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Cumberland as a real estate investment

October 3, 2007

Investor Hot Spots
by Kenneth R. Harney
August 7, 2006

Forget the splashy high-profile, big markets if you’re tracking where home real estate investors are putting their money these days. Forget Miami, Naples, Vegas, San Diego and LA. Start thinking about lower-key places like South Bend, Indiana; Pocatello and Boise, Idaho; and the northern Maryland panhandle.

According to a new analysis of mortgage data for the first quarter of 2006 nationwide, investors in those four local housing markets accounted for higher percentages of total purchases than anywhere else in the country: More than one out of five purchases in each went to investors.

The study was done by Loan Performance LLC, a subsidiary of First American Real Estate Solutions. Loan Performance has access to a vast database comprised of millions of active, ongoing mortgages, through cooperative agreements with virtually all major lenders and Wall Street investment banks. That huge database allows it to essentially look inside the mortgage market in real-time, observing emerging trends in delinquencies, types of loans being originated, loan to value ratios, credit scores and many other characteristics on a market-by-market basis.

In its latest analysis, covering new mortgages originated for home purchases between January 1 and March 31 of this year, Loan Performance found a stunning 25.8 percent of all mortgages financing home real estate purchases in the Cumberland, MD-eastern West Virginia market went to people who identified themselves as investors, not primary owner-occupants. In South Bend, Indiana, investors accounted for 23 percent of all new purchasers. In Boise, Idaho it was 20.8 percent and Pocatello 20.2 percent.

By contrast, Miami and Naples, Florida, where investor purchases of condo units and preconstruction contracts were all the rage during the peak boom years of 2003-mid 2005, investors accounted for just one out of six new purchases during the first quarter of this year.

Although Loan Performance offered no theories about current investor patterns, the top several hot spots — at least as percentage shares of the total local market — appear to share some common characteristics. Real estate prices in all of them are moderate by national norms, and rental properties tend to cash flow better than, say, Miami condos, which come with high price tags and negative cash flows for investors. Also real estate appreciation in places like Boise, the northern Maryland panhandle and West Virginia never went off the charts during the boom years, but maintained steady, moderate growth. Second home purchases may also have played a role in the Idaho, Maryland and West Virginia markets.

Loan Performance also looked at the markets with the highest percentages of higher-risk negative amortization and interest-only mortgages during the first quarter of 2006. West Virginia topped the neg-am list with more than half of all new home loans — 51.4 percent — carrying negative amortization options. In Wyoming 26.2 percent of all new purchase loans were neg-am, as were 22.5 percent in Nevada, 21 percent in California and 15.6 percent in Florida.

Neg-am loans allow home buyers to make monthly payments that are less than the amounts needed to amortize or pay off the debt over the stated term of the loan. Typically neg-am loans either require balloon payments at some point during the term, or in the case of popular payment-option loans, to “reset” at some point to a payment level sufficient to pay off the debt within the stated term of the mortgage.

By depressing monthly payments, neg-am loans allow purchasers to acquire properties that they might not otherwise be able to afford using a traditional mortgage. For that reason they are popular with buyers and investors in many markets, but also carry elevated risks of default should borrowers be unable to make payments after the “reset” date, refinance into affordable replacement loans, or make balloon payments.

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