Lenderama Mortgage Blog

One way or another, most foreclosures are investment properties.

That’s been my guess for quite some time. MBA announce a report today on 3rd quarter loan performance. I found some very telling information in the report.

…foreclosure actions were started on approximately 384,000 loans, but of those foreclosures, 63 percent were cases where the borrower did not live in the home, the borrower did not respond to repeated attempts by the lender to contact them, or where the borrower failed to perform on a repayment plan or loan modification that was already in place.

They broke the data down further in the report. Approximately a third of that number is made up of investment properties. The others are empty homes. The report leaves open that it’s possible that these homes were owner occupied, and now abandoned. When is the last time you heard of someone just abandoning their home before closure proceedings were initiated? A few maybe, but my bet is that the bulk of these abandoned homes were never occupied in the first place. They were investor homes secured through occupancy fraud.

The biggest problem with just about any study that tries to quantify our market situation is that it either tries to explain how sub-prime lenders over extended themselves, or how fraud is rampant, but I never found anyone who tries to show how both of these factors work together.

January 17, 2008 by · 34 Comments

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34 Responses to “One way or another, most foreclosures are investment properties.”
  1. chris says:

    Todd-

    I’d guess that the pre-abandoners are more than you think. From 2003-2005 I was a Realtor, and I had a lot of clients that pre-abandoned homes they legitimately lived in because they were afraid of humilation or so they could get a rental before their credit was smashed.

    CJ

  2. Many a would be Ferarri driver bought properties on less than sound fundamentals. They are likely the bulk of the “investors” (I say speculators) of which you speak.

    But an abandoned house may very have been owner occupied. I would quickly advise someone who told me they were not going to make it to get a rental before they abandon because it will be very difficult to get one afterwards.

    CJ had that right on.

  3. Franklin says:

    Forgive my ignorance, but if a big percentage of foreclosures was for investment properties, instead of actual home owners who couldn’t ante up the mortgage payments, I’d say that was a good thing, comparatively speaking, in the sense that it means less people in dire trouble. Or is that wrong?

  4. I don’t buy it guys. I’m sure their’s a fair percentage of people who abandon their house, but it’s no where near the majority of them. Not at the point where they they left before the lender could even contact them to see if they could work it out.

    Again, that’s why I’d like to see a more comprehensive study. How many foreclosures owner occupied homes are first payment defaults? How many foreclosures are to people who live in another mortgaged home? How many foreclosures are on people who didn’t even know they “owned” the home?

    Franklin, that’s exactly what I suspect.

  5. Gina Gardner says:

    I agree with Todd. It hasn’t been uncommon, at least here in Nevada, for borrowers to try to fudge on the occcupancy in order to get away with putting less money down or paying the extra fees often required for financing investment property. Or trying to get a construction loan on a spec house but calling it their primary residence. Some of them didn’t even wait to finish building before the For Sale sign went up. We’d find out when the appraisers did their inspections.

    The best one though was a couple who were refinancing a property with one of my co-workers. The docs had been signed and they were in the recision period. My buddy was in the neighborhood and she decided to drive by the house…and discovered that it had burned to the ground! She contacted the would-be borrowers and the wife said, “Oh, yeah. Well, um, we were gonna tell you about that…”

    Right.

  6. Gina Gardner says:

    Oh, wow. Just spoke to my husband at Countrywide Bank of America. He has a client, a Realtor no less, who just tried to get him to classify an investment property 3 BLOCKS from his house as a second home….yuck.

  7. Dick Weiss says:

    Vacant homes and abandoned homes are like leaves on a tree here in South Florida. It is becoming a field day for foreclosure investors. I suspect that things will only get worse throughout 2008 as more and more mortgages readjust and the folks in Washington continue to scratch their heads.

    My blog at http:www.shortclosures.com zeros in on short sales and foreclosure investing. Also my free newsletter at http://www.whoisdickweiss.com deals with the same subject. Check them out to get the positive slant on this housing bubble.

  8. Chris says:

    Yes, here in California I drive down the street and it seems like every other home is a foreclosure. Not sure that the banks are very smart with this going on, have an associate bought at $650k 3 years ago, fell behind when he lost his job, got a new one with a contract, tried to work with the lender but they didn’t want to help in the least. Ended up losing it last month, listed now for $350k. Bank will lose $300k+ for no real good reason. You would think they would wise up, work with people to some extent at least?

    I deal with private money, see a whole lot of activity today, probably more to come as money continues to tighten up.

  9. Howard says:

    I’m sure a combination of everything touched on holds true. Only thing I did not hear mentioned, Straw Borrowers. Just another example of the many scams that helped lead the industry reach it’s current sorry state. In the big picture I’m sure the percentage is negligible but we all know this type of mortgage fraud took place at an alarming pace. I spoke with an associate last week, a bank/lender who shall remain anonymous was, “recently,” burned to the tune of $4MM on a fraudulent multiple closing. The fact that mortgage fraud continues in such a tight market frightens the stuff out of me. Where is due diligence?

  10. Wade Young says:

    I agree with Todd. Areas that were experiencing outrageous appreciation are now being hit the hardest because people jumped on the investment property bandwagon. People bought condos in South Florida for $900k that are now worth $600k. They planned to rent them out and make a killing off the appreciation. Those properties are empty at foreclosure because they were always empty. The former assistant secretary of HUD, Catherine Austin Fitts, has indicated that HUD is being run as a criminal enterprise. She claims that mortgage fraud is rampant. She has also indicated that there are more mortgage securities on the market than there are mortgages to back them up. If that is true, there could be even more trouble ahead than just the sub prime mess.

  11. Miles says:

    You guys really said it. The banks are NOT WILLING to work with the lenders at all!! They would rather lose 100K or more than work with the home owners. I don’t get it. I am going through this right now. My bank sent me refinance papers???? How am I going to get them to refinance a house that is worth 40% less than what I owe on it? Ridiculous. What the hell are they thinking? I am not an investor and nearly everyone on my street is going through the same thing I am. Most of us are going to let our houses foreclose. Foreclosures are just starting to happen folks. It is going to be really, really bad.

  12. It is a very sad situation, but i have to agree with Miles: foreclosures are just starting to happen and it will be very bad. We must find solutions as fast as we can.

  13. Beth says:

    We are not your typical investor. My husband and I are in the position of having 4 investment properties all of which were bought between 2004 and 2006 that we fixed up and rented and planned to keep as a long term investment for our childrens future. We put alot of our own money down to purchase these homes because when we moved to Florida, we sold some properties in Massachusetts and reinvested it in Florida. Everything was going well because we are great landlords and know how to maintain properties and had found good renters. Starting in Jan of 07, each property was hit with triple tax hikes and insurance hikes, so we had to come up with 50,000 in 3 months. We used up our 25,000 in savings and incurred credit card debt just to make the payments to our mortgage companies, as we were never late and had great credit scores and wanted to keep it that way. So now here we are-we lost our renters, or had to cut others rents so they would not move, we’ve sold one property short sale, one is pending that we will lose 60,000 of our own invested money, another we just received a foreclosure notice on, and we are finding it tough to make our own home payments. We have no more ability to get credit as they up to the limits (60,000 in cc debt). What really hurts is that we have tried to do everything right-we have spoken to the banks at least once a week to try and work something out, and this we started BEFORE we became late. It did not help. They will not refinance because the homes are worth so much less than what we owe. Yet they are willing to accept a short sale from someone else or foreclose??? That sounds crazy to me. Where do we get help because lawyers want to charge us $300 just to speak with us about bankruptcy. We do not want to go that route. p.s. we never got the interest only ARM’s that lots of people did, so that wasn’t part of our trouble. Can anyone offer advice?

  14. peggy says:

    It looks like no one responded to the question posted by Beth on 6/25/08, however I find myself in a similar situation. We bought 2 investment properties 3 and 4 years ago. Put approx 30% down on each and have been rented out. However we are in a neg.cash flow on each and homes have dropped over 30% in value. We also have depleted all savings on these and have only our IRA’s left (what’s left of those!)
    If we walk away can they go after our primary residence or IRA? We are in Calif.
    Any advise?

  15. Billy says:

    I have a question for all of the people who are in the process of losing their multiple mortgaged investment properties, Aside of their primary residence of course. If you are losing your investment homes and the Bank takes a loss…They send you a 1099-c form stating a detailed $$ amount of the “cancellation of debt”( that is equal to the difference of the selling of your foreclosures and the mortgage balances left behind) which the IRS states is taxable income… is that the case? and if the amounts are stated as $200,000.00 approx., due you actually owe the taxes on $200K??

  16. Beth says:

    That’s the way I understand it. But now that we have sold one short sale during this year, there is a difference of 135,000. So i guess we are going to owe 20,000. But the bank is taking $50 /month until next July when at which time they say they wil re-work what we owe them. So how can we still owe and be paying on the 135,000 to the bank and pay taxes on that money as well. (they did not forgive the difference so maybe we won’t have to pay taxes on it just yet.
    The other house we have that we have not paid on since January may have an offer. But it willl be for 99,000, and we bought it for 248,000. So at least if that happens, we won’t have to deal with it til 2010 because it wouldn’t close until 2009. Remembering these are investment properties, the banks are not likely to “write off ” the amount we owe, so in that case, if we still owe the bak something, I don’t think we are going to have to pay taxes on the difference.

  17. jorge says:

    Majority was not investors but owner occupied. Why are we trying to pass laws and bills to save so many families from getting thrown on the street? Because thats who has been affected, families! (not investors)

    http://www.CreditGuideFor.Me

  18. Mark A. Wise says:

    Todd:

    Glad someone is finally asking the right question! Do you know if there are any more current statistics available on non-primary residence foreclosure numbers? The stats cited are from 07–and I know with the bursting bubble, the number of investment/2nd home/spec. home foreclosures are bound to be high, espeically in highly speculative markets like Florida and Nevada. I think it is an important question NO ONE is discussing in most media/government circles. WHY?!?!?

  19. Stacy says:

    Beth- If you ever go back to this web site i would love to talk to you- your story is EXACTLY my story. And thank goodness I am only in jeopardy of loosing 1 property but it is a HUGE loss.

    Beth can you please contact me at 571-309-0304. Since you have been thru this I would love to talk to someone who knows what to expect.

    Stacy

  20. I imagine the 30,000 – 50,000 vacant homes being reported in the local papers are largely investment properties. One area not being reported is the abandoning of animals with these vacant homes. It happens more than most people are aware of.

  21. It’s been about a year since you’ve posted. I check back now and then as you had great material.

  22. Beth says:

    Jorge-you are wrong. Even though we had 4 properties as investment properties, we still were and ARE the “little guy”. 10 years ago, we did everything right. We put our heart, soul, and sweat into 4 properties up north, and that’s how they increased in value slowly. We were excellent landlords and took a small profit each month from those homes. When we decided to move to Florida, we knew it would be a risk, but were unaware of how big a risk we were taking. We only came here to raise our kids in the sunshine, and start our own business. We didn’t do it to profit from the real estate. We only did the same thing here that we did up north. We sold on 1031k’s and reinvested so we could be landlords close to the houses we owned. We fixed them up and rented them out for fair value. Meanwhile, i had children and we had started our own business. When taxes and insurance jumped 2 years ago, instantly we had trouble, but i started opening charge accounts to pay the additional increase nobody could have anticipated. On 5 properties, it amounted to more than we could handle. Suddenly the values were plummeting, and it got harder to get renters. Pretty soon, my charge cards(which I never had before this whole situation) were up to 50,000-ALL from paying mortgages, taxes and insurance. We lost a few renters, and realized we had to sell something fast. Fast ended up being 10 months later, and the values fell so low on all of our properties, that all the money we had originally invested was lost-over $500,000. We never lived beyond our means. We never did anything wrong. The whole real estate dream failed for us. Luckily we still have our own home because I had to stop paying on the last house we are still trying to sell(a duplex). If they were to modify our loan even temporarily, we would love to keep it because it is actually rented. But it’s a fight whenever you try to talk to mortgage companies. It is going to forclose; we can’t even sell it for 99,000 and we owe 248,000. Imagine that. A money maker for someone who can afford to put a downpayment on it. SO TELL ME-why shouldn’t the government help people like us too. Good people who did everything they could but it all crumbled around them. (ps, i’ve got my credit cards down to 30,000 just over the last 6 months.)

  23. Bec says:

    Beth we are facing the same thing. We bought up 7 houses in the past 4 yrs – some to rent some to flip. We now can no longer afford to pay on them. I immediately went to the lender to help out with loan modification – they held on for 3 mthss before telling me there is nothing they can do for me on not one home. So now I am forced to short sale. I cannot find anyone to talk to because I am so fearful of what we will face with the IRS next year with the 1099 on 4 homes. Every attorney I talk to either immediately tells me I should file bankrupsty which I absolutely do not want to do because I have never paid my debt late and I want to stand by that. But to do that I am now inn CC debt $30K. I have searched the internet for weeks trying to find an answer – I just dont know what direction to turn in – it seems that even though we will have lost hundreds of thousands of dollars, we are still goingn to be penalized. I am in Arizona and would appreciate any info anyone can give me. I honestly do not believe these lenders want to help us and I cant believe that thhey would rather short sale/foreclose then modify the loans.

  24. Beth says:

    Yes, you are in the same situation as us. We sold one short sale, and the bank is telling us we owe themn 135,000. We tried talking to the banks way before we got in trouble because that’s what all the experts tell you to do. They would not help us until we were”3 payments behind”. So we talked to them at the 3 month mark(after racking up 60,000 in cc debt just to pay those mortgages on time) and they said-oh-there’s nothing we can do because your house is not worth what you owe. Plus you don’t live in the homes. Basically the only option you have is to pay us. We sold another (you saw my story) and lost over 100,000 of our own HARD EARNED money we had put down on and into that house. So then we got 20,000 deposited into a new bank account and filtered it out. We have to have something in case of emergency since we used our 401k’s and our daughters 529 college fund to pay mortgages!! We have nothing now but our jobs and the one home we live in. We have stopped paying on the duplex and it’s been in the foreclosure process for about a year. I called them the other day for help to try to hang onto that but they said now we have to make 3 “good faith ” payments before they try to consider doing something for us. WTF???? We now have to be three months on time for them to speak with us??> Who is making these damn rules????? I swear i’m really frustrated! I would like to try to hang onto the house but they won’t accept what we can afford. We are only getting 1100 in rents, how can i pay them 2300??? Lawyers are NO HELP. They don’t give direct advice. Is there anyone who knows what the heck is going on with this insane system? We are NOT wanting to declare bankruptcy. I won’t do that to my kids. We are hard working honest people who don’t want to take the easy way out. Why can’t they temporarily lower my monthly payments for a year? It could be that simple and no one has to lose their properties or their dignity. Sorry Bec, I am only a little further along in this than you. All i can say is pay for the home you live in above all. Your credit will be ruined no matter what after this is all over. Try your best not to lose sleep over it. The stress is not worth it. For the next year at least, it won’t change your everyday life. Oh, and change your phone number. I hate when they call to harass us. It doesn’t mean that I can magically make money appear just because they call me and threaten me. If i had it, i would give it-it’s that simple!
    By the way-the bank told me the other day that I should stop paying on all the credit cards and pay them instead. Ok so then, I lose all my credit cards, screw my credit even more, and hang onto a house that is worth 75% less than what we owe on it?!?!

  25. Bec says:

    Beth, thanks for the quick reply. What kind of attorneys did you contact. I cant seem to find a foreclosure attorney. I want to keep like 4 of the houses but the fact of the matter is that if we do file bankrupsty, they will make me give up the others anyhow. I also have tried to do the right thing. I want to be able to pay back my debt. I am so excited for you that you were able to pay down t hat CC debt like that. I so want to be able to do that and I will try. But its very frustrating and I just feel like everyone is blowing smoke up the butts making us believe that people are there to help. I refuse to let this stress me out. The part that stresses me out is that I cant get a straight answer. Ok I get it I have to give up my homes, I am totally fine with that because I refuse to let finances cause me stress or illness – I am blessed to have been able to achieve these homes and we are young enough that we can do it again. So I totally am fine with doing what I have to do. My biggest concern is the 1099’s Im gonna get after shortselling on these homes – YIKES how am I going to do that and the last thing I want is to have a problem paying the IRS. That scares the heck out of me. At this point my last concern is my credit. I have a home I can live in forever, I have a car – there is nothing else I need and I can keep these for 7-10 years if I have to. I like you, have never lived beyond my means and we are very very simple people – I just have to believe that all these foreclosures and bad credits are going to have to be overlooked and forgiven otherwise nobodys getting credit. Again, I just wish I could talk to someone who could give me the ins and outs of everything so there are no surprises and I know I am doing the right thing the whole way through this process. Theres alot going on all at once and the last thing I want is to screw myself because I overlooked something because I was exhausted trying to find the answers. Its crazy!!!!! Again if there is any info that you or anyone else could give me to help me through this process I would be so appreciative.

  26. Norman says:

    We too invested in 2 condos in South Florida and a condo and a house in Las Vegas, hoping to flip them. As property values dropped this became impossible. We had 4 good renters but the rents nowhere paid the mortgages and expenses. We too could not get any help from the banks and were told they would not consider a short sale unless we were behind on payments. Then we stopped paying and were told by the real estate agents they could not do a short sale on occupied property so we let the renters go. Now the Las Vegas condo. has been foreclosed but thus far we have not received a 1099C.
    If we do, there is an IRS provision(Publication 4681 and Form 982) that may allow us to qualify for exclusion if one is insolvent i.e. you owe more than your assets. Hopefully that will work

  27. Wade Young says:

    Norman-

    I’m not an expert on Form 982, but my understanding is that your debts must exceed your assets (insolvency) AND the amount of the spread must exceed the amount of debt written off. If that’s true, that’s a far different scenario from your liabilities simply exceeding your assets. If you look into it and find that to be the case, please do a follow up post to let us all know. Best of luck.

  28. I am hoping after the bill Obama approved to help homeowner that the Lenders will get thier finger out of their U know what and really help…

    I agree with most of you and have to ask myself why the Lenders have not been willing to help the homeowner, in the long run they loose more money by not helping and the homeowner is gone… Heart breaking… I too tried to get a home loan modification since my loan is an option arm so you can imagine my home is underwriter as well and plus… but the lender also denied my request… Love to hear more update on this issue now that March 4 is in a few days to see how the new Loan mods will work.. any news please update me.

  29. Muffin says:

    Bec and Beth –
    My husband and I are in the same situation. We bought two condos in SW Florida for investment; one in 2005 and one in 2006 (once it was finished being built). My husband thought we’d make a lot of money by hanging onto these for a couple years, then selling them. We got renters for both (one has switched renters several times, the other has had the same renters for 3 years), but the rent didn’t come close to covering the mtg pmt, much less the taxes and condo fees. We put the less expensive one on the market and in over a year, we had one showing, and not one offer. We had it listed for less than we owed, figuring we’d just have to cover the shortage. Now, we owe about $250,000 on it and prices keep slipping. Now they are going for around $99,000. The other one is the same story: worth about half what we owe. It is sickening. We also do not live above our means: pretty average home, own one car (paid off), no credit card debt, have always paid our bills on time! We tried to talk to the lender on one (Chase) about refi, but they said no way, because it’s worth less than we owe!! The other one, my husband tried to call them multiple times (Citimortgage) and was on hold for over 2 hours, never getting to speak with anyone!!! We finally found a realtor/auctioneer in our hometown that works with a co. in FL to do auctions. He said in order for the lenders to even consider modifying the loans or going short sale, we had to stop paying. So we did, which makes me sick to my stomach. Now I get calls from both banks on a daily basis! Now Citibank has time to talk to me!! Both condos are set to be auctioned early next month and we’ll try to pursue a short sale. Of course, when I talked to Citibank, they claimed there was no way they could approve a short sale that quickly and said we need to fill out some 10 page form for them, then get an appraisal! Our realtor says we will go ahead w/ the auction and if we get an offer, we’ll submit everything at once and try and get a short sale approved. I’m just sick over the whole thing!!

  30. Bec says:

    Ok so heres the updated version of our situation.

    We did not do a short sale on any of the homes except 1. The others we are just letting go to foreclosure because 75% of the homes on the market in our area are short sales. We went to see a RE Atty – yes had to pay him just to get direction but it was worth it. Theres alot of different scenarios and legalities to having so many homes go at once. Anyhow, we put our one home up on short sale – got a offer the very next day. Countrywide did an appraisal and said they will not accept anything below the appraised value. 2 weeks later Countrywide called back and wanted to know if we could get a counter from the people. Dont know what that is all about.

    Anyhow, I called Wells Fargo this am on one of our flips that we are now 3 nmths behind on. Wells Fargo – totally different than Countrywide was so kind and is going to do whatever they can perhaps a deferrment hoping that by the grace of God we will have a job by then. Oh yeah, forgot to mention that since Feb my husband is no longer employed.,

    So I am so thankful for Wells Fargo and their attitude instead of the – no job – well I cant help you then.

    The attorney we talked to said that the first couple months of late payments they dont care to help at all, but once you go into 3 mths default you are in a different classification and they start to work with you a little more, then onnce you are approaching foreclosure – you are now in a much higher classification and they will be a little more willing to work more with you

  31. Muffin says:

    Well Bec, our third month in default will be the April payment!! I just hope we can get a good offer on one or both of these condos at the auction, and that the bank will accept it. Even if we could get rid of one, that would be better. How far below the appraised value is the offer on your one home? I can’t believe they bank is saying they will not accept below appraised value! Are they nuts? Would they rather pursue foreclosure? That’s another thing that bothers me….all the appraisers that valued these properties at or above the selling price back in ’05 and ’06. How did/do they justify those appraisals and (now) obviously inflated values? Just because people were willing to pay it? How come it doesn’t work the opposite way: no one is willing to pay the “appraised value” so the home isn’t actually worth that much. The banks and the appraisers colluded to reach a certain value on the property to make the sale go through at the time.

  32. Well I have heard that there are some lenders that are (trying to help) but most banks haven’t. I keep hearing that they have the incentive to do help the homeowner, and only the ones that have paid on time the bank is willing to help… anybody hear anything differnt?

  33. Bec says:

    They were pretty low on the offer the appraisal was at 220K and the offer was at $150K – we did not expect them to accept it at all in fact we really werent ready to let go of it at all so we were hoping they wouldnt accept it.

    Now heres another update PTL – we have decided today to keep the cabin and stop the short sale. My BIL is going to help us out because although we bought it 4 or 5 yrs ago – our family travels here to come stay at the cabin annd everyone loves it so my BIL does not want to see it go. So I told him I would call the lender and see if they would do a modification, they will not touch it because its not a primary residence. I get that but give me a break – I have 8 homes with CHL – have been a customer with CHL for 10 yrs – NEVER EVER have been late on a pymt until Dec 08. So here we are letting 5 of these houses go to foreclosure – one we tried a short sale – so now we are saying ok we will pull it out of short sale – catch the payments up and keep them current to keep the cabin and they still wont meet us halfway. Its flippin rediculous. The thing that gets me is we did not get any of our houses with putting 20-25% on each. We obviously have been very faithful in our responsibilites to pay obtain and pay mortgages yet we get treated as if we are one the the ones who lied their way through the entire mortgage process to get something we just couldnt afford. Its rediculous. I offered them the rental income on the home and they wont take it.

  34. Many a would be Ferarri driver bought properties on less than sound fundamentals. They are likely the bulk of the “investors” (I say speculators) of which you speak.

    But an abandoned house may very have been owner occupied. I would quickly advise someone who told me they were not going to make it to get a rental before they abandon because it will be very difficult to get one afterwards.

    CJ had that right on.

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