Foreclosures and Bank Owned Properties Could Reduce Texas Coast Prices

We are concerned about bank owned properties and foreclosures for 2010. If they hit the market all at once, we could see a drop in median price. Good news for buyers, bad news for sellers.

With the exception of Port Aransas, there is an alarming number of distressed properties on the Texas coast that have not come on the market yet.

The short-sales process, often agonizingly long, may not speed up overnight, but there’s reason to believe that better days are ahead. The federal government’s long-awaited guidelines for standardizing short sales were released at the end of 2009, and although they don’t take effect until April, mortgage servicers have the option of implementing them early.

The short sales guidelines are part of the government’s new Home Affordable Foreclosure Alternative Program, known as HAFA, which is an add-on to the Obama Administration’s more wide-reaching Home Affordable Modification Program launched in early 2009. The idea is that if borrowers are eligible for the modification program but are unable to work out a plan to stay in their home, they—and their lenders—have a well-mapped route for executing a short sale or a deed in lieu of foreclosure.

The new HAFA program applies to the large volume of so-called "risky" loans that were issued outside of Fannie Mae and Freddie Mac guidelines during the housing boom, such as zero-down loans, option ARMs, and Alt-A mortgages that didn’t require extensive income documentation (see sidebar, "Which Loans Are Eligible?"). As of this writing, Fannie and Freddie were developing their own, similar guidance for loans they’ve backed.

The HAFA guidelines are voluntary, but major banks and servicers—including Bank of America, Chase, Wells Fargo, and Citimortgage—as well as dozens of smaller lenders, are expected to participate, clearing up the logjam of potential short sales on their books.

To participate, a mortgage servicer must have opted in to the government’s Home Affordable Modification Program by the close of last year. Through the end of November 2009, there were 78 such mortgage servicers, which together cover approximately 85 percent of eligible mortgage debt, according to the program’s servicer performance report.

Texas is experiencing its highest residential foreclosure rate since the late '80s.

All residential foreclosures are governed by strict statutory rules, and Real Estate Center attorney Judon Fambrough says homeowners in jeopardy should know these rules to protect their rights.

See “A Homeowner’s Rights under Foreclosure," available at http://recenter.tamu.edu/pdf/825.pdf

Shadow Inventory Unlikely to Hurt Market

Nearly 5 million houses and condos, of which the mortgages are delinquent, will go through foreclosure over the next few years, a new study by John Burns Real Estate Consulting Inc. concludes.

This represents more than half of the 7.7 million households now behind on their mortgage payments. The situation is worst in Arizona, California, Florida, and Nevada. Burns calculates that there is an inventory equivalent to 27 months of sales in Orlando, 24 months in Miami, and 18 months in Las Vegas.

Consulting firm CEO John Burns says there is strong investor demand for these properties, so as long as employment continues to recover and interest rates remain moderate, these sales won’t have much impact on overall prices.

The Mortgage Bankers Association is seeing signs that the foreclosure crisis is ending.

“The continued and sizable drop in the 30-day delinquency rate is a concrete sign that the end may be in sight,” says Jay Brinkmann, MBA’s chief economist, in a published statement.

Brinkmann said that normally there is a large spike in short-term mortgage delinquencies at the end of the year because of high heating bills and holiday expenditures. This year, there was not only no spike, but the 30-day delinquency rate actually fell from 3.79 percent to 3.63 percent.

Thirty-day delinquencies have historically been a leading indicator of serious delinquencies and foreclosures, Brinkmann said.

“[This] gives us growing confidence that the size of the problem now is about as bad as it will get,” he said.

I'm having serious trouble following your foreclosure argument. South Padre has roughly 11 foreclosures listing, out of roughly 600 active listings for the whole island. So what's the big deal? Even if foreclosures doubled or tripled, I don't see it as a reason for prices to fall off a cliff anytime soon. What is the agenda here, to get sellers to lower their asking prices, hoping to get the market moving again? If that's the goal, it could backfire, because it suggests to potential buyers that they should wait to get a better deal.

I think the biggest impact to island property values this year is the escalating war in Mexico. That's especially important when you consider that half the island is owned by Mexicans from Monterrey. This past week the drug cartels have hijacked cars, buses, and trucks to blockade more than 30 roads in Monterrey. Combine that with similar incidents in the border Mexican towns and highways leading to the border towns, and I think it all adds up to a serious shortage of Mexican tourists.

On the other hand there is a possibility that the Mexican civil war could be good for the south padre property market. If I was a rich family in Monterrey, I might be very inclined to move to South Padre for the safety and security of the USA. I am sure some Mexicans will do this, but at this point I don't think anybody can estimate the magnitude of this effect. My own opinion is that South Padre is a great tourist destination, but not an ideal place to raise a family. Perhaps bigger towns like Brownsville and McAllen will benefit from an influx of Mexican refugees more than South Padre (?)

One more point. If the Mexican civil war does cause erosion of property prices on South Padre, the effects could migrate further up the coast. My logic is this: if there are more compelling deals in south padre, sellers in places like Corpus might be forced to lower their prices as well, or the buyers will be more attracted to South Padre.

Nobody can say for sure what will happen, or what the impact will be. However, we can all pray that the war in Mexico ends soon!

With regards to the Mexico conflict, Washington now wants to broaden the military focus. Right now they're trying to resolve some logistical bottlenecks in order to speed the delivery of MORE military equipment to Mexico. (not troops, thank God, just $1.4 billion worth of equipment and other support over the next three years) There is good reason to believe that this conflict is going to get a whole lot worse before it gets any better. That's what happens when drug gangs start killing US embassy employees. Some predict the situation in Mexico can't improve until the underlying economy improves, and that isn't likely to happen until tourists feel safe again to visit Mexico, probably next year at the earliest. (Just ask yourself how long do things in Mexico have to be calm before YOU risk taking your family to some place like Acapulco?)

Given the huge dependence we all have on Mexicans to support the lower gulf coast real estate market, and the especially serious problems in the Mexican border towns, WOULD YOU risk the trip up from Monterrey, through the border battle zone, to vacation on South Padre, or shop for property?

Here's another thing to think about. The experts are predicting gas prices are going to hit $3 again this summer. The last time that happened the condo rental agencies were handing out gas coupons to attract tourists. Even Spring Break, with all of those advance reservations, didn't fill up all the hotels this year. Bad Omen.

Need more convincing to sell ASAP? Just look to mother nature. The weather guys are predicting an especially rough hurricane season this year. We got REAL lucky last year, thank God, but this year it could get rough again. Another hurricane like Ike could wipe some of the lowest lying gulf coastal resorts off the map, as happened to Port Bolivar just a couple years ago.

http://www.local1259iaff.org/gilchrist.jpg

If you thought vacation property prices were already low, just wait until later this fall, when prices are likely to fall significantly further. Even if your property isn't directly harmed by a hurricane, any hurricane along the coast reminds potential buyers of such perils. (Remember how Ike flooded parts of South Padre, even though it made landfall more than 300 miles away, up near Houston?)

http://www.youtube.com/watch?v=Ng9NRdOa4aA&feature=related

Also consider the time on the market that it will take to sell your property. On south padre there is currently about a two year supply of properties on the market. If you figure that it will cost you 10% of the property value annually to pay for your mortgage, maintenance, taxes, insurance, HOA fees, etc., then it is logical to assume another 20% loss on your real estate investment before you ever get to the closing table.

Local foreclosures could also drag down the market, but the expected wave of foreclosures elsewhere in the country could have even more negative effect. If you're a potential buyer looking to retire on the Gulf Coast, that may be hard to do if the mortgage on your Cleveland residence is under water, and sinking deeper due to the local foreclosure situation.

Overall I'm guessing that by the end of this year we'll see prices on South Padre fall by at least another 10%, and quite possibly twice that much. The closer your property is to Mexico, the more it's likely to fall in price. (Gulf front property owners take heart. The biggest losers in this market will be the property owners in the Mexican resorts, where all those headless corpses are turning up)

Don't agree with me? That's OK, everybody is entitled to an opinion. But if you're trying to sell into this market, it doesn't matter what YOU think, what matters is what the potential BUYERS are thinking. Some background music to ponder the situation:

http://www.youtube.com/watch?v=wh4Za5dEpzE

My advice to potential sellers? Talk to a LOCAL agent, and list your property ASAP, PRICED TO SELL. And don't forget to offer the agent an additional 5% if they can sell it within six months.

There is an additional problem that no one ever mentions. If they bank owns numerous properties in an area and they are having trouble getting rid of them then what do you think thay will say when someone wants to finance another one for 60 to 100k more than the bank now knows they are worth at foreclosure?