A breaking new short sale trend for 2010 is shaping up that you need to know about…$500,0000+ deals. That's right, loans with principal balances above $500,000 are making my students and I a fortune right now. Bloomberg News recently reported that $500,000+ loans are defaulting more than twice as often as $250,000 or less loans. What makes this so fascinating is that only a year ago, $500,000+ loans defaulted at a below normal rate of 4.7%. This rapid rise in luxury house defaults is very predictable and the beginnings of the next wave of massive foreclosures that is going to slam the residential real estate market.
In 2007, we experienced the sub-prime meltdown. The sub prime debacle was the result of mortgage companies originating ARM loans to shaky borrowers. Once the payments began adjusting upwards, the already shaky borrowers were sunk and unable to meet their new obligations. Since the majority of these loans originated in 2005, the majority went into default at the same time and thus became known as the sub-prime meltdown.
In 2010, it is shaping up to be an Alt-A meltdown. As you know, the peak of the real estate bubble occurred in 2005. While sub prime borrowers were slipping into ARM loans, homebuyers who wanted to buy a bigger home than they could afford began slipping into Alt A loan programs. These borrowers were different though. They had good credit, good income, and were a seemingly safe bet for lenders. They just couldn't afford the $500,000+ home that they really wanted so lenders invented interest only and option ARM loans.
These loans did not pay down the principal balance, and in the case of the option ARM loan, it actually made the loan bigger each month. And these Alt A programs were on a 5 year clock. For example, the borrower would have 5 years of low interest only payments and then at the 5 year mark, it would re-cast into a fully amortized loan. That re-cast increased the payment considerably. So do the math, 2005 plus 5 years equals…yap…2010. So that is what is happening before our very eyes. Great borrowers with great credit from 2005 who originated Alt A loans are now faced with a loan that is re-casting to a payment that they can't afford.
But there's more! Nationwide, as a gross generalization (I know real estate is localized and this is not the case everywhere), most homes are worth less now than they were in 2005. And interest only loans do not pay down the principle balance so whatever a borrower owed in 2005 is the exact same amount they owe in 2010. For option ARM loans, they make actually owe more now than they did in '05. Ouch! So not only is the payment rising for Alt A loan borrowers, they are also stuck with a property that has no equity. That's why the number of defaults is skyrocketing and precisely why our students are making an absolute fortune working these deals.
Now that you know the $500,000+ deals is where it's at in 2010, there's a catch. Unlike sub prime borrowers, those who purchased $500,000+ homes and qualified for $500,000+ loans are very picky about who they work with to do their short sale. They want to work with the best in their market. If you don't know your stuff, they won't deal with you. If you can't instill confidence in the homeowner and back it up everytime you communicate, every step you take and every move you make, they'll move onto someone else. They don't have time for amateurs. How do you do this if you are first starting off in real estate investing or are not a 10 year short sale veteran? Join up with a mentor who you can lean on. So long as the homeowner knows that you work directly with an expert short sale investor, you're in the clear.
The $500,000+ deals are where it's at in 2010 but only the cream of the crop short sale investors can take advantage of them. Are you one of them?