Bottom-feeders: Start your engines!

With home prices falling sharply enough to start cash flowing as investment properties or throwing off enough of a profit to make a purchase (and renovation) make sense, so-called 'vulture investors' are starting to enter the marketplace -- first as well-financed groups buying groups of homes from bank at 50% off peak prices, but now as individual investors thinking they've found an opportunity.

Sounds good, right? Not so fast, and it's not as easy as it looks -- and certainly more difficult than it was when credit was easier. From a Washington Post story:

More people are tossing around the idea of picking up an investment property, lenders and real estate agents have told me. "I'm finding a lot of people asking about them," said Jerry Bartlett, owner of a Jobin Realty brokerage in Kingstowne. Not many can pull it off, though.

Bartlett sends them to get financing before he will even start working with them. "They come back distraught," he said. The lines of credit they thought they could tap may not be there anymore; the credit rating that they thought was pretty good may not be high enough now; their down payment may be shy by 10 percent or more...

The first requirement is cash. Rick Eul, a vice president with Bank of America Mortgage in Annandale, said investors need at least 20 to 25 percent of the price as down payment. "Two years ago it was like, 'Do you have a pulse?' " he said. No longer. It's back to the pre-boom standards of creditworthiness -- or even a tad tighter...

You will have to prove to the loan officer that you have enough income to handle monthly payments on both the investment property and your own home.

If you have a signed lease and have already cashed your tenant's check for the first month's rent and the security deposit, you will still get credit for no more than 75 percent of the rent as income. (That's all you should count on. The remaining 25 percent normally gets eaten up by repair expenses, vacancies and other costs.)...

You will also need a credit score of 720 or better, Uhl said.

Plan to pay a higher interest rate than on your own home loan. Interest rates for investors are now running about one percentage point higher than those for owner-occupied homes.

Click here for full story.

News Summary for Sunday 6/22/08

Commercial developers seeing return of recourse loans (Wall Street Journal)

Rates improving for some home loans (Wall Street Journal)

FHA wants to phase out seller-funded down payment charities (Washington Post)

Website pushes real estate analytics to new level (Inman News)

MLSs and brokers adding consumer-friendly tools to websites (Inman News)

Bush and Congress may finally negotiate housing deal (CNNMoney)

States increasingly tackling rising foreclosures (CNNMoney)

San Francisco launches solar roof program (BuilderOnline)

Diary of a homebuilder exiting a market (BuilderOnline)

Gas prices increasingly impacting homebuying decisions (USA T0day)

Homebuilders making it expensive to cancel

Over the last ten years, most builders were generally fairly lenient with refunding deposits as long as they thought another buyer would soon appear who wouldn't be stuck with any weird design choices or pricey installed upgrades. But as the cancellation rate for new homes has soared to well over 30% -- and even 40% for some builders -- buyers hoping to cancel for any variety of reasons are finding that the fine print they didn't read sometimes also meant they were signing a promissory note for the deposit, making it much harder for them to walk if they think a better deal is on the horizon. From a Washington Post story:

Builders typically ask for 10 percent of the contract price as a deposit, said Harvey S. Jacobs, a Rockville real estate lawyer and owner of Stress-Free Settlements. "If you can get away with paying less, great," he said. "But they ask for 10 percent." Builders also typically ask for additional cash to cover the price of options and upgrades.

In addition to the cash deposit, builders frequently ask buyers to sign a promissory note for an equal amount of money, Jacobs said. That note comes into play only at closing, when it becomes payable out of the buyer's mortgage. It's a liability that lies dormant but that serves to double the amount of cash the buyer has at stake if he pulls out of the deal.

Those promissory notes are builders' attempts to stem that wave of cancellations. If buyers are willing to forfeit $50,000 to walk away from a $500,000 home sale, maybe being on the hook for $100,000 would keep them in the deal. "I'm definitely seeing more letters saying, 'We're going to enforce your promissory note if you don't close,' " Jacobs said.

What's more worrisome, Jacobs said, is that many people don't even realize they have signed such a note, just one page among the many included in a sales contract.

(Ed.) Does NO ONE read documents they're signing anymore? I think this excuse is starting to get a little out of hand. But I digress...

The first opportunity you have to read a builder's sales contract and the accompanying documents (which can be just as important -- and binding -- as the contract itself) could very well be when you are being asked to sign them...

Never sign a contract while you're sitting in the sales office. When you're writing a deposit check for tens of thousands of dollars, and signing a contract worth hundreds of thousands, you really deserve a few days to have the specifics looked at by your own real estate lawyer...

Arthur G. Kahn, a partner with the Brincefield, Hartnett & Kahn law firm in Alexandria, said the procession started in fall 2006.

Sometimes, there are technical aspects to the contract that could become a convincing argument for a refund, he said. For example, he cited a "relatively arcane and complex statute," the Interstate Land Sales Full Disclosure Act. With some exceptions, it requires developers to register subdivisions of 100 lots or more with the Department of Housing and Urban Development. If the development is covered under that law, buyers are supposed to be given a disclosure document, called a "property report," before they sign a purchase contract.

Registration "is a time-consuming process, and you're not allowed to market until HUD has approved the registration of the project," Kahn said. Especially during the real estate boom, he said, some developers didn't want the delay. If the developer should have registered with HUD or should have given the buyer the property report but failed to do so, that could be a route out of the deal and toward a refund...

There are other avenues lawyers might take to recover deposits. For example, contracts often allow builders as long as two years to complete construction. But, especially with condo projects, some deliveries have been closing in on that two-year deadline. No rational buyer wants to pay 2006 prices for a condo now. These deals are ripe for cancellation. Your argument for getting back the deposit may focus on the details about when that two-year clock started ticking, and when the home qualified for an occupancy permit.

A bailout for lenders and borrowers still helps everyone

One of the more increasingly specious arguments against a government-led bailout of lenders and homeowners facing foreclosure is the issue of fairness. No, it's not fair to bail out those who are adults and made their own mistakes, but given that the entire economy seems to be at stake, we may have little choice. From columnist Steve Pearlstein at the Washington Post:

Forget all that nonsense about the Bernanke Fed being too timid or behind the curve. In the face of what is turning into the most serious financial market crisis since the Great Depression, the Fed has been more aggressive and more creative in using its limitless balance sheet -- in effect, its ability to print money -- than at any time in history.

We can argue till the cows come home about whether this is a bailout for Wall Street. It is -- but only to the extent that it is also a bailout for all of us, meant to prevent a financial and economic meltdown that drags everyone down with it. In broad strokes, we're going through a massive "de-leveraging" of the economy, wringing out trillions of dollars of debt that had artificially driven up the price of real estate and financial assets, and, more generally, allowed Americans to live beyond their means. The Fed's goal has not been to impede that process, simply to make sure that it proceeds in an orderly fashion. But even that has required central bank intervention that is unprecedented in scale and scope. And despite yesterday's huge rally in the stock market, Fed officials warn that this de-leveraging is nowhere near finished...

...the real problem began in late February, as several of Wall Street's biggest investment banks prepared to close their books for the quarter and realized they were looking not only at big declines in profit from issuance of new stocks and bonds and fees from mergers and acquisitions, but also another round of write-offs in the value of their holdings. In response, the banks began to hunker down, instructing their trading desks to raise margin requirements for hedge funds and other customers, requiring them, in effect, to post more collateral on their heavy borrowings.

Thus began a chain reaction in which hedge funds began selling what they could -- largely mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae -- to raise the cash to meet their new margin calls. That wave of forced selling drove down the price of those bonds, which prompted more margin calls and more forced selling. By the end of last week, the interest rate spread on those securities -- the difference between their yield and that of risk-free U.S. Treasury bonds -- had jumped four, five, even 10 times the normal rate....

The Fed hopes that by injecting $400 billion of liquidity, it can help restore the more normal functioning of credit markets and encourage banks to lend again rather than hoard their cash. For it is only when bank lending and credit markets have returned to more normal operations, say Fed officials, that the beneficial impact of their interest rate cuts can be transmitted to the economy. And they leave little doubt that, despite a heavy dose of monetary medicine already in the pipeline, they intend to add another dose at their meeting next week.

It's anyone's guess how long this credit crunch will last, but the chances are that we'll have several more market meltdowns and Fed rescues before it's over, probably in the fall. Until then, the dollar will continue to get hammered and stocks will continue their fitful decline. And if the last two financially induced recessions are any guide, it will be well into 2009 before the economy hits bottom, followed a couple of years of slow growth and "jobless" recovery.