Dennis Norman Musings

By: Dennis Norman

The Office of the Comptroller of the Currency and the Office of Thrift Supervision issed a report on mortgage performance which showed an increase in delinquencies, foreclosures in process, and other actions leading to home forfeiture but offered a little ray of light with a drop in “newly initiated” foreclosures by 2.6% from the second quarter to third quarter of 2008.

The report shows banks and thrifts are definitely working with borrowers trying to keep them in their homes as the number of loans that were modified to try to help the borrower rose to 133,000 loans, a 16% increase from 2nd quarter 2008.  Unfortunately it does not appear the modifications are working, not even in the short term as the report shows that of loans that were 30 or more days delinquent and were modified in the 1st quarter of 2008 37% of them were in default again after 3 months and 55% after six months.  Clearly the modifications have only been acting as a band aid for the majority of the borrowers and not a long term solution as was intended.

Comptroller of the Currency, John C. Dugan, said “One very troubling point is that, whether measured using 30-day or 60-day delinquencies, re-default rates increased each month and showed no signs of leveling off after six months and even eight months”.  Mr. Dugan goes on to say “this trend of increasing delinquencies underscores the need to understand why these modifications have not been more sustainable.”

You, the real estate investor, should take note of the facts and statistics in this report.  This shows the real estate market is still very volatileas many homeowners struggle to keep their homes.  Foreclosures may affect you negatively by lowering the value of some of your rental portfolio if you have homes in areas that have significant numbers of foreclosures.  However, foreclosures also present opportunity for you as well as the lenders are not going to keep the homes, they are going to sell them and the current market will dictate the price.  Until market conditions improve this will give you a good selection of homes to purchase and if you are cautious and patient, at good prices.  This last statement may sound somewhat “vulture-like” but it is not intended that way at all.  I am very sympathetic toward the homeowners struggling to keep their homes and think it would be a much healthier market to have the foreclosure rate drop dramatically but until that happens the sad fact is there are going to a large number of homes foreclosed on and then sold.

The other thing I think this shows is unfortunately there are a lot of homeowners that will be forced to rent a home or apartment as a result of losing their home.  This should keep demand up for rental property in many markets.  One word of caution though…don’t forget what happened for about 5 years during the early part of this century.  Renters were fleeing rental property and buying homes making it difficult to maintian decent occupancy rates on many rentals in several markets.  This may very well happen again in the future, although hopefully at not the same extreme as last time.  At some point our economy will be OK again as will the real estate market at which time many people that chose, or had to rent, will go back into homeownership.  To protect yourself I would keep this fact in mind when acquiring rental property and buy property that will not only appeal to a tenant today, but should appeal to a homeowner in the future.  That way when the time comes if the rental market is slowing down but sales are up you should be able to sell it to someone that wants it for a home and not be stuck with only investors as your buyer.