Melissa Savenko's Richmond Real Estate Review

Almost 20% of Richmond Mortgages Underwater - OUCH! What Are Some Options?

So according to CoreLogic, a real estate analysis company, 19.5% of the mortgages in the Greater Richmond area, a total of 44,307 properties, are under water.  That means the owners owe the bank more than the property is currently worth.  Another 6.5% of home owners, or an additional 14,131 properties, have less than 5% equity in their homes.

What does this mean?  Nothing good, especially with real estate values flat-lined.  If you are one of those home owners with negative equity in the home, what are your options?

1.  Short Sale:  Sell the property for less than it is worth, with the permission of the bank.  That's the kicker - you have to be eligible for a short sale, meaning you have suffered some "hardship," AND the bank has to be willing to accept mortgage amount minus $X.  AND you still have to sell your house on the open market.

2.  Mortgage Modification:  Even harder than the short sale.  Means you have to get the bank to change the terms of your loan - amortizing it over a longer period, decreasing your interest rate, or forgiving principal - so you can remain in the house with a reduced payment. 

If you think a short sale is hard, you haven't tried a mortgage modification.  I had one client that tried unsuccessfully for 15 months.  A lawyer friend of mine did get a modification, but it took 10 months and effort every single day.  You never talk to the same people.  The banks lose paperwork.  The Loss Mitigation and Collections Departments don't talk to each other, so one group is telling you you are eligible for modification, the application just needs to be reviewed by the right person, and the other group is sending foreclosure notices.  Welcome to "Alice-in-Wonderland-through-the-looking-glass" land.

3.  Stay Put:  Probably the best option.  But sometimes people have to move, even if it is a terrible market.  Think job relocation, divorce, illness, death in the family. 

4.  Rent:  See if you can find a tenant that will cover all or at least most of the mortgage.  Move into something more modest, likely a rental, since most people can't buy without selling.  And pray the market improves.

None of these is a good option.  But welcome to the new normal.  The only thing that is going to fix the real estate market is time.  And the federal government not doing more stuff to screw it up - but that is a totally different discussion.

MORE Bad News - Really, Is This a Real Estate Apocalypse?

If the news in residential real estate isn't depressing enough already, here comes this N.Y. Times article about further price declines.  The Case-Schiller index, which tracks housing values in the Top 20 metropolitan areas, saw a SUBSTANTIAL decline in values from February to March.  Predicted to lose about 1+%, the index instead slumped 11.6%.  Ouch.

Is Richmond bucking the Case-Schiller trend?  Are there signs in the residential real estate market HERE to be hopeful about?  More on this later.  Right now I am going to have more coffee and try not to be TOO overwhelmingly depressed about my chosen profession.  Power of positive thinking and all that, you know.

 

Historic Preservation Tax Credits Are Endangered by Court Ruling

Here is a succinct article describing a pending court challenge to tax credit programs. The appeal is the result of an IRS tax challenge to the syndication of tax credits, and the IRS' recent victory on the point in the Fourth Circuit in front of a three judge panel.  The analysis is complicated and technical, dry reading that only a lawyer could love.  Short version:  The IRS argued successfully that the distribution of tax credits to the partner-investors in a limited partnership equals a disguised sale and should be taxable as ordinary income.  As the article points out, the historic tax credit program has been an economic boon to Richmond and other older cities throughout the Commonwealth, like Staunton, Roanoke and Lynchburg. 

For the average bear, here are the relevant facts.  Taxing the distribution of the credits as a sale will reduce the value of the credits to the developer.  This could make the rehabilitation of historic buildings non-economic.  Oftentimes the tax credits are the difference between a project being sufficiently profitable and not.  This means fewer historic renovations and adaptive reuse projects - the conversion of old apartment buildings and even hospitals to condominiums (cf. Windsor Court Condominiums, One Monument Place, Locke Lane, Ginter Place), the conversion of industrial and commercial spaces to apartments (cf. Tobacco Row, Carolina Consolidated, Lee Street School), the conversion of industrial spaces into commercial buildings (Glave & Holmes' office, the Edgeworth Building) - will be done.

That means:

• Less additional real estate tax revenue to the City, as buildings remain underutilized;
• Fewer construction jobs;
• Less spending on products related to construction;
• The need for more ground-up building; using more green space for building;
• Having to move further out of the urban core to find that green space, with all the ancillary environmental impacts. 

I don't think any of these are good things.  Hopefully, the full panel will revisit the ruling and consider the long-term policy impacts of these programs. 

 

And the Hits Just Keep Comin' - MORE Bad News in Residential Real Estate

The N.Y. Times published this article on the growing backlog of foreclosed homes currently in the hands of the major banks and mortgage lenders.  Short version:  There is a huge backlog of foreclosed property currently bank-owned that has not yet hit the market, and banks keep taking more back.  Scary statistic: In the Atlanta market, the estimate is the banks are foreclosing on EIGHT properties for every one they sell.  Ouch.

Is the news all bad?  What's it mean for little ole Richmond, Virginia?  I need to think on this one a while.  Meanwhile, like everyone in this business - developers, contractors, home sellers, agents - I am putting my head down and trying to push on through.  May the force be with us.

BAD News in Residential Real Estate + GOOD News in Commercial Real Estate - What Gives?

So, first thing I read this morning is the Bizsense article "All of a Sudden, Boomtown USA," which describes the over 200% increase in commercial deal value for the first four months of 2011($160.6M), compared with the same time period in 2010 ($47.9M).

The next thing I read is the Richmond Times-Dispatch article, "Homebuilders Say Outlook Remains Soft."  [NOTE:  The online version's article is titled "U.S. Homebuilders Remain Pessimistic," which seems to me a more negative title. I wonder why the discrepancy?]  According to the article, the National Homebuilders Association's projections for the future were its most pessimistic since September 2010.  Which is saying something, since all of 2010 was pretty daggone awful.

So what gives?  How can commercial real estate be looking up, and residential real estate still be on life-support, if not flat-lining?   I don't have any hard evidence or data to back up my findings [I know, I know, for some of my metric-driven colleagues and clients, this makes you crazy].  However, I do have some theories, which I intend to share, just in my next post.  Right now, I have two hours to get my office desk clear enough that a new desktop computer can be installed.  Anyone who has seen my office knows that will be a tall order.  More later....

Changes to FHA Financing - Mortgage Insurance Premiums Going UP April 18, 2011

Happy Valentine's Day to us!  On February 14, 2011 the Department of Housing and Urban Development promulgated formal guidance on an increase in mortgage insurance premium ("MIP") for FHA loans, effective April 18, 2011.  FHA is going to increase the MIP expense by 25 basis points, or one quarter of a percentage point (0.25%).  What does that mean for FHA borrowers?  FHA loans, which already have a fairly hefty upfront fee PLUS charge MIP for five years, are going to be more expensive.

In plain English, how does that effect YOU as a potential FHA borrower?  For every $100,000 you borrow, you will pay an additional $22.50 per month, because of the MIP increase.  That's an additional $270/year.  Or an additional $1,350 over the life of the loan.  Now, some people may say, "no big deal."  But for first time buyers, who often judge what they can buy based on a monthly PAYMENT, that extra $22.50/month per $100,000 borrowed ain't chump change.  On a $200,000 loan, that $45/month could go to pay a utility bill.

This is just one of the changes to federal lending rules that will make it harder for moderate income buyers to borrow.  The seller closing cost contribution is expected to come down to 3% from 6%.  That means more cash out of pocket for buyers.  The underwriting standards will be tightening.  Credit score requirements will be increasing.

But it's not just moderate income borrowers who will be impacted.  Fannie and Freddie are going to require more money down for their loan products, possibly as much as 10%.  Conforming loan limits are going to come down, likely back to the traditional $417,000, meaning loans larger than $417,000 will be non-conforming and therefore more expensive.  Trust me, there is plenty of pain to go around if all of the recommended changes are implemented.

More on all of these changes in the next several weeks.  But the practical reality is if you are considering buying a home, and particularly if you are going to be an FHA buyer, consider buying NOW to avoid those April 18, 2011 changes.  Interest rates are great and there is more and more inventory coming on for the Spring market, so there are wonderful opportunities out there.  Otherwise, more marginal buyers may find themselves able to borrow much less, or shut out of the market altogether.

Thanks to Ingrid Sell for originally posting this document on Facebook.

ALL The Articles To Date in the Justin French Scandal - Necessary Background Before My Defense of Historic Tax Credits

Wow.  I can't even keep up with all the articles on the Justin French mess.  For those of you who have not been following the sordid drama, here is the list of articles from Richmond BizSense (who broke the story), the Richmond Times-Dispatch and Style Weekly.  They are in chronological order, as the story unfolded:

• Richmond BizSense, "Strategic Default?" June 30, 2010
• Richmond BizSense, "French's Bills Pile Up," July 9, 2010
• Richmond BizSense, "In Development Feud, Writing Is on the Wall," July 16, 2010
• Richmond BizSense, "Union First Sues Justin French," July 19, 2010
• Richmond Times-Dispatch,"Developer Fights Bank in Takeover of Property," July 20, 2010
• Richmond Times-Dispatch, "Judge to Decide in Bank's Bid For Properties," July 27, 2010
• Richmond Times-Dispatch, "Judge Approves Receiver for Certain Justin French Properties," July 28, 2010
• Richmond BizSense, "French Saga Takes a New Twist," July 29, 2010
• Richmond Times-Dispatch, "Developer Loses Control of 8 Properties," July 29, 2010
• Richmond Times-Dispatch, "Richmond Developer at Center of Dispute," August 1, 2010
• Richmond Times-Dispatch,"Federal Agents Raid Developer's Office," August 5,2010
• Richmond BizSense, "Feds Raid French's Office, Developer Goes Off the Radar," August 6, 2010
• Richmond Times-Dispatch, "Federal Agents Raid French Consulting Office," August 6, 2010
• Richmond BizSense, "I Was Not Told Why They Went In," August 6, 2010
• Richmond Times-Dispatch, "Architect on Two of Developer's Projects Sued," August 7, 2010
• Richmond BizSense, "Architect on French Projects Sued," August 10, 2010 
• Style Weekly, "Justin French, Chapter One," August 10, 2010
• Richmond BizSense, "French Tax Credit Records Raise Red Flags," August 12, 2010

This is going to be a critical story in Richmond for a while to come, and the fallout goes well beyond Mr. French.  I am already hearing stories from commercial brokers of deals falling apart because of the local banks' exposure on the French projects.  I'm hearing that lenders are refusing to touch any transaction with a historic tax credit component.  I'm hearing that commercial lending by the community banks in this town has ground to a screeching halt while this mess is sorted through and the banks' losses quantified.

This is very, very, VERY bad news for the City of Richmond, which has the largest number of historic properties and neighborhoods in the Greater Richmond Metropolitan area.  Historic tax credits are a means to revitalize these neighborhoods, increase property values, and promote environmentally-friendly building practices.  Yes, they can be abused by unscrupulous actors, but don't let a few bad apples spoil the bunch.  Folks, historic tax credits are a very good thing.  In my next posts, I want to explain exactly why.  But until you understand how tax credits work, please don't condemn the entire program just for the bad actions of one developer and his cronies. 

Banks and Foreclosures - They Don't Want the Property! - Then Stop Acting Like IDIOTS!

According to this article in Richmond BizSense, local banks and other financial institutions don't want the properties they're taking back by foreclosure, so they are creating their own websites to try to sell these properties.

Well, excuse me if I have little to no sympathy for these lenders.  I have seen WAY too many insipid, asinine, and down right idiotic decisions by these folks to buy their "woe is me!" tale.

Just a few illustrative examples:

• Individual with legitimate hardship (reduced pay, unexpected illness leading to additional expenses) but a good job files loan modification paperwork with large regional bank on December 12, 2009. Individual is NOT asking for principal reduction, only for reduced monthly payment in the form of an interest rate reduction or perhaps a short-term forbearance.  As of today, individual STILL has no answer, despite almost daily calls to the bank.  Lender is now threatening to foreclose due to one missed payment.
• Father loses his job and is unable to make mortgage payments.  The family has equity in the home.  They put the house on  the market at a fire sale price, while racing against the clock, since the bank has started foreclosure proceedings.  Ten days before the scheduled sale, they receive an offer on the house that would pay off the note in full AND give them $50,000 nest egg to find a rental and get back on their feet.  The lender refuses to cancel the foreclosure sale because it is "too late" for them to review the offer.  The bank forecloses.

And these are just two of MANY examples we have, just here in my 15 agent office.  So excuse me if I have no sympathy for these guys.  If they had procedures that made any d*mn sense and individuals who had any authority and could make REASONABLE DECISIONS then perhaps I would.  But over and over again I see banks scr*wing over good folks who have fallen on hard times and are trying to do the right thing.  So wah, wah, wah guys - you are reaping what you sow.  And ruining lives in the process.

Housing Prices UP in Richmond, Virginia - We're Bucking the National Trend!

This article in today's Business section of the Richmond Times-Dispatch shows that there is good news in the Richmond, Virginia housing market.  Prices here were up 1.6% in the second quarter to an average of just over $200,000.  That's great news, and not unexpected by those of us that are "boots on the ground" in the selling trenches.  I've been told by agents with far more experience than me that Richmond tends to suffer less of a downturn, and recover more quickly, than the national real estate market.

Here's my concern, though.  It seems the national news is overshadowing the local news when it comes to buyer psychology.  People feel like things are terrible, because they are terrible in other localities, and that's what they hear on the news and in the press.  The good news about OUR market is buried on the 4th page of the Metro and Business section of the local paper.  Meanwhile, the major network newscasts lead off every night with more doom and gloom about the national economy.

The reality here:  There are GREAT real estate deals to be had here in Richmond, Virginia.  Even steals.  And interest rates are at record lows unlikely to be seen again in our  lifetime.  Real estate markets are local, folks.  And the evidence suggests the Richmond market is in recovery.  So if you want to buy a home, and have the means to do so, AND a stable job, I suggest you get qualified and get to looking.  And if you need an agent, you know where to find me - melissasavenko@gmail.com.  Happy house hunting! 

Strategic Defaults in the Residential Real Estate World - The Word from Ken Harney

Interestingly, after I posted a local story on strategic defaults in the Richmond commercial development world, I came across this article by Kenneth Harney, a  national real state columnist, on the impact of residential defaults.  Seems the lending and credit scoring world is analyzing strategic defaults in  the residential market.   A "strategic default" occurs when a homeowner intentionally walks away from a mortgage, usually when he or she owes substantially more than the current market value of the property.  In other words, the homeowner CHOOSES to stop making payments, knowing the lender will ultimately foreclose.  The article suggests this phenomenon is more likely in states that limit the ability of lenders to go after the mortgage holders for any deficiency, i.e, the difference between the foreclosure sale price and the original mortgage.  Harney also suggests the strategic default issue is likely to create stricter underwriting requirements for anyone trying to borrow, even folks previously considered "platinum" because of their credit scores.

Personally, I have not yet come across anyone who is making a conscious choice to default on their mortgage. Maybe I'm lucky. Maybe this is a function - as I believe - of the fact that the Richmond area is much better off than other, harder hit markets, like Florida, Arizona, California and Nevada.

I don't know that there is a "moral" to this story.  Maybe the takeaway is things could continue to get worse, before they get better.  I sure hope that's not the case.