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Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
Hey – are you a rehabber who's had a difficult time finding deals lately?
Are you a wholesaler who’s seen the pool of motivated sellers dry up?
Or are you a buy-and-hold investor, like me, who has been priced out of the prime neighborhoods you’re targeting?
Then I have GREAT news for you.
Because Phase 2 of the sub-prime meltdown is just around the corner!
I know it doesn’t look like it right now. In fact, according to an article that I read recently:
"…the national foreclosure rate fell to 1.7 percent in June, down from 2.5 percent a year ago. Sales of foreclosed properties are at their lowest levels since 2008, and the rate of foreclosure starts—the beginning of the foreclosure process—is at 2006 levels. At the peak, 2.9 million homes suffered foreclosure filings in 2010; last year, the number was 1.4 million.”
But, the article continued:
"…these numbers are likely to reverse next year, with foreclosures spiking again. A series of temporary relief measures and legacy issues from the crisis will begin to bite in 2015, causing home repossessions.”
They say that the foreclosure crisis was never solved; it was deferred. And next year, the clock begins to run out on that deferral.
Three Boulders Being Dropped in the Pond
They say that several factors will contribute to this new avalanche of foreclosures, including:
1. Home equity lines of credit will start to feature increased payments, as borrowers must pay back principal instead of just the interest. TransUnion, a credit rating firm, estimates that between $50 and $79 billion in home-equity loans risk default because of the increased payments, which could add hundreds or even thousands of dollars to payments a month.
2. The government’s Home Affordable Modification Program (HAMP) provided only temporary interest-rate relief to borrowers, and after five years, that relief runs out, with interest rates gradually rising about 1% each year. More than 319,000 of these rate resets begin in 2015.
3. Many mortgage modifications outside of HAMP were similarly structured as temporary relief. Many homeowners who fought their way through a broken system and got a modification did not get one that is satisfactory or sustainable.
The author quoted a research study that estimated that 2 million modifications will face interest rate resets in the coming years, and 40% of those homes remain “under water.”
And that – SHOCKING! – under-water homes are highly correlated with defaults and foreclosures.
Yeah thanks for that Captain Obvious.
But that’s not all…
Two additional HUGE factors will pile on and sweeten the deal for us.
Two More Body Shots to the RE Market
1. The first is that the Mortgage Forgiveness Debt Relief Act expired in 2013 and may not ever get renewed, all mortgage relief given to borrowers will get treated as earned income for tax purposes, leaving the borrower with a huge tax bill they are unlikely to be able to afford. The first tax bills reflecting this will come due in April 2015.
2. The second is that the foreclosure backlog, most prominent in states that require a court ruling to foreclose, will finally unclog in the coming years.
The article did caution, however, that it’s hard to predict just how many additional foreclosures will spring from this scenario, because it depends on a number of factors, including whether banks respond to a default wave with additional relief.
With 2 million rate resets, however, and a foreclosure backlog in the hundreds of thousands if not millions, some percentage of those loans will fail. And the fact that harder-hit areas like Nevada and Los Angeles are already seeing a spike is not a coincidence.
So while it’s highly unlikely that we’ll see 5 million more foreclosures hit the market, it IS highly likely that we’ll see another flood of them.
Keep in mind that if you’re rehabber – this is both good and bad news.
The bad news is that if you have projects going when these issues start to bubble up, you may be left with a property you can’t sell at the price you thought you’d be able to…
But the good news for rehabbers and the rest of us is that we’ll start to see prices decline in some areas, and there will be a whole lot more motivated sellers to reach out to.
So get ready for Phase 2 of REI nirvana!
Because it looks like 2015 could be a banner year.iem
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.