Realtors need to separate fact from fiction to protect clients from the "subprime tsunami" and false pretenses of getting rich quickly in real estate, a panel of home loan experts said Wednesday.
"We’re never going to see 54 percent appreciation again, I have a hunch," Shane Watson, managing partner of Direct Access Lending, said during a three-hour symposium for local Realtors. "We believe the market is very strong here and this is just the calm before the storm."
Watson said that Nevada leading the nation in foreclosure filings and Clark County being second to Los Angeles County is actually good for the industry. It will drive away investors who entered the market with marginal credit and perhaps even misrepresented their income on loan applications, he said.
"What’s the old saying? Buyers are liars," he said.
Foreclosure filings dropped significantly across the country in April, according to Sacramento, Calif.-based Foreclosures.com. Fewer than 100,000 notices of pending foreclosure auctions were filed during the month, down 14.3 percent from almost 115,700 filings in March.
"One month does not make a change, but it’s better than (going) up again," Foreclosures.com President Alexis McGee said.
Some housing experts blame the rise in foreclosures on subprime lending. People either bought more house than they could afford or took out all their equity during refinancing.
Andrew Pugh of SellFastLV.com said anecdotal evidence from his business suggests that many owners have little or no home equity despite the price boom of 2003-2004. That’s why those facing foreclosure aren’t able to cut their prices and "be done with it," he said.
One woman bought her house in July 2003 for $170,000, "absolute perfect timing" as things started to run up for the next 12 months, Pugh said. Last August she refinanced for $300,000. Now she’s behind on payments and needs to sell, but comparable sales in her neighborhood are only $270,000.
"You can’t slash the price below what you owe on the house," he said. "I seriously think most people in Vegas pulled out all their equity and blew it on who-knows-what. Those 10,000 or 11,000 vacant properties on the (Multiple Listing Service) represent anxious sellers that are slowly bleeding to death and would love to sell at just about any price."
With no equity, home owners list their house for what they owe plus commissions and closing costs and it sits on the market, Pugh said. Eventually it goes back to the bank.
"Unfortunately, I can’t do anything for these people and neither can a real estate agent," Pugh said. "They might be able to short sale if they can find a buyer, prove they’re insolvent and don’t get lost in the bank’s bureaucracy. Good luck. Otherwise, they’ll go back to the bank in a few months and then show up as REOs down the road. Now, the real question is, where did all that refi money go?"
We all know people who have "champagne taste and a beer budget," said Anthony Washington, a mortgage banker and principal of Washington and Associates.
That’s when stated income for a mortgage loan becomes a dangerous situation, he said. They’re going to choose the $350,000 home when they really should be going into a $300,000 home.
"Oh, my income has to be this? OK then, that’s what it is," Washington said. "The door of opportunity to enter the market was too wide open. The door got wider and wider."
Rebecca Froass, senior director for Freddie Mac in Washington, D.C., said subprime loan origination grew from $126 billion in 2000 to more than $590 billion in 2006, from 11 percent of all home loans to 24 percent. Nevada’s share grew by 133 percent, she said.
Some subprime borrowers had no credit or thin credit and, with the gap growing between median income and median home prices, saw it as a way to finance their dream of home ownership, Froass said.
"Again, we don’t think subprime (lending) is bad on its face," she said. "It allowed a lot of people to own a home who couldn’t normally afford one."
The purpose of two-year, low-interest loans is to get people into a house and hopefully their financial situation would improve down the road, Washington said.
Understanding that people’s spending habits don’t generally change in two years — credit card debt continues to grow and saving is at an all-time low — combined with the same assets, income and FICA (credit) scores, and now the loan program they had is no longer available, Washington said.
"Right now, the market is fine from a lending standpoint. It’s just that lending requirements have changed and we must make adjustments," he said.
Before foreclosures, Nevada rose to No. 1 in the nation in mortgage fraud, which was largely tied to occupancy fraud, Watson noted. Investors were purchasing homes as rentals and second homes and telling the banks they were primary residences, he said.
"There are third-party companies here that design tax returns for investors," Watson said. "That’s what we’re dealing with in Southern Nevada."Housing in Las VegasMore Information
ON THE WEB Freddie Mac (English) Freddie Mac (Spanish) Protecting Your Investment (PDF) Affordable Lending Products Wholesale Lenders