Archive → May, 2010
What is a Flip and Why is it SO Difficult?
What is a flip? No not the one in the picture but the one related to Real Estate that has created so much trouble recently. A flip transaction is one in which an investor purchasers a home (typical at trustees sale), performs some clean up and renovation work, and then lists the home and sells it for a profit. In many cases, investors are turning these properties in as little as 1 to 2 months and generating profits to the tune of 50% appreciation and more!
These are difficult because the lending world is scared to death of them in the current market. Why? Because of the “shadow inventory” that everyone talks about but we have yet to see hit the market. Lenders are afraid that if they lend on a flip that has generated a large amount of appreciation and the “shadow inventory” floods the market, then we will see a second round of downward spiraling home prices. This could leave the lender with a whole new batch of maximum financed homes that have declined in value and the homeowner ends up underwater. The resulting fear is another round of walk always and another round of foreclosures down the road!
The big question is if this fear is grounded in reality.Currently, flip transactions where the property is being turned in less than 90 days and the appreciation is greater than 20% are virtually impossible with an FHA loan and takes an act of congress to get done on a conforming loan product. If the flip is greater than 90 days then the road is a little less bumpy but still requires a 4 wheel drive vehicle to get the job done. Most flips will require 2 appraisals, documentation as to what improvements were performed that justifies the appreciation, and in some cases a lender ordered home inspection.The disconnect in the industry is that while HUD has lifted the old 90 day moratorium on flip transactions for the next year there is a lack of lenders willing to fund these transactions. So while HUD giveth, investors taketh away!
The insanity of our market continues and good legitimate transactions remain on the table with few if any lending sources. If the lending community is so worried about the shadow inventory and another round of falling home prices then the counter to that would be looser credit (within reason) and promoting home buying activity. By holding their cards close to their vest and not availing themselves of the programs offered via the secondary market it seems the lending community is setting themselves up for a self fulfilling prophecy. The shadow inventory will come and we will have more homes on the market. The way to counter another dip in values is to have lenders willing to lend under the current guidelines so qualified buyers and sellers can meet in the market and do business.I welcome your thoughts and comments on this subject.
What’s Ahead For Mortgage Rates This Week : May 3, 2010
Mortgage markets improved last week on tame inflation data, a benign statement from the Federal Reserve, and ongoing credit problems in Greece.
The factors combined to drop conforming mortgage rates to their lowest levels in 6 weeks.
It’s an unexpected development considering that mortgage rates were supposed to rise post March 31, 2010. That was the day the Fed’s support for mortgage markets ended.
Since then, however, a month-long string of devastating economic and meteorological events within the Eurozone sparked a global flight-to-quality that benefited “safe” assets such as mortgage bonds.
May 2010 may not be so kind.
The week starts with news that Greece reached a $147 billion bailout agreement with the IMF Sunday. This is a plus for the Eurozone and mortgage market negative. Rates should rise on the bailout.
Also on Monday, the government releases Personal Consumptions and Expenditures data.
PCE is the Fed’s preferred inflation gauge and it’s expected to show an annual read of 1.3 percent. Anything higher and rates should rise.
Then, for the rest of the week, employment data takes center stage.
- Wednesday : ADP releases its private sector employment data
- Thursday : The government releases initial jobless claims
- Friday : The government releases April’s job report
Jobs are key to the U.S. economic recovery, tied to consumer spending, consumer confidence, and mortgage delinquencies. If job growth is better than expected, mortgage rates should rise. If job growth is worse, rates should fall.
There’s no “best day” to lock this week so keep an eye on the market. However, if rates rise as quickly in May as they fell in April, you won’t have much time to act.