In these days of record foreclosures, many people are losing their homes because they can no longer afford to pay the mortgage payments. However, although this seems like a losing situation, there are some people who are thriving as a result of foreclosed homes. Some people in the real estate game are buying up foreclosures and reselling them for a profit. There are also some people who are in need of a home and benefiting from foreclosed homes. Here are four advantages to buying a foreclosed home.

Better Chance of Negotiation
With all of the foreclosed properties, banks are often anxious to get rid of some of the homes on their list. As a result, you have a better chance at negotiating with them on the price and conditions of the sale. This means you can often talk them into making repairs on the home or other minor changes if you agree to buy it. In some cases, the bank may even be willing to pay part or all of the closing costs.

Great Price on a Fixer Upper
If you enjoy working with your hands and you are good at fixing homes, you can get a great deal on a foreclosure that is in need of repairs. Even if you do not plan to live in the house, you can fix it up and sell it for a profit. Many investors are doing that these days because you can fix up a home in a matter of a couple weeks and make a profit of thousands of dollars!

Moving In Immediately
Most foreclosures are empty homes because the previous owners have already left it behind. Vacant homes are great because you can start moving in as soon as you finalize the paperwork. This is easier than waiting until the current owners move out because you do not have to pay your own rent or house payments while waiting for the owners of your new home to move out.

Flexible Financing
Banks do not want foreclosures on their accounting books. The longer they are on their books, the more anxious they are to get rid of them. This can be great for qualified buyers. Banks will be willing to work out more flexible financing options with potential buyers just to get the foreclosed homes off of their hands. Keep this in mind when searching for the foreclosed homes that you are considering purchasing.

If you want to take advantage of a foreclosed home in your area either for your primary residence or as an investment opportunity, now may be the best time to do it. Mortgage rates have been dropping recently and they are currently under five percent. Shop for a foreclosed property today to take advantage of the low rates and other incentives going on in the mortgage industry right now.

Starting June 1, homeowners who are in the foreclosure avoidance program will need to present documentation of their finances before they can modify their mortgages. This announcement was made by the Obama administration earlier this week.

Before these stricter regulations take place, mortgage borrowers can ask to have their interest on mortgage rates lowered and they can extend their loan terms for a trial period without any documentation of their finances. Starting June 1, however, homeowners wishing to do this will need to provide several pay stubs and other financial documents in order to ease the terms of their mortgage for a modification. Under the current system, banks and other lenders are supposed to collect income and other financial information for a three month period. Following that, if the borrower paid three lowered payments and provided the proper paperwork, their mortgage modification could become permanent.

Unfortunately, the current system is not working for either the homeowners or the lenders. Lenders reported that homeowners were not providing adequate documentation of their finances while homeowners complained that banks were asking for too much and even when they did submit the proper paperwork, the banks lost it. In the months between the spring of 2009 and December of 2009, lenders offered about 1.2 million mortgage modifications to homeowners for a trial basis. Only about 66,500 homeowners received a permanent modification, according to the United States Treasury Department.

The new regulations are designed to provide a "simple, standard package of documents" for homeowners to fill out when they are requesting a modification. Lenders could use these documents to determine if a homeowner qualified for a modification. Also, once the homeowner pays three lowered payments at the modified rate, their loan would automatically be permanent.

The federal government is hoping that these modifications will help reduce the number of foreclosures occurring throughout the country by giving homeowners other options. It is backed by billions of dollars of government subsidies and it helps reduce payments to about one-third of a homeowner's household income. The government hopes this will help at least three to four million American homeowners who have gotten themselves into financial difficulties and cannot make the full mortgage payments each month.

Lenders are expected to cut interest rates and extend the loan terms to 40 years in order to get subsidies from the government to finance this program. They are also required to suspend payments on part of the overall amount that the homeowner owes on the loan. In addition, lenders will need to determine if the borrower would be better off financially by going through the mortgage modification or going through foreclosure.

Is it a sign that the economy is on the road to recovery when 24 percent fewer homeowners in The Golden State are defaulting on their mortgages? According to a report on ABC News earlier this week, the fourth quarter or 2009 was a good three months for homeowners since about a quarter of mortgage borrowers were able to keep up with their payments without defaulting.

Between October and December, there were more than 84,560 default notices filed on mortgage loans. That might seems like a huge number, but it is quite a significant drop from the nearly 111,700 default notices filed from July to September of 2009. However, the number of defaulted notices in the fourth quarter of last year is up by about 12 percent over the last quarter of 2008.

The new numbers show a consecutive decline in the number of mortgage defaults throughout California. On the other hand, many homeowners in higher-end neighborhoods are receiving default notices as these pricier homes are getting harder and harder to pay for with the current job market. Although the homeowners in these areas were able to hold off the defaults longer than the homeowners in entry-level positions, those with more financial resources are starting to feel the pinch of the recession and the resulting job losses as well.

About 35 percent of the default notices from the last quarter of 2009 occurred in some of the more affordable areas of California. That number is a significant drop from the 52 percent of defaults from last year at the same time. The upscale areas of Orange County saw an increase in default notices with about 24 percent more homeowners in the affluent homes were not able to make their payments. Other areas that saw a rising number of defaulted mortgages include Santa Barbara, Santa Cruz and prominent towns along the coastline.

More than 51,000 homes have been lost to foreclosure in the last quarter of 2009. That is a two percent increase over the previous quarter which saw about 50,000 homes foreclosed on due to non-payment. During the same period in 2008, only about 46,180 homes were lost due to foreclosure, which equals about 11 percent less than the current standings.

So while it looks like things are starting to turn around, we are still not where we were just two years ago. Our foreclosures are on the decline but they are still outnumbering the number of foreclosures in 2008. Of course, any progress is better than nothing and we are excited to see something turning around in this economy. As long as these numbers continue along these paths, the market may stabilize itself and become better than it was just a few years ago. This is just something we will have to observe and see what happens. Along with the lowered mortgage rates, these new developments could be ideal for the housing market.

For those optimists talking up a housing recovery they might want to stop and take a deeper look into the housing crisis. Analysts at the Amherst Securities Group believe the market faces about 7 million properties that are likely to be foreclosed on by lenders which have yet to hit the open market. The huge amount of forecloses in the pipeline create a shadow inventory of houses (homes that need to be sold but are not currently on the market). There are three sources that contribute to a huge shadow housing inventory. The first cause is the coming wave of forecloses which are due to a majority of ARM's mortgages due to reset during 2010 through 2012. A second source of shadow inventory will come from current home owners who are struggling to make mortgage payments, who plan to put their homes on the market once the housing market makes a small bounce and to a lesser extent baby boomers retiring will downsize and put their homes on the market once there is a bump up in the housing market. A third source of shadow inventory will come from “strategic defaults”, this is when someone who can make there mortgage payments decides to walk away and default on their mortgage because they are upside down on the house (owe more on the house then it is worth). This likely to occur in a case were a short sale is not feasible, and a homeowner owes $300K on a house now worth $150K which they bought just a few years ago. They figure why make a mortgage based on $300K when the house is now worth half, they can take a hit to their credit and rent the same house for half of what the mortgage payment was. This entire shadow inventory will halt the housing recovery and lead to the next leg down in the housing market.

The shadow inventory reflects mortgages already being foreclosed upon or now delinquent and likely to be and, assuming no other properties are on the market, it would take about 1 ½ years to sell this inventory based on the current pace of existing-home sales.

There have been a number of economic reports hinting at a stabilization of the housing market during the 4th quarter of 2009. From May through October, the S&P/Case-Shiller 10-city index of home prices rose each month; May was the first month-over-month increases in values since 2006. A troubling sign for those claiming a housing recovery is underway is that new home sales were down 7.6% in December and in 2009 new home sales were the weakest since 1963.

And adding to the concern is that this dip in sales occurred while the $8,000 first time home buyer credit is still in effect.

The favorable seasonality will be over come the 4th quarter housing numbers and the reality of a 7-million-unit housing shadow inventory is likely to set in. This is already underway with the S&P/Case-Shiller 10-city index showing a fractional gain for October and a .25% decline in November, the pace of the decline should increase over the next few months. However it is likely the economic housing numbers will be misleading over the next few months and a majority will say it is the housing market turning around and recovering. I feel this is not the case, we are seeing a temporary stabilization of the housing market. The uptick in the housing numbers are due to banks slowing down the filing of forecloses due to the government loan modification program, the spring/summer seasonality strength of the housing market, buyers rushing to take advantage of the soon to expire $8,000 first-time home buyers credit and the record low mortgage rates thanks to the Federal reserve buying treasuries to help keep mortgage interest rates artificially low but that program is due to be over during March 31st, 2010.

When the shadow inventory is unleashed and government reduces or removes the current stimulus measures the housing market correction will continue. A major effort was been made by the government to temporarily stabilize housing prices. The next leg down in the housing market is near. However the government can possibly extend these housing stimulus efforts which could slow or delay the next move down, but how much more is the Fed willing to spend?

The Federal Reserve released its Federal Open Market Committee statement today and the most noticeable aspect was confirmation that it is winding down its purchase of mortgage backed securities.

The statement says:

"To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets. "

The risks of ending this program are pointed out in this article, and include higher mortgage rates. Indeed, our projections show that mortgage rates may rise between 50 to 100 basis points once the Fed stops buying mortgage backed securities. Average national mortgage rates are at 5%, and have actually fallen over the past three weeks.

The Fed also confirmed that it will keep the Fed Funds rate low for the foreseeable future.

"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

This news does not change our forecast of rising mortgage rates and flat deposit rates for the next 6 - 12 months.

You can read the full Fed statement here.

We reported on the dropping mortgage rates yesterday, but the low rates do not always mean that you can get a home loan these days. Credit has gotten tighter as banks have increased restrictions on individuals and companies. There are four basic obstacles to getting a home loan even for some qualified buyers.

Credit Problems
If you have any credit problems at all, now is the time to get them fixed before applying for a home loan. These days, you have to have near perfect credit in order to qualify for a home loan. Late payments on credit cards, utility bills and other debts can drop your credit score and make you a less attractive risk for a mortgage loan.

Down Payments
One of the biggest obstacles to getting a mortgage loan these days is the down payment aspect. New home buyers have trouble coming up with a sizable down payment for a home. With most traditional mortgages, you need at least a 10 percent down payment before you will get approved for a house loan. With the tighter restrictions, you may need 20 percent or more in order to qualify for a home loan. If you have bad credit or damaged credit, you may need even more than that.

Income
One aspect of a mortgage is based on the potential borrower's income. Borrowers who have a low income may not be approved for a loan big enough to have a mortgage if their income is not high enough to make the monthly payments. Another income issue is the stability of the income. If you are trying to borrow money for a mortgage but you have just started a new job or if your job is unstable, you may have a problem qualifying for the mortgage. This often happens in cases in which a potential borrower is self-employed and they do not have the paperwork or proof to prove their income over previous years. In these cases, you may need a larger down payment in order to bring the monthly payments down or you may need to provide the proof of your income and its stability so the lender knows you have the ability to make the payments.

Appraisals
When you are trying to get a mortgage, part of the approval process relies on the home's appraisal. If the lender feels the appraisal is too high, you may have a problem getting the loan. However, you can always shop around and consider other lenders. Some lenders are willing to take the risk while others are not.

With all of these obstacles to getting a home mortgage, there are solutions. The solutions may take some work and dedication, but they are not impossible to accomplish. With the credit aspect, paying your bills on time for the next six months to a year will bring your credit up. With the down payment aspect, you may be able to borrow some money from family members or apply for federal monies set aside for first-time homebuyers. The income problem may be a little harder to overcome, but it can be done. Just keep trying and you can take advantage of these dropping mortgage rates while they are still effective.

After a nine month historical run up to the tune of 70% plus gains in the stock market. Let’s look at seven reasons why I think the next sustained market move will be down:

1) Home building by any standard has exceeded usual norms the last five years or so and we now have a large inventory overhang, decreasing existing housing sales and increased foreclosures, and multiple other problems facing home builders. Plus shadow inventory, it is basically banks and homeowners who want to sell properties but are holding homes off the market till the market bounces. Some estimates of this shadow inventory are staggering.

2) Debt, debt and more debt. Under Greenspan and Ben our debt to GDP ratio climbed from 1.25X to 3.25X. Stop and think about that stat for a moment. And it does not include the incredible debt load the government has added this past 18 months. Who will pay that debt and how is that debt going to be paid.

3) Commercial real estate. In the U.S. we have roughly 50% more retail space per person in this country than the second closest country. If you believe private real estate was overbuilt, you have not seen anything yet. Commercial real estate is still not near a bottom and it is incredibly overbuilt. We could be looking at a decade or more before this area of real estate comes back to where it belongs.

4) Adjustable rate mortgages (ARMs). A majority of the option ARMs are yet to reset. These are the private mortgages where the borrower can choose to pay just interest or even less. There is some sense that the low rates now will help, which they will, but when you are resetting from interest only or less to interest payments and principal payments on an increased balance, then low rates are not going to save you. A ton of these will reset from 2010 through 2012 and beyond.

5) Unemployment problem is still not improving; the good news is unemployment does not seem to be getting worse the 4 week average of initial claims has been on the decline. But no matter how the media spins it 400K-500K initial unemployment claims per week is not a sign of a turn around. Initial claims of 350K would signal some jobs growth and a net gain in jobs.

6) Market sentiment has become to optimistic. Recent surveys of economist’s predictions continue to be too optimistic. And sentiment of the individual investor, two weeks ago reached levels of optimisms not seen since 2007.

7) Corporate profits, the bottom line improvements for companies in the 2^nd half of 2009 have been largely due to cost cutting (like layoffs) as opposed to increased sales and growth. This does not signal a recovery and a new run away bull market.

The Bottom line is fundamentals and the stock markets are out of alignment. The stock markets next sustained move is down; the stock market is over do for a correction of at least 10-15% that would take the S&P 500 down to a 1040-965 level.