Real Estate Blog

You gotta love Jon Stewart of the Daily Show. He is making news more accessible to young people (my kids and, of course, me) by delivering it as entertainment. He’s had some interesting guests on the show to cover the housing market. The housing market situation is so ridiculous, it is a natural fit on this kind of show.

John Stewart: People would come in and say “I don”t have good credit, or a job, and my car has been repossessed and I’d like a house, what do you think?

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Lender: Ok

Last night I saw the interview with Richard Bitner who is humping his book, Confessions of a Subprime Lender. I was in a BN a few weeks ago and almost picked it up. I had read the interesting review in Daniel McGuinn’s Newsweek Resident Expert column in the spring but was already OD’ed from subprime talk.

But after hearing the interview last night, and the fact that he speaks with such clarity, I would imagine it’s a fun read. He was a wholesale lender, providing mortgage money to mortgage brokers…and guess what?…underwriting standards eroded.

Looks like another reason to delay reading War & Peace.

See the clip [it starts at 15:00]

Read the original:
[This Just In] There IS Meaningful Housing News On Comedy Central

The Federal Reserve finished crafting their subprime mortgage rules regarding Truth in Lending called Regulation Z. I am doubtful that this rule would have been updated if we weren’t experiencing the current mortgage market turmoil.

Because this is such an important issue, it will take effect on October 1, 2009 (more than a year from now.)

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“The proposed final rules are intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting sustainable homeownership,” said Federal Reserve Chairman Ben S. Bernanke. “Importantly, the new rules will apply to all mortgage lenders, not just those supervised and examined by the Federal Reserve. Besides offering broader protection for consumers, a uniform set of rules will level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers,” the Chairman said.

Ask anyone whether they thought these types of rules would already be on the books (for high priced mortgages - 1.5% above the “average prime offer rate”) - here are some excerpts:

• Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value.
• Require creditors to verify the income and assets they rely upon to determine repayment ability.
• Ban any prepayment penalty if the payment can change in the initial four years.
• Require creditors to establish escrow accounts for property taxes and homeowner’s insurance for all first-lien mortgage loans.

And here are rules for all loans, not just high priced:

• Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home’s value.
• Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees.
• Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer’s principal dwelling, such as a home improvement loan or a loan to refinance an existing loan.

Is it just me or do these rules seem crazy obvious? Why aren’t they on the books already? Why on earth do these rules only apply to subprime mortgages? Not Alt-A or Prime?

Speaking of scapegoating subprime, and something about the squeaky wheel getting the grease, lets talk oil and the evils of the dreaded speculation.

And the tale of two economies…

Highlights of Regulation Z [Federal Reserve]

The rest is here:
[Subprime Truth In Lending] From A To Regulation Z

There has been some joy in the real estate marketplace during the past few days, in large measure because the National Association of Realtors announced that home sales rose in May.

Read more:
Why Shun Investors?

My business partner John Cicero, of Miller Cicero, our commercial appraisal firm ran across a pretty interesting book released by McGraw-Hill last year, a well respected publisher.

Here’s an excerpt from the book: The Complete Guide to Financing Real Estate Developments (Hardcover) by Ira Nachem (2007, McGraw-Hill, New York), List price $79.96.

Since appraisers want to continue to receive assignments, they generally have a desire to satisfy you, their client. You sometimes can play on that desire and get the appraiser to produce a report with values a bit higher (or lower) than he otherwise would report….If you want to make sure that the appraiser is not undervaluing the property, you should tactfully indicate your concern up front…

In other words, its important to pressure the appraiser - in fact, it is part of a strategy to be a successful developer. Of course with the changing credit market landscape, I would think the lessons learned from this book are now limited. Still, it is quite shocking to me how cavalier this quote is and how commonplace it probably was.

For more details, take a look at John’s post over at my other blog Soapbox.

See the original post:
Even Storied Book Publishers Didn’t See The Pressure

Pirates of several hundred years ago have been getting a lot of attention of late via the 3 Johnny Depp/Disney movies.

Well, apparently pirates formed some of the first petri dishes of modern economics and democracy according to a new book “The Invisible Hook: The Hidden Economics of Pirates” written by an economics professor at George Mason (hat tip to Freakonomics).

The book caught me eye, arrgh, as someone who fancies the likes of (sorry, I digress) Talk Like A Pirate Day each September 19th as well as my friend Chris Miles’ site TalkLikeAPirateDay.com. The “founders of International Talk Like a Pirate Day acknowledge that there is, in people who love to say “Aargh,” a yearning for a certain kind of freedom.”

Aargh!

Presidential candidates, take note: Long before they made their way into the workings of modern government, the democratic tenets we hold so dear were used to great effect on pirate ships. Checks and balances. Social insurance. Freedom of expression.

The pirates who roamed the seas in the late 17th and early 18th centuries developed a floating civilization that, in terms of political philosophy, was well ahead of its time. The notion of checks and balances, in which each branch of government limits the other’s power, emerged in England in the Glorious Revolution of 1688. But by the 1670s, and likely before, pirates were developing democratic charters, establishing balance of power on their ships, and developing a nascent form of worker’s compensation: A lost limb entitled one to payment from the booty, more or less depending on whether it was a right arm, a left arm, or a leg.

Aside from walking the plank analogies, what the heck does this have to do with housing?

I’m getting to that.

If you think about it, one of the arguments against anything in the form of a bailout, is that we let the free markets decide (aka “Aargh”). Good honest hard working people should not be asked to foot the bill for other’s greed. I agree.

But all the “help” done so far is explicitly presented as anything but a “bailout” which is not true. That’s because any “fix” is essentially a bailout.

In a pure sense, the “anti-bailout” sentiment is based on the idea that people took advantage of the lending system to their own personal gain at other’s expense so they should suffer their free market fate.

If people broke laws, they should be punished. But what if they didn’t and gamed the system to its full advantage because there were no regulations or significant repercussions?

My entry into blogging in 2005 was born out of frustration that people around me were gaming the system “legally” (definitely not ethically) and seemingly nothing could be done about it or no one in government was willing to or understood what the problem was. Until now.

Which brings me to my next point.

Free markets don’t work if there aren’t guidelines (remember that quote from Pirates of the Caribbean?). The problem with the lending environment of the past 5 years was the lack of approperiate regulation, oversight and enforcement. There was not a level playing field and risk could be shifted off to unwitting (misinformed, naive or stupid) investors.

In other words, it was a systemic problem.

Yet a business enterprise made up of the violent and lawless was clearly problematic: piracy required common action and mutual trust. And pirates couldn’t rely on a government to set the rules. Some think that “without government, where would we be?” Leeson says. “But what pirates really show is, no, it’s just common sense. You have an incentive to try to create rules to make society get along. And that’s just as important to pirates as it is to anybody else.”

Unless all parties have skin in the game, whether it is lenders, investors, borrowers, appraisers, mortgage brokers, mortgage bankers, investment banks, government, regulators, GSEs, ratings agencies, there is no financial democracy and we will have another systemic breakdown.

In other words, we need a workable regulatory structure.

The pirates were a lot more innovative than we probably give them credit for - you do need to lose an arm or a leg if you do something wrong.

Aye…

See original here:
[Bailing Out The Housing Ship] Pirate Economics And Democracy

Lost a reliable Internet connection at home for the past 3 days so my posting has been non-existent (but I did change a few lightbulbs with my free time)

Back in the day, I loved to read books like Barbarians at the Gate, Den of Thieves and Liars Poker covering the truth and mythology of Wall Street (now I read books like Pontoon). Michael Milken was directly or indirectly connected to many of those stories, as well as the firm he worked for Drexel Birnham Lambert because of the financial vehicle he championed, the fabled junk bonds.

When the subprime crisis first became kitchen table talk last summer, initially there was discussion that it was another “junk bond” crisis. I cringed because junk bonds weren’t bad in and of themselves. The investors that used or purchased them got into trouble, because didn’t appreciate the risks associated with them. Higher returns, equals higher risk. Sounds a lot like subprime market participants doesn’t it?

Andrew Ross Sorkin’s excellent article in the New York Times today called Junk Bonds, Mortgages and Milken addresses this issue:

“The financial crisis we’re in today stems from the invention by Drexel Burnham Lambert of the junk bond,” Martin Lipton, the superlawyer who co-founded Wachtell, Lipton, Rosen & Katz, said derisively at a conference last month. “You can draw a straight line from Drexel Burnham to the financial world today.”

Miliken disagrees:

Critics who compare the subprime debacle to the bubble in high-yield, high-risk corporate bonds that Drexel helped inflate two decades ago are “people who don’t understand markets very well,” Mr. Milken said. He suggests that “their rationale is that both types of financial instruments are risky.”

And he says junk bonds, or those rated below investment grade, “have little in common with mispriced subprime mortgages,” which he says are the real culprits.

“Having financed several of America’s largest home builders, I know a few things about the housing industry,” Mr. Milken said. “What happened to housing was not a failure of securitization, but rather a disastrous lowering of underwriting standards and other unfortunate practices.”

Criticizing securitization — the slicing and dicing of debt that he helped popularize — is “like condemning scalpels because a few unqualified surgeons have injured patients,” he said.

With the introduction of new financial instruments, users tend to go overboard at the end of the cycle and then new regulation is introduced that tends to go to far (ie mortgage current underwriting standards will become a self-fulfilling prophecy).

Ultimately what junk Bonds and subprime mortgages really had in common, were the people that used them. They didn’t reflect adequate risk into their pricing. A more pro-active SEC might keep that in check, but then squash innovation.

I need to change some more lightbulbs.

Read more here:
[Indebtor’s Ball] Subprime Discussion Without The Junk