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How Badly Will the Four Million Foreclosures Affect the Future Housing Market?

The market changes and changes again.

Foreclosures spiked 19% last month and 257,944 houses were taken back by the banks last quarter of 2010 according to Realtytrac.com, both record numbers. Realtytrac goes on to say that nationwide, almost 4 million foreclosed homes will ultimately have to find their way back to the market in the next few years before we have any semblance of a normal market.

That’s four million bad credit reports for the unfortunate homeowners.

Whenever I read national foreclosure stats, I break it down further for California investors. California, Nevada, Arizona and Nevada account for the lion’s share of house foreclosures, and California usually gets around 21% of all foreclosed houses. So that means California will see another 840,000 people out on the streets eventually. Southern California will get about half of those so that means there will another 420,000 REOS/short sales show up on credit reports for those unfortunate homeowners.

Will those 420,000 soon to lose their property ever buy a house again, and are they forever locked out of the housing market?

The answer is no, according to Fannie Mae. The mortgage giant is offering troubled borrowers who opt to do short sales (sell their homes for less than the value of the mortgage) or deeds in lieu of foreclosure (essentially just hand the keys over to the bank) the chance to get back into home ownership more quickly. Two years sooner, in fact. Last week it was at least four years before Fannie would underwrite a borrower with a foreclosure on their credit report.

Fannie Mae (i.e. the government) is looking to get Americans out of homes they can’t afford and into homes they can.

That’s right; everything is peachy after two years. Hand over the keys, walk away from hundreds of thousands of debt you promised to pay back and you are healed.

Don’t get your hackles up and join the local Tea Party Rally to bemoan the lack of responsibility of those receiving a free pass from a government bailout. Don’t worry about it; it’s happened before. Only ten years ago, as a matter of fact.

Underwriting guidelines were tight in the depths of the last real estate down turn. Mortgage broker booked lots of problem loans. In 1996, many loans were in process but fewer closed. Properties didn’t appraise for enough money, borrower’s credit was suspect and their job stability was suspect. Many loans were flying into loan offices on a wing and a prayer.

Loan approvals became tough as foreclosures mounted from 1994 to 1999.

But a funny thing happened in the late 1990’s to the early 2000’s. Everybody had marked up credit, or so it seemed. Loan approvals became easier as mortgage companies competed for the borrowers that were buying or refinancing. Suddenly, foreclosures and bankruptcies were OK as long as they were 2 years old. Then in 2002 to 2007, the real estate boom was everywhere, loans were easy and money was loose and if the foreclosure was one year old, you were still OK with some underwriters.

The nature of capitalism is bubble driven; how can it be otherwise? Everybody wants to make money during boom times and the smart ones know how to make money in any market.

So when you read another 4 million foreclosures (440,000 for Southern California) happening this year, remember 3 things:

1. In 3-4 years, they will all be gone

2. Bank loans will become easier to get, but cheap properties will be hard to find

3. Buy and hold investors will get rich. Hold for cash flow now and greater capital gains later.

The market changes, and changes again

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