DEAN GRAZIOSI: DEAN GRAZIOSI REVIEW – REAL ESTATE FEED BY DEAN GRAZIOSI

According to a federal report, more than 50 percent of home modification loans fell two or more months behind after just the first year in 2009.  The report covers approximately $6 trillion in loans or 64 percent of all mortgages in the United States.

Believe it or not, the news is not all bad. Only 40.7 percent of mortgages modified in the second quarter of 2009 were delinquent after nine months.  During the same period in 2008, 51.8 percent of mortgages were two or more months delinquent. While the trend is improving, the modification program cannot be deemed a success and goes a long way toward explaining bank resistance to various modification programs.

The Administration’s Home Affordable Mortgage Program has been slightly more successful than non-government assisted programs.  Under the Home Affordable Mortgage Program, payments are modified so as not to exceed 31 percent of pre-tax income.  This should allow homeowners who want to save their home an opportunity to succeed. 

For the most part, interest rate reductions were the chief modifications made to mortgages in the first quarter of 2010.  85.9 percent of mortgages were modified in this manner.  Term extensions were applied to 45.8 percent of the loans while principal reductions were applied to only 1.9 percent of the loans.

The Obama plan offers new incentives to lenders who want to use the principal reductions to avoid foreclosure action.  A troublesome trend is that 25 percent of homeowners who are underwater are willingly allowing foreclosure proceedings.  The damage to credit ratings is severe but homeowners see paying off a mortgage that exceeds the value of the property as a bad investment strategy.  By walking away, the damage is done and homeowner can begin to rebuild their credit.

The rate of completed foreclosures increased by 19 percent in the first quarter 2010.  Short sales increased by 9.2 percent but 120.4 percent in the past 12 months.  No matter how the figures are viewed, they are dismal.

On the brighter side, lenders are showing an increased willingness to work with troubled homeowners.  Modification approvals outweighed foreclosure initiations by 107 percent in the first quarter.  

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Homeowner’s Insurance is an inexpensive way to protect one of your largest investments. If you have mortgage, your lender will require you to purchase a Homeowner’s Insurance Policy. 

Homeowner’s Insurance is a contract between the owner and the insurance company.  In exchange for paying the premiums, the insurance company will pay the owner for damages caused by natural disasters or by human error.

Owners have protection against natural disasters like fire, lightning, wind or winter storms.  Damages caused by humans like theft and vandalism are also covered.  Most homeowner policies include liability coverage for persons that incur injuries on the property. The cost of legal defense in these instances is usually included in the coverage.

Homeowner Policies do not include coverage against floods or earthquakes.  If the property is located in an area where these natural disasters are common, the lending institution may insist that the owner acquire flood and/or earthquake insurance.  The cost of this coverage is more expensive than typical homeowners insurance.

As the mortgage company typically has a significant amount invested in the home, which is often more than the owner’s insurance, they will want their investment protected to the maximum amount.  Proof of this insurance will be required before the property will close.  Many mortgage companies will charge the homeowner for the insurance and then pay the premium themselves.

The premiums, like the real estate taxes, will be paid from the homeowner’s escrow account.  Proof of payment and coverage will be forwarded to the homeowner each year.  If the lender does not require premiums to be held in escrow, the mortgage company will send notice to the owner each year requiring a cop of the new coverage.

If the home s sold, the homeowner will receive a refund for the unused portion of the policy.  The same practice applies to unused real estate taxes that have been prepaid. 

Homeowner Insurance is provided at a reasonable rate.  The homeowner is free to seek competitive proposals for the insurance. The homeowner should make sure the coverage meets all the lender’s requirements and serves their best interests as well.

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Residential real estate investors are in for happy days ahead.  In fact, investors will soon enter heretofore impossible territory.  Conservative estimates drawn from the U.S. Treasury Department, Zillow and Radar Logic clearly illustrate that the government will soon have more than 3.1 million Real Estate Owned Properties to manage and sell.

As usual, the nation’s taxpayers will be paying for damages incurred by the country’s lax and irresponsible lending practices.  Remarkably, the proponents of these practices have tarnished the public confidence in financial institutions but have created millions of multi-millionaires along the way. 

The employees who developed the high-risk, low-doc loan packages worked for such companies as Goldman Sachs, Lehman Brothers and Bank of America, among others.  The typical Goldman Sachs employee earned a resounding $630,000 last year. 

Of course were it not for the American taxpayer which gave the company $10 billion in a direct loan and another $10 billion through an AIG loan repayment, the company would have closed the doors.  It is good to know that companies like AIG, which has cost the American taxpayer more than $180 billion so far, can afford to repay Goldman Sachs for what was clearly a poor investment while Goldman cannot help out any of the homeowners the company duped.  It is the classic example of American greed.

Now the federal government will be forced to come to the rescue again.  Other than the financial companies that packaged those dreaded low-doc loans and then sold them over and over again, the next group of winners stands to be residential investors.  The new-age investors who can learn to deal with the government’s cumbersome paper trails and slow decision making abilities stand to make big returns on relatively small investments.

The reason is that the U.S. government cannot afford to maintain these properties.  Frankly, investors may soon see favorable financing terms that will exceed their wildest expectations.  If you are an investor, get your REO presentation kit together.  If you have never invested in real estate before, this is the best chance you will ever have.

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