Common Sense Creative Financing in Managing REOs

The new trend in the larger marketplace and especially in the REO niche, some insiders say, is more common sense creative financing.

"I spoke with one of these investors last week and he's looking for REOs, he wants to take those REOs off their hands clearly at a discount, and lenders got to get rid of them," Lender Support Systems Inc. president and CEO, Cary Burch, told MSN.

"If anyone is writing off their losses right now, now's the time to write off as much as you can, because you want to be clean as you're going into the next year. This guy is hanging on to it and they're renting them out."

Since borrowers who were living in the currently foreclosed houses had to move out and rent, he said, there is a lot of competition in the rental market.

"Lenders are selling off these properties, investors are buying them, and then they are flipping the house to a rental and offering lease options to former owners."

He sees renting out to people who used to live in foreclosed homes and also offering them the option to buy their property back as an effective way of managing REOs.

"We're getting back to more creative financing," he said. "But it is a more common sense creative financing."

President of First Houston Mortgage, David Zugheri, agrees.

"When we get past these difficult times, we'll look back and realize that all of this is just a part of a healthy housing cycle. Free markets do not behave, they do not stay flat, they go up and they go down, and at the end of this market, at least from what I can see, we're going up. As bad as all these foreclosures are, what we'll be left with is a lot of new houses, or newer houses in states like Nevada, Arizona and California."

Eventually these properties will be occupied and people will end up buying those houses, he noted, since despite the current crisis, lenders continue to offer 100% financing if a borrower has good credit and verifiable income.

"Think of those people who get to buy at a discount and then five years from now maybe they'll have accumulated $20,000, $30,000, $100,000 worth of equity that might be their retirement nest egg." He believes that in the long run, these are positive developments.

"What is happening right now is readjustment of wealth. There was definitely a bubble that is unwinding, and there will be a big redistribution of wealth that will make many people more wealthy than they are today."

As of now it is anyone's guess whether lenders will hold onto default properties and REOs for a while or sell them in the affordable market.

Mr. Burch believes that it will be a matter of when "inventory will catch up with the demand as the credit spectrum starts to expand and adjust."

One example, he said, is Las Vegas in the late 1990s when it was overbuilt and builders stopped building and there were half-finished houses for five to seven years, until the local economy took off again and that inventory got picked up by private money. "Again the same are lending the money today. If you look at that they're OK for the long hold. Real estate traditionally in the history of our country has always been one of the most solid investments."

As to how long the market readjustment period will last, both executives believe it will be at about 18 months.

"What will happen is that FHA will allow people to refinance their way out of their problem," Mr. Zugheri said.

"Some people are just going to lose houses. The worst that we'll see will be this February and this March because people have property taxes coming due in January, and the effect of these taxes coming due, their loans not being escrowed, and possibly a reset to their interest rate, will be too much to bear on a lot of folks."

More foreclosures may start to hit the books around February, he said, as lenders start to feel the pressure of foreclosures. They will put even more of a burden on the homeowner, on top of a reset when interest rates may have gone up 200 to 300 basis points.

"Probably by midyear 2008 we'll be able to see some of the dust settle, as Mr. Zugheri said, with so many foreclosures and property taxes, people are going to roll over and say this is the last part of it. But there could be another wave. It's really hard to say until we're seeing those indicators," Mr. Burch said.

"Those who survive in two years, you don't have to be the best in the market you just have to survive. Those who survive win."

Once the market's immediate reaction is over, he added, the mortgage industry is a very creative industry, with real estate being a huge asset to the economy. It has to improve at some point in time. The top 10 players of 10 years ago are different from the top 10 now, and they may be different a year from now.

"This is the same change in the mortgage industry that is the same as during the industrial revolution way back when, because it's changing the whole rules of the game. Everything needs to change," he said. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/