New Foreclosure Rules

New Foreclosure Rules

Here is an interesting new policy change coming from
Fannie and Freddie.  If you have
been trying to buy a foreclosure home recently, you have probably been just as
frustrated as I am.

When they first hit the market, most foreclosure homes are
listed about 10%-15% under “market price”.  This is mainly to make sure the asset does not sit on the
market a long time and lose even more money, but also in some part because a
foreclosure buyer is taking some level of risk since the seller is not
testifying to the property condition and reports are non-existent.

The low price has attracted a lot of investors, who in
many cases are buying with all-cash, or first time buyers.  Of course, the all-cash investor has a
strong offer through a quick close and no appraisal; this puts the first-time
buyer at a big disadvantage and what we’ve seen in the market is a “feeding
frenzy” where investors are blocking normal buyers out of the market

So to help make situation more fair, the latest announcement
from Fannie/Freddie is that they will force a 15-day waiting period before
hearing any investor offers so normal owner-occupied buyers can be allowed to
make a reasonable offer.  Great

I wonder if this policy change is a result of many complaints
from eager buyers.


[Deal of the week] Santana Row Foreclosure

If you have been waiting for the
opportunity to live the Santana Row lifestyle, here is the most affordable
entry point we have seen.  Here is
a 2 bedroom 2 bathroom unit overlooking the main street, with an outdoor patio,
just above the new LB Steakhouse.


334 Santana Row #201, San Jose,
CA 95128

MLS #80954192

2 Bedrooms, 2 Bathrooms

7 years old

1179sf living space

435sf lot

Why is it a good deal?

It is the lowest priced 2
bedroom unit we have seen come on the secondary market in Santana Row since
these were originally built in 2002. 
These condos are always in high demand and sure to grow in value over
the long term.

What is the risk?

Competition.  Actually, the listing agent tells me
they already have 4 offers and it’s just the first day on the market
today!  The price is likely to go
into the high $500k or low $600k range.

Who is the best buyer?

Santana Row is a lifestyle.  You need to want to live the active,
small-condo kind of lifestyle.  A
young and active couple, 2 roommates looking to get started, an older couple downsizing
into the simple-life, all these are good buyer candidates.  I also believe an all-cash investor is
in a strong position to use the power of cash to negotiate a successful acceptance
from the asset manager since there is heavy competition at this price.


Is there a tidal wave of foreclosures coming?

I get this question all the time.  The media keeps mentioning something
called “ghost inventory” or “shadow inventory”, referring to the number of
homes that are bank-owned but not yet for sale on the open market.  Some people believe that this growing
number of homes represents an overhang of inventory that will bring prices down
even lower as they release them for sale. 
I don’t believe a tidal wave is due to hit the Bay Area — let me


First off, banks and asset managers have no interest in
seeing declining home prices, especially if they believe they will continue to
take back more houses through foreclosure.  So “dumping” a bunch of new inventory and driving down
prices will only hurt prices further for homes they currently have or will be
taking possession of soon.


Perhaps the most important reason we won’t see a wave of
foreclosures is due to the bank’s own loss-recognition policies.  From my limited understanding, when a
bank reclaims a home through foreclosure, the property becomes a managed asset
to the bank, but the loan that went bad has not yet been fully recognized
through their accounting rules as a loss. 
When the asset is sold, then they need to recognize the actual loss
(difference between net after sale and the value of the original loan).  Of course, the bank can’t sell every
property they have and recognize their losses immediately because it would
devalue the bank completely.  As a
result, Wall Street would hammer their stock price and question management of
the company.  They have no choice
but to slowly recognize these losses over time.


So, for these reasons, I believe we will see foreclosures
continue to trickle onto the market at a controlled pace, keeping prices stable
and generating opportunities for buyers like we’ve never seen in our