Good News, Bad News in Foreclosure Activity

June 28, 2014

Rick Sharga, the executive vice president of Auction.com, says the extraordinary reliability of recent mortgage borrowers actually has a downside. (Handout, Handout / June 26, 2014)

In the For Crying Out Loud Department, we have yet another reason the housing market is straining to reach normalcy: there aren’t enough foreclosures.

Not that Rick Sharga wishes mortgage default on anyone — and he acknowledges that the nation has been through a collective financial tragedy.

But the executive vice president of Auction.com, an online real estate company, said the extraordinary reliability of recent mortgage borrowers actually has a downside, and lenders could and should take a little more risk to help rev up the marketplace.

At the recent National Association of Real Estate Editors meeting in Houston and in a later edited interview, Sharga explained his view of where housing is going.

Q: First, the inarguably good news: You believe the nation’s legendary foreclosure mess is behind us?

A: Yes, the pig has finally made it almost through the python. At the peak of the crisis, we were looking at about 14.5 percent of all loans being either delinquent or in the process of foreclosure. In a “normal market” that number is between 4 and 5 percent.

Right now, we’re roughly at 7.5 percent of all loans, so we’re down by half from the peak but almost twice as high as normal. In the next two to three years, that number should work its way down to the norm.

Q: How could there be a downside to that?

A: The vast majority of the loans that are delinquent right now were made before 2010.

They’re delinquent but not in foreclosure. However, they’re so delinquent that there’s no way to salvage them. These borrowers haven’t made a payment in two to three years.

On the other hand, the loans that have been made in the last three years aren’t going into default at all.

We’re seeing pretty much historically unprecedented loan performance — historically speaking, about 1percent of loans will be in foreclosure in a given year, and now we’re looking at about half of that.

Short of a borrower getting hit by a meteorite on the way home, nobody is missing payments.

And this suggests that we probably have over-tightened credit. Not that we want more people in default, but we know that people are having a hard time getting loans. Loan standards are just too tight.

That’s one reason it’s going to take time for the market to normalize.

Q: You also talked about the influence of hedge funds and other extremely deep-pocketed investors on the rental market. For a couple of years, they’ve been famously buying single-family homes by the hundreds, fixing them up, then renting them out.

Some market observers say these institutions’ affection for single-family rentals is on the wane — but you say that marketplace is just evolving. How so?

A: The single-family rental market, as a category, is going to continue to grow. The institutional players are slowing down, but not stopping.

Blackstone, one of the largest hedge funds, has announced it’s only going to buy $30 million worth of houses a week, down from $100 million a week. They’re not leaving the marketplace.

But that opening is going to lead to the entry of a new category of investor.

I’m seeing the development of super-regional investors, which are good-sized investment funds that aren’t as big as Blackstone, but bigger than the individual guys. They may own 400 or 500 properties, and they seem to be shifting their attention from the Southwest to the Southeast and Midwest, into Atlanta, north and central Florida, the Carolinas, Illinois and Indiana, where they still can buy houses for $150,000 or less.

Q: Does this mean that the traditional, mom and pop investor in such properties is getting shut out?

A: The whole single-family rental phenomenon isn’t new. It started with the mom and pop investors.

Before the Blackstones of the world, 95 percent of single-family rentals were owned by people who owned five or fewer properties. It was a cottage industry, literally.

A number of the really large investors are going to underestimate how hard it is to manage this kind of property, nationally.

That has been the Achilles’ heel of the marketplace. But the mom and pop investors are pretty savvy, and they don’t get as much credit as they deserve.

What I’ve seen happening is, these little guys are becoming the property scouts for the big investors.

They’ll buy the houses, do the repair work and flip them to the Blackstones. They’ve moved from being landlords to being flippers.

They’re better than the big guys in finding the hidden gems in the market.

I’m also seeing the big investors becoming more interested in buying properties that are already rented. They call them stabilized properties and they’ll pay a little more for them. That’s another way that the mom and pops are doing well.

This article was originally posted on ChicagoTribune.com on June 26, 2014.

About The Author

Read All Stories By Chicago Tribune

Copyright © 2008-2018 mRELEVANCE, LLC | Chicago Real Estate News | Chicagoland Real Estate Forum. All rights reserved. Thank you for visiting Chicago Real Estate News Chicagoland Real Estate Forum, Real Estate Listings and Information Provided by MLC Realty, Inc.
Internet Marketing by Marketing RELEVANCE

Equal Housing Opportunity

1819 W Grand Ave | Chicago, IL 60622