Tom Elder, REO Insurance, All Risks, LTD Lender Force Placed, Wholesale Insurance

One of the toughest properties for banks to find coverage on these days is vacant foreclosed commercial properties, which have grown in numbers over the last several months and promises to continue to be a problem for the upcoming year.

As the Senior Financial Institutions Underwriter for All Risks, Ltd. I see this day in and day out. A bank has a package policy that has been allowing them to insure their foreclosed properties and now all of a sudden they submit a commercial vacant property and their current policy declines it. This leaves the bank scrambling for coverage and has their insurance representative looking in all of the usual places. The problem is that they will have a hard time finding coverage with the usual list of carriers they would approach.

The underlying issue is the increasing number of foreclosures that are swelling the market. The commercial market has remained, up to this point, relatively unchanged when compared to residential foreclosure rates. With the last few months of 2009 offering an increase and CMBS (Commercial Mortgage Backed Securities) delinquency levels on the rise, we can anticipate a much larger and more rapid increase in 2010. It has become apparent to most experts that the commercial foreclosure curve is really just beginning. When you combine these facts with the small and medium business failure rates and the necessity for management companies to lower rents to keep occupancy, you have the makings of another foreclosure storm, only this time with commercial real estate.

This has lead traditional insurers to shy away from the vacant commercial foreclosure risks all together; leaving banks and lenders on their own to find adequate coverage to protect their interests in the foreclosed property.

So where do they turn? Lender Placed and Foreclosed property insurance programs. These are programs designed by insurers to meet the needs of this risk market head on. The policy is written as a master policy. (A master policy is a one time annual policy that is written to cover the banks entire portfolio as needed. This type of policy should not be confused with blanket coverage. With a master policy the properties still have to be reported to the policy, they just are not individually underwritten.) The reporting is done in many ways but the best and most efficient programs offer a web based reporting tool that lenders can log into 24/7/365 and add and remove properties as needed.

One of the most appreciated benefits of these types of insurance programs is that they offer cash flow management control for the lending institutions. These types of policies offer the convenience of monthly billing for the insured. Monthly billing means that the bank is only paying for insurance that they use, as opposed to the traditional method of paying for an entire year up front for each and every property. This allows a bank to minimize the capital outlay for insuring their portfolio of foreclosed properties.

A lot of aggravation and lost money can be saved at the end of the day , if banks and their insurance representatives were aware of these programs and working with experts who understood the type of risk they are insuring as opposed to trying to make it fit into coverage that was not intended for their needs. All Risks, Ltd. offers one of the most comprehensive and well thought out Lender Placed and Foreclosed (REO) insurance programs on the market today.

Feel free to contact me with any questions or even for a review of your current program to see if there are gaps in coverage that leave you unnecessarily exposed.

Tom Elder

Senior Financial Institutions Underwriter

telder@allrisks.com

Although foreclosures slowed pace slightly in May, it more than likely will be a short lived leveling of the market. With interest rates trying to creep up and refinance options dwindling more and more, homeowners are "stuck" with payments they can't afford and no where to turn. Add to this the increased pressure for lenders to get their balance sheets cleared of toxic assets (non-performing loans and foreclosures), and you have a perfect storm that is going to cause great turmoil ahead in the housing market.

Despite every effort to keep rates low, they are still creeping up and eventually will go WAY up. Some are predicting mortgage interest rates in the double digits coming out of this super imposed low rate era. Very simply, as we continue to print money and create stimulus, we decrease the value of our dollar. With this decreased value in the dollar, the cost of borrowing money will have to increase. In fact, the cost of everything will have to increase. It is called inflation (created in part by increasing the amount of currency in circulation). This will close down the refi market, bring to a crawl the already slow paced existing homes purchase market and dry up what little builder (new homes) market is left. Keep in mind, however, people did buy houses when interest rates were 19%, just not as many.

The sky is not falling, but the economic laws do still apply here, so ignoring the facts in evidence won't change what has to happen. What goes up will correct. In a stable real estate market we go up 7% and correct 2% and we still gain 5% appreciation on our homes. In the markets of 2001 to 2005 property appreciation was insanely high. Some areas were seeing 37% property appreciation per year for 3 years in a row. When you have this type of sharp rise in the market you have to be prepared for an equally big correction. That correction is what we are seeing now.

So, if you bought a house in 2005 for $400,000, it might only be worth $292,000 in your market. This is the problem most people are seeing in their markets. It is making it easier for people to just throw their hands in the air and walk away from the property. That is what is being seen in record numbers, and yet another contributing factor to the rise in foreclosures. This trend should be expected to continue to gain momentum through the better part of 2010 as home prices continue to fall, struggling to find a bottom to this out of control spiral.

What is the bank's answer? Modification of the loan terms to create affordable payments and keep people in their homes. In theory it is a great idea and a great option for some consumers. The only problem is that it is not working. The lending industry is seeing a 50% re-default rate on these modifications and this rate is expected to soar to as much as 75% re-default. The unfortunate reality is that there are more factors coming into play than just bad loan terms. The U.S is about to hit a 10% unemployment rate. This is alarming and also one of the major contributors to the sharp increase in the default rate of mortgages and ultimately the sharp rise in the number of foreclosures.

Within this crisis, the new boom markets arise. Many agents now specializing in foreclosures, short sales, and distressed sales are reporting income levels better than many years in "the boom". There are many new markets that will arise out of this transforming economy. To be truly GREAT at anything, you have to be able to look a bleak situation and be able to find the opportunity within to arise victorious. Stay focused on opportunity, educate yourself with the facts, and formulate a strategy.

Thanks again for reading

Tom

A record 342,038 U.S. foreclosure filings, default notices, auction sale notices, and bank repossessions were reported for the month of April according to RealtyTrac, the leading on-line marketplace for foreclosures. This report comes right on the heels of March's record number. The report further shows that 1 in every 345 U.S. housing units received a foreclosure filing in April. RealtyTrac says that this is the highest number of filings since they began reporting in January of 2005.

The States leading the foreclosure charge are Nevada, Florida, and California in that order. Nevada boasts that 1 in every 68 housing units received a foreclosure filing in April, while Florida comes in at 1 in every 135 units and California at 1 in every 138 units. While Nevada residents might be rejoicing that they saw an 18% decrease from last month NV foreclosures are still at a 111% increase from April 2008. Meanwhile, Florida got smeared with a 37% month over month rise and a 75% rise over April of 2008. California might be seeing some stability return with a 10% decrease in April and only a 42% increase over April 2008.

What does all of this mean for the market? As they say on Groundhog Day, six more weeks of winter. In recent month's as much as 50% of home sales nationally have been from distressed proerties. We will see this trend continue and housing prices will continue to fall for 2009. Banks that were slow in the foreclosure process, waiting to see where all of the current legislation and stimulus plans fell into place, are coming off the fence and moving forward aggressively with the foreclosure process. We will see this trend continue through 2009 and the current sharp spike in foreclosure volume will continue through the next quarter or two at minimum as banks become more aggressive to "clean" their balance sheets and prepare to start anew on the other side of the current recession.

Tom Elder has joined the All Risks National Specialty Programs unit as the lead financial institutions underwriter for the new nationwide REO/Foreclosure and Lender Placed Property Insurance Program. At All Risks, he will target commercial banks, credit unions, savings and loans, mortgage banks, and financial institutions that service and/or invest in mortgage loans.

Previously, Elder worked for MetLife Bank as a regional reverse mortgage consultant. Prior to that, he owned a mortgage company for six years.

The REO/Foreclosure and Lender Placed Property Program is available nationwide on an admitted and non-admitted basis with an A.M. Best "A XIII" rated carrier. Features include simple Web site administration, monthly itemized billing for all coverages and transactions, premium earned on a daily prorated basis, special coverage and retro rating plans. All Risks offers a customized program with a variety of limits, deductibles and coverage options.

It was a good time in the boom for rehabbers and hard money lenders alike. There were plenty of properties to find and an easy profit to be made. This combination of things made it very appealing to some to make hard money loans or private money loans. I would class the folks who moved into this market as either amateurs or seasoned pros.

Being in a sector of the market that directly observes the fall out from the bust real estate cycle that we are currently in, I get to see first hand the mistakes of the amateurs that decided to embark on the private lending adventure.

Although there are many things that could be pointed to as potentially avoidable mistakes if planned properly from the beginning, I am going to focus on the foreclosure process and avoiding areas of exposure that are left if not properly planned out.

Above all else, whenever you start a new business venture, of any sort, you should always imagine the worse case scenario and plan backward from there. There should also be an exit strategy planned long before an entrance strategy is ever executed. With private money lending the worse case scenario is a default on the loan and potentially having to foreclose on the property. One of the biggest mistakes made by people getting into private money lending is to lend the money personally and not forming a legally incorporated entity whose only line of business is to loan commercial money.

Why on earth could it matter (other than the obvious liability exposure). One of the first things to happen when the loan goes into default is that the taxes and homeowner's insurance is probably not getting paid either. When the insurance lapses on the property, you, the lender, no longer have your interest protected in the property. Should the home burn down or whatever, the buyer walks and you are pretty much out the money. Especially if the buyer goes bankrupt.

What has to happen at the time of lapse is that a force placed or lender placed insurance policy has to be placed by you to protect your interest in the property. The problem? You will have a VERY difficult time finding this type of policy through personal lines. This is typically a commercial lines product, which means very simply that an individual would typically not qualify for coverage. The alternative? You could get a standard homeowner's policy, right. Wrong! It will be difficult to get homeowner's insurance on a property that you don't technically own. You won't be able to do that until the foreclosure process is complete. In most states that is a very lengthy process. That is a very long time to have no coverage on the property and hope that nothing happens.

A little planning up front can save a lot of agony in the long run. Set up a legal entity and only lend through it. This makes the whole process much easier, if the dreaded worse case scenario happens. It may not be impossible to find coverage as an individual for this, but it will just seem like it is.