Property Grunt

Thursday, February 26, 2009

Go Big or Go Home

This is Obama's Final Battle.

Tueday night Obama gave his Living on a Prayer Speech and laid it all out. It is quite an ambitious agenda he has set for himself and the country. His critics state that he is asking for the impossible. I say he has no choice but to go for broke.

However it is not going to be easy for any of us particularly with this housing market.

Effort Takes Shape to Support Families Facing Foreclosure

As resistance to foreclosure evictions grows among homeowners, community leaders and some law enforcement officials, a broad civil disobedience campaign is starting in New York and other cities to support families who refuse orders to vacate their homes.

Temporary halt to foreclosures urged for NY

A coalition of 143 New York nonprofits called for a moratorium on foreclosures to give a $275 billion mortgage relief plan unveiled Wednesday by President Barack Obama a chance to work.

New Yorkers for Responsible Lending wants mortgage lenders and servicers to halt foreclosure actions on all primary residences in the state until at least eight weeks after the Obama administration’s proposal takes effect early next month.

“Even if Obama’s plan is put into place quickly, it’s going to take time for lenders to do modifications,” said Josh Zinner, co-director of the Neighborhood Economic Development Advocacy Project. “It’s absolutely critical that there be a foreclosure freeze to give this plan a chance to work.”

More than 32% of all subprime adjustable rate mortgages were seriously delinquent or in foreclosure in New York at the end of 2008, according to Mr. Zinner’s organization, meaning thousands of residents are in jeopardy of losing their homes.

What usually happens is that the banks forecloses on the property then sells it off to specialists in distressed properties. This is how the real estate food chain works and it results in lenders cutting their losses and investors getting great deals. Unfortunately, the former owners of these properties are left traumatized, physically, psychologically and financially.

It's harsh but that is how it works.

However with these developments, there is no incentive for people who specialize in distressed properties to get involved because they will be dealing with this type of resistance.

Does that mean one should not buy or invest in real estate? Absolutely not. There are some great deals out there. However I should urge that people should exercise due diligence to the point of paranoia. You need to know if the property you are interested in qualifies for the Obama housing plan, if the owner is distressed or underwater, how flexible the lenders are and by all means make sure if the property you want to own is the in the cross hairs of community activists.

Then there is Obama's Housing plan

Bailout Likely to Focus on Most Afflicted Homeowners

The first group is made up of people who cannot afford their mortgages and have fallen behind on their monthly payments. Many took out loans they were never going to be able to afford, while others have since lost their jobs. About three million households — and rising — fall into this category. Without help, they will lose their homes.

The second group is far larger. It is made up of the more than 10 million households that can afford their monthly payments but whose houses are worth less than what is owed on their mortgages. In real estate parlance, they are underwater. If they want to stay in their homes, they will have no trouble doing so. But some may choose to walk away voluntarily, rather than continue to make payments on an investment that may never pay off.

Scratch beneath the details of any housing bailout proposal, and the fundamental issue is whether it tries to help the second group or just the first.

Mr. Obama has evidently decided to focus on the first group, based on the previews of his speech that aides have offered. In coming weeks, his administration will begin spending $50 billion to entice banks to reduce the monthly payments of people who otherwise couldn’t afford to stay in their houses. In effect, the government will split the losses on these mortgages with banks.

The $50 billion will come from the money Congress has already allocated for the bailout of the financial system. It is likely to be aimed at people who need a significant, but not an enormous, amount of help to meet their mortgage payments.

There are some big advantages to this approach. Bailing out all underwater homeowners would be tremendously expensive. All told, about $500 billion in mortgage debt is already underwater, and it’s impossible to know in advance who is likely to walk away. So the government would have to spend hundreds of billions of dollars to help millions of people who don’t need help staying in their homes.

I empathize with the people who are on the verge of losing their homes or have lost their homes. More than you will know. I understand their outrage and anxieties. A lot of these people were put in a situation by lenders where they were completely over their heads but did not realize it until it was too late.

I am also a believer of the philosophy that if s**t in your bed you should sleep in it.

In real estate appraisal there are 4 stages of a property which are Growth, Equilibrium, Decline and Revitalization. These stages also apply to a neighborhood. Suffice to say we are in the decline phase.

What usually occurs in this period is that the distressed investors come out in droves to cherry pick for the best deals that are out there. And despite the fact that the credit markets are pretty much in suspended animation, all you need to do is type in distressed properties sales.

However I am unsure if Obama's plan and stopping foreclosures will help. In fact I think it will just prolong inevitable.

Just because help is available does not mean people will take it. It all comes down to whether the aggravation is worth it. Owners who are underwater may realize they are overpaying for a home that has plummeted in value. Banks and lenders may also realize that after doing the numbers that restructuring does not make any sense for them to get involved with the Obama plan and resist any actions to be part of it.

What I see here is a messy convergence of forces that involve the government, distressed owners, community activism and lenders. Which is why I do not see any resolution to the housing crisis expedited in 2009. In fact it would not surprise me if we are still at square one in 2010.

As for President Obama's lofty ambitions, he really does not have a choice. I highly doubt Bernanke's assessment that the recession could end by 2009 and in fact it is possible that this could go on for more than 4 years. It is possible that Obama will be a one term wonder and no one is more aware of that than President Obama himself. So he has to push and he has to push hard.

Will this work? I have no clue. Maybe this will be all for naught. But the people are wailing for action and he is giving them a show.