asset as they displaced millions of people out of their homes and put those homes onto their own balance sheets. It started with the greed of bankers wanting to originate as many mortgages as possible, eliminating borrower qualifications and putting homeowners into homes they could not afford. It has resulted in a burst housing bubble, lower housing prices, tight credit guidelines of today and many great people losing their homes.
I have many personal friends who lost their homes during this crisis and my heart goes out to everyone who has lost a home. It is a tragedy that started with the greed of needing to originate loans and reducing borrower qualifications.
These toxic loans helped create an unprecedented level of distressed property inventory. Many homeowners losing their homes give up on adding value to the property and general maintenance. They were in homes they could not afford and some of them could not keep up with leaky roofs, blown heat pumps the myriad of other challenges that come with home ownership. Many also intentionally damaged their homes with holes in the walls and general property damage.
I have seen some cases of direct vandalism of their own homes including taking the heat pump with them and drilling holes into galvanized piping and a host of other items. I suspect that the foreclosing banks drove these homeowners crazy during the foreclosure process to the point that they intentionally vandalized their own homes right before they were forced out of their house.
Financial institutions quickly discovered that taking back a foreclosure was an expensive event. Besides the legal fees; they discovered the cost of maintaining vacant property is also expensive. They learned about all the additional fees from asset management companies, vacant property insurance, costs to secure property and in some cases make the home safe, utilities, realtor commission fee’s when they go to sell the house and so on.
Their expenses associated with holding non-performing assets from foreclosures are very high and are often estimated at 1.5% of the house value, per month. If a house is valued at $100,000, the financial institution will typically budget $1,500 per month in holding costs associated with the foreclosure. This is why these financial institutions that hold foreclosures in inventory are motivated sellers in today’s real estate market.
The good news is for the buyers in today’s market as this burst bubble has created a tremendous buying opportunity with foreclosures as the foreclosure inventory remains very high and prices are now affordable. Combine the discounted prices of distressed real estate with historically low interest rates and you have a winning combination for everyone looking to buy a house in today’s market.