Understanding the Second-Home Market

Second and vacation homes have been one of the silver linings in the otherwise bleak, current housing market. This part of the housing industry was devastated by the housing crash. It is slowly beginning to show signs of improvements, particularly in places like Miami and Las Vegas, where bargain hunters are cherry picking some of the best deals in the country.

In order to clearly understand the drivers behind the second home sales, we have to go back to the mid 2000’s. This segment peaked in 2005 when approximately one million second/vacation homes were sold nationwide. The sales continued to decline for the next few years due to the chain of crisis and events that continued to plague the housing market. Also, most people who wanted a second home had bought one prior to 2005. Since then, there has been a glut of properties on the market. However, this sector started making a comeback in early 2009, and by the end of that year, about half a million second/vacation homes were sold.

So what’s behind the recent surge of second home sales?

Ironically, many of the sellers are second homeowners themselves. Most of these sellers bought their second homes at the peak of the real estate boom.  High mortgage payments and depreciated home values are some of the motives to sell their second homes.

Baby boomers, who have been dominating the U.S. real estate market for many years are the ones primarily fueling this new buying trend. Between 2005 and now, there have been five more years of baby boomers entering the market who under normal market conditions would have already purchased a second home.

Almost 4 out of 5 boomers own primary homes. Many are now regarding investment in a second home as a long-term strategy to diversify their portfolios. Conversely, the new generation of second home buyers now has multiple advantages such as low interest rates, abundant supply and choices, and home prices that are well below the normal market prices.

In 2009, vacation and second home sales outpaced the sales of primary residences and investment homes. There are several reasons for this. While the sales of primary homes have been declining over the past few years, the expiration of tax credits has slowed it further to a crawl. According to the National Association of Realtors (NAR), there are three factors benefitting the second and vacation home sales: increased interest from foreign buyers, improvement in the stock market and easier availability of jumbo mortgages.

Investors from Europe and Canada have been taking advantage of the current buying opportunities in droves. Analysts expect investors and institutional buyers of second homes from the emerging economies of China, India and Brazil to also stake a claim to the tremendous buying opportunities in the U.S.

Experts caution that it is too early to rejoice. While the market for second and vacation homes has certainly improved, any new wrinkles in the U.S. and European financial markets could derail this train.

The Foreclosure Crisis & Title Insurers

The foreclosure crisis, which initially started as just another factor that added to the prolonged financial woes of the nation has since become the leading story and perhaps the biggest stumbling block for the economy’s recovery. Every sector of the housing industry has been taking a severe beating since the start of the crisis and there seems to be no end in sight.

The prevailing uncertainty will severely impact the refinancing prospects of homes that were purchased while undergoing foreclosure. This will affect the sales of foreclosed and distressed properties, which constitute majority of the current home sales.

Investors and buyers of foreclosures risk facing ownership challenges and even potential “clawback” of the purchased properties if previous owners claim and are able to prove that they were deceived by a faulty foreclosure process.

The massive investigation that’s currently being carried out by all fifty states has been discovering many shortcomings and questionable practices by banks and mortgage servicers, some of which apparently go back several years. This means the investigation could go on much longer than anticipated, cost a lot and may find several guilty parties along the way. The Attorney General of Ohio has already cited one mortgage servicer for questionable practices and it could potentially cause them to pay billions in damages. The high cost of fighting multiple lawsuits could mean more bank bankruptcies, especially those with low reserves against losses.

While all these and many other problems continue to add fuel to the foreclosure fire, “title Insurers” could potentially transform this proverbial fire into a raging inferno and bring the sales of foreclosures to a grinding halt. Here’s the problem. Lenders require title insurance in order to issue a mortgage because it ensures that buyers have a clear title to their property. This is done to protect the financial interests of both the buyers and the insurers.

Thanks to the robo-signing scandal, insurers are applying their emergency brakes on insuring new foreclosures to limit their liability. If prospective buyers can’t get title insurance, they won’t get a mortgage and this could stall or completely shut down sales of future foreclosures. Also, those who’ve already purchased foreclosed properties from lenders accused of robo-signing could file claims against their title policies and this could inundate underwriters with claims and put some insurers out of business.

In conclusion, there is no end in sight for the continuing foreclosure crisis. Some mainstream financial media commentators and legal pundits have been using phrases such as “housing Armageddon” to describe the debacle and its future course.

The Lifting/Resolution of the Foreclosure Freeze

While dust from the robo signing – a shady practice where lenders allegedly processed foreclosure documents and affidavits sloppily, without a thorough review mechanism to verify the authenticity of documents – controversy is still up in the air, Bank of America and other giant lenders announced resumption of foreclosures which put almost 2 million homes at risk.

These institutions had temporarily suspended evictions and foreclosures in 23 states that require judicial approval for foreclosures. The attorneys general of all 50 states are currently investigating the mortgage servicing industry’s foreclosure practices. While robo-signing became an overnight Internet buzz word, it wasn’t the only ingredient of this deadly concoction.  Attorneys for home owners have found evidence of missing documents, some of which may have been thrown away. Federal and state investigators now believe that they may have to go back more than three years to unearth root causes that may have contributed to the current situation.

Despite skepticism expressed by various experts, Bank of America said it would resume foreclosures in the 23 judicial states, while the freeze would continue or lifted on a case-by-case basis in the 27 states that do not require judicial approval.

Lifting the foreclosure freeze is good news for real estate agents as many of them had seen their business come to a grinding halt after major banks had frozen foreclosures in October. Conversely, homeowners who are behind on their mortgage payments could soon feel the banks breathing down their necks.

Homebuyers and investors are in a dilemma about pulling the trigger now to purchase REOs or wait until the dust settles down. The hesitation to buy is partly emotional, but largely fueled by the uncertainty of the ongoing federal investigation and the recent announcement by the nation’s three largest insurers about not offering title insurance to buyers of bank-owned homes with flawed or nebulous foreclosure paperwork. This is a catch-22 for a lot of buyers that finance home purchases through a mortgage because lenders require a title insurance policy and insurance companies won’t issue one till they are convinced that the property in question was properly foreclosed by the bank.

A Category 5 Hurricane named “Foreclosure Crisis” and its ill-effects on the Sunshine State

While the U.S. was spared the wrath of the 2010 Atlantic hurricane season, many states have encountered the wrath of a man-made hurricane named “foreclosure crisis,” which in many states including Florida has reached a category 5 status in terms of its destructive power.

This gargantuan hurricane continues to wreak havoc on the mortgage industry and destroy thousands of homes in its path since the time it made landfall several months ago.

Besides Nevada and Arizona, Florida is the third hardest hit state in the nation, thanks to the deadly blend of the national financial abyss, bank failures and the foreclosure crisis. Just this year alone Florida was socked with 27 bank closures, which is a whopping 19% of the nation’s share. The ripple effect of this financial swamp has caused huge volatility in the rental and owner-occupied residency rates. Jacksonville led the nation with a 14.4% rental vacancy rate, which is almost twice the national average.

Back in September, Ally GMAC’s mortgage division stopped foreclosures in Florida and 22 other states to investigate a fraudulent practice called “robo-signing,” in which their employees were allegedly signing off and improperly filing paperwork with questionable or cursory review processes. Other banks followed suit by halting foreclosures in these 23 states.

In mid-October, this domino effect prompted the attorneys general of all 50 states and mortgage regulators in 30 states to announce a joint investigation of the foreclosure practices of mortgage servicers. Preliminary reports from the investigators indicate that the robo-singing allegations may just be the tip of the iceberg and there may be numerous other shoddy practices which could have started over 3 years ago.

The investigation committee which has 12 top legal bigwigs from various states continues to uncover deceitful practices. For example, in a deposition filed at a West Palm Beach court in December of 2009, a GMAC employee, who was a member of a 13 people team responsible for reviewing and signing 10,000+ affidavits, was many times not bothering to verify the accuracy of the documents and information given to him.

A news feature about Michael Carlson’s case which was published on November 9th in the St. Petersburg Times has the potential to push the foreclosure crisis into unchartered waters. Carlson’s home in Dunedin, FL was foreclosed in 2008 by Bank of America. Carlson is contesting the foreclosure, stating the bank’s failure to notify him about the legal proceedings until after the foreclosure was completed. The problem is Bank of America sold that home to another owner more than a year ago. The current owners had assumed they were buying a bank-owned foreclosed property. They could lose their home and be evicted if Carlson wins his case. If that happens, those owners would almost certainly file a case against Bank of America. Legal pundits believe if Carlson wins the case, this could set a national precedent and if one or more such cases are filed, the snowballing effect could create a legal tsunami which could potentially rattle the housing market even further and the put the nation’s shaky economy into a tailspin.