Foreclosures Compete with New Home Sales in 2009

Foreclosures and real estate-owned assets are competing with new home sales and the excess supply of existing homes on the market. As a result, speakers at a recent conference in New Orleans say construction lenders are finding it hard to get project financing across the nation.

Every time a house isn't built, jobs are lost, said Jack Haynes, executive vice president, national builder division, Countrywide Home Loans Inc., at the Strategies for Success in Construction Lending Seminar, hosted by Granite Loan Management.

"Consumers, the whole country is built on a dream of homeownership. We need to heal the psychological damage and get consumers back to feeling secure. If banks cut the spigot off, we won't get through this. As a lender, we have to look from area to area, project to project, for special niches, to see what we can do." Mr. Hayes said the market could start to see a lift in the middle of 2009 but it won't be until 2010 until the construction lending industry feels it.

Tim Sullivan, president, Sullivan Group Real Estate Advisors, says the presidential change of leadership will be a good thing for the industry and that he hopes it makes a difference. "The uncertainty and fear - the human element, can't be modeled."

The lender goal should be the preservation of the asset value, Mr. Sullivan said. Is the project a good deal, considering the market position and the challenge of competing REOs in the area? "2012-2014 will be a whole different world."

Financing sells REO, and financing is not available now under terms people can or want to qualify for, especially in big cities with larger inventory. But things will get better following the downturn if the mortgage market burns through more REO.

More and more laws are being passed to work with borrowers and help them avoid foreclosure. The Home Saver loan modification program has helped 45,000 people so far this year, but according to some of the speakers it doesn't cover a lot of loans that are delinquent. California just passed a foreclosure moratorium statute and 16 states have enacted some sort of legislation dealing with this in 2008.

Wayne Pugh, president of the Appraisal Institute, said foreclosure sales represent a far greater percentage of home sales in today's market. Home-equity lines are being compromised from declining values and lender constrictions.

"During the next two years, real estate is still a good investment. Residential will always be, because you have to have it. The problem now is there is a growing population, a weakening economy and tightening of credit standards."

There is a re-engineering occurring of the appraisal process. There are 100,000 appraisals throughout the U.S. of which 70% are poorly trained, Mr. Pugh said. "They have poor supervisors. We have to raise the bar - to change what is required to become an appraiser today in order to solve today's problems."

Appraisers need to understand the environment around a specific property and conduct an analysis of the area, he said.

According to Mr. Pugh, the Appraisal Institute is well positioned to move forward and go beyond the traditional Fannie Mae appraisal report, encouraging the best work from national appraiser. There are still bad actors out there acting as professional appraisers who are living off completing three appraisals a month in Florida while selling cars and boats, he said.

The BPOs being ordered today are not being delivered in the condition of what the client needs, he added, but they are more expensive than an appraisal and sometimes completed by a real estate agent who is simply doing a drive-by and coming up with a number.

In his economic update at the conference, Doug Duncan, chief economist for Fannie Mae, said the economic recession will go through the second quarter of 2009 and there will be some positive growth in the third and fourth quarters although the market will still be weak.

He said 70% of households currently have no equity, and the rise in delinquencies in the mortgage space is unprecedented. Jobs were still being added in the first half of this year, he told attendees at the conference.

"There are no buyers today, but there are lots of sellers," he said. "The last 18 months has seen policy efforts by the government to get the market functioning to get a price and establish a bottom."

The industry needs to leverage real principle in order to know how to value these assets, he added. Mr. Duncan used the analogy of a swimming pool to analyze the mortgage market, saying the water in the pool is dangerously high. "We are adding and subtracting to supply at different speeds. The pipe pumping foreclosures has to get fixed. Drains for new and existing home sales are in a historically tight filter. Not much water is getting through."

He said the economic stimulus is likely to cost a couple hundred billion if the current decline in gas prices is sustained.

A current theme at the conference revolved around prevention and making sure lenders and everyone in the industry is armed with knowledge in order to stay in compliance.

"With what has occurred in the industry both on the lending side and construction side, housing starts are down almost 70%," commented Bill Cobb, president of Granite Loan Management. "Probably half of the lending capacity for residential has shut down because of capital or losses."

There's a ton of inventory on the market that has to be utilized, he added. "Part of the inventory isn't in the right places. There are parts of the country that really have to go up, and we see some hope there."

As a result of the downturn, he said, weak lenders won't survive. "It's the ones that are doing it right who will survive. They then have an opportunity in the industry."