A MEGA short sale tsunami of epic proportions is on the horizon. Five separate economic factors are all coming together at the same time to create the perfect short sale storm. And this storm looks to be generating the greatest short sale opportunity of our lifetimes. The following five surges are the backbone of this massive financial tidal wave that will usher in unprecedented opportunity for short sale investors.
Surge # 1 – The Department of the Treasury
The Treasury is about to announce its plans for streamlining short sales. Click HERE to get a sneak peak of what to expect. The Treasury plans to use up to $10 billion from a previously announced $50 billion pool of mortgage modification funds for payments to address lender concerns that home prices will continue falling in high-cost areas. With the US government behind short sales, the awareness and validation of its efficacy will increase the number of short sales
Surge # 2 – Unemployment
Depending on your source, the unemployment rate in this country is reaching levels last seen in the great depression. What’s even more scary is that the unemployment level continues to rise. When unemployment rises, so to does the number of mortgage defaults. “We’ve gone through the sub-prime foreclosures,” says Thomas Popik, director of research at survey firm Campbell Communications. “The next wave is short sales by people who lost their jobs.”
Surge # 3 – Lack of Loan Modifications
As you have heard me say before, the concept of the loan modification is a mirage for most borrowers. “Just 12 percent of homeowners eligible have had their loans reworked, leaving millions more foreclosures to come,” the Treasury said on September 9. Although there are many well intentioned loan modification companies out there trying to make it work, the statistics are strikingly clear that load mods just aren’t working. For borrowers, the only other option before foreclosure is a short sale.
Surge # 4 – Banks Withholding REOs
Banks have secretly been withholding their REOs from being marketed for sale. The overhang of supply is currently about 7 million units, or 135 percent of a year’s of existing home sales, according to Amherst Securities Group. Lenders are taking back properties at foreclosure and then sitting on them, in hopes that the real estate market will recover and they will be able to sell them for far more later on. Therefore, the demand remains steady but banks are purposely reducing the supply.
Those real estate investors who are trying to battle it out in the foreclosure game are many times coming up empty handed because lenders are purposely holding back supply (which creates more competition and the inability to get a great deal). With short sales, lenders are unable to control the flow of supply because they don’t own the property yet, the homeowner still does, and the homeowner is the one making the decision to sell.
Surge # 5 – Option ARM and Interest Only Period Maturity
In the height of the real estate bubble, a new breed of mortgage products, including interest only and option ARM loans began to crop up. With an interest only loan, the borrower makes no principal payments. With the dangerous Option ARM loan, the borrower can choose to make a payment that is less than an interest only payment, which create a negative amortization situation whereby the loan gets larger and larger each month. These toxic loans typically has an interest only or Option ARM characteristic for the first 5 years followed by a 25 year regular amortization schedule. That 5 year maturity date is almost upon us for the vast majority of these loans. Most experts predict the peak of the maturity dates to fall in the 2nd or 3rd quarter of 2010. Watch this 60 Minutes video for a more in depth look at this concept.
The Perfect Storm
When you combine these 4 surges together, you get the perfect short sale storm. And the tsunami that this storm is going to create has already begun to take shape. Short sales increased by 45% during the second quarter of 2009 alone.
Most experts agree that this short sale tsunami won’t reach it’s peak for another 8 to 12 months. So NOW is the time to get in the short sale business. You aren’t too late; you’re right on time.