The meltdown in the subprime mortgage sector continued last week, raising concerns that home buyers with impaired credit will face higher rates and far fewer options in the months ahead. Following the December bankruptcy filing of Ownit Mortgage Solutions, a major subprime lender, a steady stream of mortgage firms have either announced cutbacks in subprime production, quarterly losses, or sharply-elevated delinquency rates. Some major banks, such as Washington Mutual, have announced staff reductions in subprime and moved to tighten underwriting rules.

Subprime mortgage originations now account for 20 percent of all new loans, up from a tiny sliver a decade ago. Roughly 45 percent of all subprime borrowers use their loans to buy a home, according to Michael Fratantoni, an economist with the Mortgage Bankers Association, and 25 percent of those purchasers are buying their first home. Any major flight of bond investors from the subprime mortgage securities market, in other words, would have negative repercussions not only lenders and borrowers, but on realty agents and builders as well. The tightening of standards already underway is reducing the availability of “piggyback” mortgages-combined first lien and second lien loan programs that cut downpayment requirements to 5 percent or zero with no private mortgage insurance. The cutbacks in investor appetite are also reducing opportunities for home buyers with spotty credit histories to use limited-documentation and stated-income mortgage financing, sometimes called “liar loans” in the industry. Mortgage wholesalers also report sharply-reduced investor appetites for loans that “layer” risk-combining, for example, low FICO scores with high debt-to-income ratios. (more…)

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Many people who flip houses haven’t had to do any significant work on their properties at all. In a rising real estate market, just holding property for a few months is sometimes enough to make a nice profit, especially with historically low interest rates and relatively easy credit. As interest rates rise and real estate prices stagnate, however, it’ll be a lot more challenging for people flipping houses to make money.

The goal of flipping houses is no different from what investors in stocks or mutual funds are trying to accomplish. In order to make a profit, house flippers buy low and sell high, seeking out real estate at depressed prices with the intention of reselling it at higher prices later on. There are all sorts of methods that house flippers use to try to find good prospects. Some focus on properties on which banks have foreclosed, with the hope that a financial institution will be more interested in a quick sale than in getting top dollar for the property. Others look for particular areas that have been out of favor in the past but have good potential for gentrification and urban renewal, which are often accompanied by rising real estate prices. You can even find some people who look through obituary pages to find grieving families needing to sell the home of a loved one. (more…)

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Asheville’s number one attraction, the Biltmore Estate is astonishingly opulent: 175,000 square feet, 250 rooms, sited among 8,000 acres of forest and meticulously manicured lawns with 75 acres of beautiful gardens. Here, in a gorgeous spot, Vanderbilt created his dream replica of a great European working estate … super-sized.

Today its best-known side operation is its highly regarded winery, which, it surprises most people to learn, is America’s most visited winery. Adjacent Biltmore Village is now home to boutique shops and fine restaurants. Visitors to Biltmore marvel at its sheer size - the footprint of the mansion covers four acres. What lies inside is equally amazing: an incredibly massive foyer, priceless art and antiques, 65 fireplaces, a huge indoor pool, a bowling alley and an immense two-story, wood-paneled library that would be the envy of many cities. (more…)

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If you enjoy paying capital gain taxes when selling an investment or business property, you probably won’t want to learn how to pyramid your real estate wealth by legally avoiding taxes on profitable sales. However, if you prefer to build realty wealth without paying taxes, as millions of other investors and major corporations do, read on. Or you might enjoy selling your rental property at a profit, perhaps an apartment or commercial building, and using those funds to acquire your ultimate dream home without paying capital gains tax. Read on.

Ever since 1921, Internal Revenue Code 1031 has encouraged real estate investors to trade one (or more) “like kind” investment or business property for another property (or more) of equal or greater cost and equity without paying profit tax. Uncle Sam views a tax-deferred exchange as one continuous investment so no tax is due. However, “like kind” property means all properties in the trade must be held for investment or use in a trade or business. “Like kind” does not mean “same kind” of property. To illustrate, you can trade your vacant land for a rental house. Or you can trade your apartment building for a shopping center, or a warehouse for an office building. However, your personal residence is not “like kind” so it is not eligible. Over the years, IRC 1031 has evolved to make tax-deferred realty exchanges easier than ever before. After 1984, when so-called Starker exchanges became legal in IRC 1034(a)(3), direct property trades were no longer necessary. (more…)

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Efforts by major banks and Wall Street firms to unload bad U.S. housing loans are speeding up a shakeout in the subprime mortgage industry. As more Americans fall behind on mortgage payments, Merrill Lynch & Co., J.P. Morgan Chase & Co., HSBC Holdings PLC and others are trying to force mortgage originators to buy back the same high-risk, high-return loans that the big banks eagerly bought in 2005 and 2006.

As more subprime lenders face losses or bankruptcy, big banks also face another problem: Many lent money to small firms like ResMae so that those firms could make more mortgage loans to borrowers. It isn’t clear how much of these loans will be paid back to the banks. Wall Street firms also are increasing their own internal generation of subprime loans by acquiring smaller mortgage loan originators or processing companies. In 2005 and 2006, banks such as HSBC and brokerage firms like Merrill Lynch went on a buying spree, snapping up subprime loans from typically small mortgage banks that had lent money to homebuyers. At the same time, many lenders were loosening their credit standards and making riskier loans. HSBC kept many of the loans, while Wall Street firms chopped the loans into pools sold to investors as mortgage-backed securities. (more…)

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Based on results from its recent mortgage study, the Center for Responsible Lending (CRL) predicts that one out of five subprime loans issued during 2005 and 2006 will fail, resulting in foreclosure for millions of American homeowners. CRL’s study, the first nationwide review of subprime mortgages issued between 1998 and third quarter 2006, revealed that the subprime market has experienced high foreclosure rates despite low interest rates and a favorable economic environment during recent years.

So who will lose when the expected tsunami of foreclosures washes through the system? Dotzour said it will not be the mortgage companies, who originate the loans, collect a fee and then sell the loans, and he doubts it will be mortgage bond holders, who have ways of hedging both interest rate risk and credit risk. Instead, hedge funds, pension funds and endowment associations that have been chasing yield by accepting more risk, or large commercial banks offering complex derivatives to allow traders to hedge their risk in mortgage bonds are likely to feel the pinch. “It’s safe to say that nobody knows exactly where the ultimate risk really lies in the financial markets,” Dotzour said. “Look at how long it is taking Fannie Mae to get their accounting straightened out to the point that even a financial genius could understand it. There is no way a layperson will ever be able to understand the risk they take when they buy stocks in large financial institutions.” (more…)

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A rise in defaults is prompting some lenders to clamp down on the use of “piggyback” mortgages, a risky type of loan that helped prolong the housing boom by allowing borrowers to finance up to 100% of the purchase price. Lenders are likely at least to cut back on piggybacks this year because of the difficulty in selling them to investors, said Thomas Lawler, a housing economist in Vienna, Va., who refers to such loans as “oinkers” in light of their poor recent performance.

Piggyback second mortgages typically cover as much as the final 20% of the home’s cost, supplementing a first mortgage that covers 80%. Investors have grown increasingly wary of buying such loans from lenders amid a surge in defaults by recent subprime borrowers. The holder of the second-lien mortgage can hope to collect proceeds from the sale of collateral only if the holder of the first mortgage is fully repaid. In many foreclosure cases, second mortgages must be entirely or almost completely written off.

The subprime mortgage market has mushroomed in recent years as lenders found that investors both in the U.S. and abroad were eager to buy securities backed by such loans. Mr. Lawler, the economist, estimates that 17% to 18% of mortgage-financed home purchases in the U.S. last year involved subprime loans. About half of the subprime home-purchase loans included in mortgage securities last year were piggybacks, according to a recent report by Credit Suisse Group in New York. (more…)

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