Real Estate News

Americans lost more, in terms of home values, during the final quarter of 2008 than in all of 2007. According to Zillow Real Estate Markets Report, home values fell 11.6 percent or $1.4 trillion during the eighth consecutive quarter of declines.

The declines mean that U.S. homeowners lost a cumulative $3.3 trillion in home values during 2008. During all of 2007, home values lost only $1.7 trillion. Since the peak of the housing market in 2006, home values have declined by $6.1 trillion.

As home values have declined, more American homeowners have found themselves underwater on their mortgages. One out of every six homeowners had negative equity by the end of 2008, up from the one in seven in the third quarter. Further, foreclosures made up nearly one in five or 19.9 percent of all transactions in 2008.

A witch’s brew of economic insecurity, foreclosure and tightened lending standards are helping to keep hard-hit markets down and to widen the scope of markets showing declines in home values,” said Dr. Stan Humphries, Zillow vice president of data and analytics. “ As more markets turn down and markets that were already down go deeper, the pace at which value is being erased from the U.S. housing stock is rapidly increasing, with more value wiped out in the fourth quarter of 2008 than was eliminated in all of 2007. The fourth quarter is the first in which we were able to see the effects of the mounting economic insecurity that picked up steam in the fall of last year. People without jobs, of fearing jobs loss, typically don’t buy homes, no matter how low prices or mortgage rates might be. Public policy, in terms of both job creation and efforts to stem the tide of foreclosures, will have a large influence on when some of these markets find bottom.”

Of the 161 metropolitan statistical areas (MSA) surveyed as part of the Zillow Real Estate Market Reports, 21 are not feeling the pinch of declining home values. Home values in the Pittsburgh MSA were flat (-0.1 percent) in 2008. Home values in the Fayetteville, NC MSA actually increased by 6.9 percent, followed closely by the 6.2 percent increase in Yakima, WA MSA. Other areas in New York State, the Midwest and the South also experienced steady or increasing home values.

Unfortunately, 10.9 percent of all real estate transactions across the country in 2008 were short sales. The Lincoln, NE MSA led the country in the rate of short sales, with 14.1 percent of all transactions. Short sales also accounted for more than 11 percent of all transactions in California’s San Jose, Santa Rosa and Santa Cruz MSAs. The Central Valley in California continued to lead the nation in foreclosures, as well. More than half of all sales in the Madera, Merced and Stockton MSAs were foreclosures compared to the 3.9 percent recorded in the New York City MSA and Grand Junction, CO MSA, which were the nation’s lowest.

The rest is here:
Home Values Lost $1.4 Trillion during 4Q 2008

Related Posts:

• No Related Posts

Finally something that we can all get behind: Don’t pay your bills. It’s not my idea, although it has appeal. It’s the Fed’s and it’s the cornerstone of the new Homeownership Preservation Policy. To qualify for aid, the homeowner must be at least 60 days past due on his or her mortgage payments. (This program is for mortgages acquired from Bear Stearns and AIG rescues. Another program begun in December 2008 required that the homeowner be 90 days late.) At the same time, the mortgagee must be able to make a reduced monthly payment, therefore, must have some income, presumably a job. The having a job part might be tough; the missing two payments part, easy.

And more good news for mortgage delinquents; several mortgage lenders have suspended foreclosures, at least through January 2009. Among them are: Fannie Mae and Freddie Mac—together a good half of the market; Bank of America/Countrywide; Citi; and several foreign banks. If your mortgage is not held by one of these lenders, you still may be in luck. Several cities and states have suspended enforcing foreclosures; to name a few: Chicago, Philadelphia, Baltimore and Illinois and Florida. Initially, delayed-foreclosure preference was given to mortgagees who lived in their houses. It now has been extended to having an occupant in the house. An unintended consequence: what’s this going to do to the rental market and the commercial mortgagee’s ability to make payments? They will be subjected to the full force of the free market I guess.

Those who do not have mortgages must be asking: What about me, what can I not pay? Here’s a suggestion—credit cards. And there’re a slew of them not to pay: bank, store, gas, travel. You did your patriotic duty by running up this debt in the first place. Now join your neighbours and default.

The approximate $2.6 trillion in consumer-credit outstanding as of November 2008 is at serious risk. Charge-offs are expected to rise from the current 5.62% to as high as 13%, according to Nouriel Roubini. The all-time high was 7.85% in 2002. Consumer-credit defaults are tied to unemployment. Some banks have increased their assumptions on 2009 unemployment to 8.7%, which is as much as they say they can handle; beyond this level they would be in trouble. Well, they’re in trouble. According to the BLS, the rate of unemployment as measured in U-6 is already 13.5%, well into the banks’ danger zone. And this number is far below the almost 18% computed by Shadow Stats (the people who came up with the definition of recession that is universally accepted), which also puts us in depression territory.

The televised Congressional Hearings/Jerry Springer Show on the new stimulus bill carried on all day. They should give up on everything except social programs at this point. Little of what they’ve done has worked. The trigger for the next major leg down will be out of their control by definition and could even come from outside the US.

mg

P.S. Just found out the stimulus bill passed. They’re going to send me a check and broadband will be brought out to my summer place. I take back all the bad stuff I just said.

The rest is here:

Related Posts:

• No Related Posts

Sales of existing homes rose unexpectedly in December although the pace remained below that of a year ago, according to the National Association of Realtors (NAR). The jump was led by a surge in sales in the West. Sales volume was the lowest seen since 1997 while the national median price for an existing home was $175,400. According to Freddie Mac, the national average commitment rate for 30-year, conventional, fixed-rate mortgage fell 5.29 percent in December. Last week, Freddie Mac reported the 30-year rate was 5.12 percent.

The typical buyer plans to stay in their home for 10 years which is the correct approach in today’s market,” said NAR President Charles McMillian, a broker with Coldwell Banker Residential Brokerage in Dallas-Ft. Worth. “With historically low mortgage rates, flexible sellers, a large inventory, and homes that are selling for less than replacement construction costs in much of the country, buyers who’ve been on the fence should take a closer look at today’s market.”

Sales of all types of existing homes, including single-family homes, townhomes, condominiums and co-ops – rose 6.5 percent to a seasonally adjusted annual rate of 4.74 million units in December. Despite the increase, sales were still 3.5 percent below the 4.91 million-unit pace of December 2007. Overall, the 4,912,000 existing-homes sold in 2008 is still 13.1 percent lower than the 5,652,000 transactions recorded in 2007.

It appears some buyers are taking advantage of much lower home prices,” explained Lawrence Yun, NAR chief economist, saying home prices continue to fall significantly. “The higher monthly sales gain and falling inventory are steps in the right direction, but the market is still far from normal balanced conditions. Buyers will continue to have an edge over sellers in the foreseeable future.”

Regionally, the West (up 13.6 percent), South (up 7.4 percent) and Midwest (up 4.0 percent) all experienced increases in existing homes sales. December’s annual rate of 1.25 million in the West was 31.6 higher than a year ago, however the median price in the region was down almost the same percentage to $213,100 over the same period. In the South, sales increased to an annual pace of 1.74 million in December which was off 11.2 percent from December 2007. The median price in the South was $158,600, or 8 percent lower than a year ago. The Midwest’s annual level of 1.04 million was 10.3 percent lower than in 2007 while the median price dropped 11.4 percent to $140,800. Only the Northeast experienced a decline, slipping 1.4 percent to 720,000 in December. That’s 14.3 percent below December 2007. The median price in the Northeast also fell to $235,000, down 7.8 percent from 2007.

Sales of single-family homes rose 7.0 percent to a seasonally adjusted annual rate of 4.26 million in December, up from November’s 3.98 million. The median price of $174,700 for a single-family home in December was down almost 15 percent from the previous year. For all of 2008, single-family home sales fell nearly 12 percent to 4.349 million and the median price fell 9.5 percent to $197,100 from 2007 levels.

Existing condominium and co-op sales also increased by 2.1 to a seasonally adjusted annual rate of 480,000 units in December, a 10,000 unit increase over November. Sales remain 18.4 percent below 2007’s level of 588,000 units. Overall, sales declined 21 percent to 563,000 units with a median price of $210,000 for all 2008.

We’ve added 25 million people to our population over the past decade and housing affordability conditions are the best we’ve seen since 1973, but household formation is much lower than expected,” said Yun. “Consequently, there is a pent-up demand which could be unleashed with the right stimulus, including a non-repayable homebuyer tax credit. The Obama administration and Congress need to move fast to stimulate a spring sales upturn which will help stabilize home prices and set the foundation for a sustainable economic recovery.”

Continued here:
Finally some good news for home sellers

Related Posts:

• No Related Posts

Last week, average 30-year mortgage rates jumped 0.35 percentage points to 5.24%. Not coincidentally, that same week the Mortgage Bankers Association’s index of mortgage applications dropped nearly 10%.  (This came on the heels of the incredibly-not-surprising news about December’s  nearly 11% drop in new housing permits from November. Starts were down 15.5%.)

Apparently 5% is the magic number for mortgage/refi applications. Two weeks ago, when the rate for 30-year fixed hit 4.89%, refis hit a 5-1/2-year peak.

While refinance applications are down (MBA’s refi index dropped 12.4%), they are booming compared to mortgage apps which remain near eight-year lows. This is, in part, because of deflation. Buyers know that prices are only going to go down so they have no reason to buy. This trend will only increase as home-foreclosures further depress prices and sellers get more desperate. It makes absolutely no sense to buy right now.

I’ll be interested to see changes in the price of rentals. Here in the Boston area I saw a listing for a 1 bed room in a working-class neighborhood at about $1200. Hard to see that lasting. We will likely see more foreclosures as people who bought multi-unit properties see rents drop below what they’re paying for mortgages. This in turn will put more deflationary prices on housing and rents … where that ends is anyone’s guess.

Constantine von Hoffman is a veteran business journalist and author of the blog CollateralDamage.biz, a satirical look at marketing and business.

Mortgage applications tank as interest rate goes over 5%

Related Posts:

• No Related Posts

“What began as a weakness in the performance of smaller properties located in tertiary markets now includes larger collateral in secondary and primary markets,” said Susan Merrick, Managing Director and U.S. CMBS group head for Fitch Ratings. “Highly levered loans on transitional assets that were originated at the height of the market are proving particularly susceptible to performance default, as the deepening recession continues to make stabilizations according to schedule increasingly unlikely.”

Commercial mortgage backed securities (CMBS) loan delinquencies rose to 0.88 percent in December 2008, according to Fitch Ratings. The increase is due in part to defaults on two loans with outstanding balances greater than $100 million, following a November reading which featured two defaults in excess of $70 million. The loan delinquency index currently includes 20 loans with balances of $25 million or more. Six of those 20 loans became delinquent in December. The December delinquencies included a $125.2 million loan secured by a retail property located in Corona, CA and a $104 million pari passu note backed by a portfolio of two hotel properties in Tucson, AZ and Hilton Head, SC. In each case, the respective loan sponsor was experienced with the property type, but cited economic hardship due to market deterioration as the cause of inability to meet debt obligations. Both loans were securitized in early 2008.

Fitch does not provide additional details regarding the defaulting loans, however, at least one deal involving Tucson-area and South Carolina hotel properties has made the news recently. In late December, the Arizona Daily Star reported the Transwest Partners/NCH Corp. was close to defaulting on a $209 million loan involving the Westin La Paloma Resort and Spa and another resort in South Carolina. Transwest/NCH has already defaulted on a $21 million supplemental loan for the properties and has struggled to make payments on the loan because of cancellations.

The average loan size of delinquencies within the Fitch rated universe now stands at $8.2 million. This compares to an average loan size of $6.4 million for the same subset in December 2007. The 2008 vintage defaults, like those of other recent vintages, are rising at a faster pace compared to historical trends. Macroeconomic contraction, coupled with the higher leverage that is characteristic of recent vintages, has pushed up default rates for loans in 2006 and 2007 vintages. As of year-end 2007, 0.96 percent of Fitch-rated loans issued in 2006 and 0.41 percent of those issued in 2007 were 60 days or more delinquent, compared to the 10-year average default rate of 74 bps. Fitch expects that the accelerated pace of defaults witnessed in fourth quarter-2008 and additional delinquencies on larger loans is likely to continue into 2009, bringing the index to approximately 2 percent by year-end.

Excerpt from:
CMBS delinquencies rise as larger loans default

Related Posts:

• No Related Posts

Note: The article written below is not meant to defend the actions nor advocate the interests of the American banking system in regards to the real estate market, or the financial markets as a whole.

Occasionally I read a piece of information that seems to leap off the page and shout at me, and an article recently published in the Los Angeles Times featured just such a nugget. In the article, which can be read here, it states that JPMorgan Chase has withheld foreclosing on over $22 billion worth of mortgages in order to focus on reviewing the terms of those mortgages, implying that the dollar amount of bad mortgage debt on their books is well over $22 billion. JPMorgan also managed to eke out a profit in the last quarter of 2008 (which, as always, could just be the result of some creative accouting), so God only knows what that means about the balance sheets of the other national banks.

In correspondence with the numbers on JP Morgan’s books, 1 in every 54 American homes has been on the brink of foreclosure this year. This includes over 500,000 homes in California, and 1 in 14 Nevada homes, received foreclosure notices in 2008. The sheer size of these numbers can be daunting for anyone trying to take stock of the situation, including the policymakers whom we hold accountable for finding a solution. It’s much easier to strike a deal when you can attach a face to an issue, such as the CEO of a major automobile corporation. Likewise, when you have one man perpetrating a $50 billion dollar fraud and losing money for charities, among other investors, immediate action can be taken.

Unfortunately, the fact is that it is impossible to put a face upon a tragedy that has affected millions upon millions of individuals, and has been perpetrated by a web of self-interested corporation, agents, brokers, and bankers. Each of those individuals has a unique set of variables that factor into the circumstances that led to their houses being foreclosed on, or in danger of being foreclosed on. They may have lost their job, they may be dealing with personal strife i.e. health issues, divorce, or death, or they may not have been able to afford the house in the first place. Due to the complexity of the circumstances both causing and resulting from the status of mortgage, the idea that the government could possibly come up with a single solution that would be effective in preventing any further damage in the real estate market is extraordinarily naïve and unrealistic.

Perhaps most alarming is this suggestion by a group calling itself the National Community Reinvestment Coalition. In summary, their proposal to the House Finance Committee is to use eminent domain as a vehicle through which the government would be able to buy distressed properties at 30-50% of their original value, bypassing the secondary lien holders, and modifying the loans on their own terms. While most observers will probably give this proposal a slim chance of ever coming to fruition, the fact that it has even been suggested indicates that the government is in fact considering an intervention in the real estate market.

It need not be said that this would be of the worst conceivable outcomes of the real estate crisis. If the government were to take any action to interfere in the housing market, it would set a frightening precedence for future lawmakers to follow. Banks, and to some extent the GSE’s, should be responsible for setting mortgage terms and for modifying them when necessary. The government can make suggestions, and should set terms on how TARP money can be used. But the banks are in the business of surviving, and as was highlighted by the LA Times story on JPMorgan Chase, the strong banks will do what they can to stay in business. The reason that banks create local branches is so competent individuals can micromanage in the unique effects of each local economy.  The government is not remotely capable of performing such a task, which is what the eminent domain solution would require. One could certainly make the argument that several of our national banks are just zombie corporations, but that is not the case. Having the government insure your assets and provide you with capital is not the same as having the government run your board meetings. It’s the difference between allowing for checks and balances within branches of the government, and turning the Justice Department into your own private think-tank.

Generally speaking, what is in the homeowner’s best interest (remaining in their house) will also be in the bank’s best interest. The strong banks will conform to this principle, and the weak will go the way of all individuals at an evolutionary disadvantage.

Original post:
Let Banks (Not the Government) Be Banks

Related Posts:

• No Related Posts

It’s a good thing the Bushes aren’t selling their current residence when they move back to Texas. The estimated value of the Presidential Residence at 1600 Pennsylvania Avenue has declined more than $23 million or 7.2 percent, in the last year, according to Zillow.com. Don’t feel too bad for the Obamas, however, the White House remains the nation’s most expensive and iconic residence with an estimated value of $308,058,000, that’s nearly double what it was worth when the Bushes moved in.

“Zillow publishes free data and Zestimate values for 84 million homes across the country – that’s more than 90 percent of U.S. homes. We thought it would be fitting to provide a Zestimate value for the most famous U.S. home of all as president-elect Obama and his family prepare to more in,” said Stan Humphries, Zillow’s vice president of data and analytics. “Obviously the White House will never be for sale, but given the immense amount of public data on this home, we thought it would be fun to crunch the numbers and say ‘what if’.”

When estimating home values Zillow considers a range of data including a home’s physical attributes, recent sales, tax information and local market trends. In the case of the White House, the physical attributes consist of 55,000 square feet of indoor space and 132 rooms including 35 bathrooms, 16 bedrooms and three kitchens. The White House occupies 18 acres of premium land in downtown Washington, D.C. Zillow’s team of data statisticians then considered the most expensive homes as well as other homes recently for sale in the Washington area and calculated the premium historic homes typically fetch over similar homes without any historical significance. All this yielded the Zestimate value for 1600 Pennsylvania Avenue of more than $308 million as of January 8, 2009. Like all Zestimates, the value of the White House will fluctuate based on market trends. All Zestimate values are updated several times a week.

Oh, and if the Obamas were taking out a standard 30-year, fixed-rate mortgage on the White House (assuming a 20 percent down payment and a 6 percent interest rate) their monthly payment including principal and interest would be $1.48 million. Even with the Treasury Department’s proposed 4.5 percent rate on 30-year mortgages, the monthly payment would still be more than $1.25 million. Like so many Americans, the Obamas will be living in a residence requiring far more than the 30 percent of household income recommended by financial experts. President Obama would need to earn $53.3 million in gross income to afford a standard 30-year fixed-rate mortgage on the White House.

See original here:
Declining property values affect White House too

Related Posts:

• No Related Posts

“As a new Federal foreclosure policy unfolds in the months to come, public opinion will certainly play a central role. It’s clear that people have strong opinions and a candid and vigorous debate will improve the chances for a successful outcome. The outcome could shape the real estate markets for many years to come,” said David Lereah, president of Reecon Advisors Inc., an independent real estate economics and information company that recently conducted a national survey of Americans’ attitudes about how the $700 billion bailout ought to be spent.

The results of the poll, released on Tuesday, indicate that a majority (51 percent) of Americans responding oppose using bailout funds to help pay the mortgages of homeowners in default. Men, seniors and those living in the Northeast region treated defaulting homeowners the harshest. More than 58 percent of men and more than 56 percent of both the elderly and Northeast residents participating in the survey indicated they opposed bailing out homeowners. Support for extending a helping hand to homeowners in default was strongest among young people and those with annual earnings of less than $20,000. Among young people between the ages of 18 and 24, 69.1 percent support aiding homeowner in default as do 60.1 percent of those earning less than $20,000 annually.

The survey also revealed that consumer confidence in real estate is significantly higher than in the stock market despite declining property values. More than 53 percent of those surveyed believe real estate is a better long-term investment than the stock market while only 30.8 percent think the stock market is the better long-term investment given the current state of the economy. Those in in South (58.6 percent), West (58.4 percent) and young people in the 18 to 24 age group expressed confidence in real estate. Confidence in the stock market was highest (63.9 percent) among those between 35 and 49 years of age.

When asked which will recover first the stock market or real estate markets, 46 percent chose the stock market and 43.2 percent chose real estate. These results were within the survey margin of error and are therefore not statistically significant.

“These findings indicate that there are significant political barriers to proposals now being drafted in Congress to use some of the remaining $700 billion of bailout funds to help stem foreclosures by helping defaulting homeowners with their mortgages,” said Lereah.

The poll is the first in a series of opinion surveys on issues critical to real estate markets to be conducted by Reecon Advisors, Inc. for the Reecon Advisory Report, a weekly newsletter launched in January 2009. The telephone survey was conducted December 19-21, 2008 by GFK Custom Research. A total of 1,004 interviews were completed, with 524 female participants and 480 male participants. The margin of error on weighted data is +3 percentage points for the full sample. All completed interview are weighted to ensure accurate and reliable representation of the total population, 18 years and older. Reecon Advisors, Inc. is a leading independent real estate economics and information company in the real estate industry.

Go here to read the rest:
Americans unwilling to bail each other out

Related Posts:

• No Related Posts

The plummeting Case-Shiller Index, which showcases the free fall that has become the housing market got me thinking about the bubble inflation during the preceding years and the role that house valuation played in this implosion. It also got me thinking about the difference between Case-Shiller price drops and actual price deflation for those people who manipulated (or were manipulated) their housing price during the boom.

Pushing Appraisals

Let’s start with the problem. In residential lending the broker or lender is the one who orders the appraisal of the property. Whether they pay for it or the borrower pays for it is moot. In theory, the appraiser is hand-selected by the lending institution to deliver a fair value of the property. However, in practice this process often works in reverse. The lending institution already has a number that they “want” for the property to make the financing “work” under bank guidelines. This creates a rather massive conflict of interest. The broker or lender originator is trying (for all intents and purposes) to find the maximum reasonable value of the home to secure either the lowest interest rate or the maximum cash out (on a refinance) for the loan. The bank on the other hand (one would think, but often be wrong) should be looking for the lowest reasonable value of the property to protect their position. This conflict played a major role in fueling the bubble.

A Positive Feedback Cycle

Home property values exist in a positive feedback cycle (no matter if the price is going up or down), that is, the current direction of the prices tend to reinforce that present direction. The effect builds on itself. For instance you have 5 homes of similar characteristics (bedrooms, lot size, make, materials, ammenities, etc.) and they all have a 2006 value of $400,000. These homes are called comparables or “comps”. If two of those homes sell in foreclosure or short sale for $320,000 (a 20% drop) then these will influence the price of the remaining three homes that were previously valued at $400,000. These new comps drag down the price of the surrounding homes. The converse is true as well, and it was this positive feedback cycle that fueled the massive escalation of home prices in the frothiest of markets. Each new comparable sale that came on to the market at a slightly higher price established a new “comp” which helped set the market price in the area higher.

Throwing Gas on the Fire

This positive feedback cycle was reinforced by originators trying to make loan terms work for their borrwer. Using automated underwriting or by hand with published underwriting matricies, they worked to fit loans in to approvable packages. Meanwhile, banks and their risk managers sought to “protect” themselves by making it easier to qualify at lower loan to value ratios (LTV). The key assumption there being that if a bad credit risk defaults the bank has a greater likelihood of recovering their investment the more equity is protecting their position. With that assumption in-hand they built their guidelines to allow for more risk the lower the LTV. The higher the LTV the “better” the borrower had to be in terms of credit scores, income, etc. These guidelines were banded so that there were very clear breaks that significantly changed at each tier. For example if you had a credit score of 580 you might be able to get financing up to 70% LTV ($70,000 on a $100,000 house) but if your LTV was 72% the borrower would have to qualify at the 80% LTV band, which could dramatically change the terms of the loan, such as jumping the interest rate by 1 or 2%, changing the monthly payment dramatically. It also might change other ratios required by the guidelines that would “kill” the deal.

And, conversely each 5% (typically) that you were able to drop the LTV of a loan the lower the interest rate would be for the borrower. So you can see there was immense pressure in an uber-competitive environment to get the “best” value for the customer to win the business. Best always meaning highest.

Competition and Gaming LTV Ratios

This led to increased competition among loan originators to get the highest value of the house because that often resulted in the lowest interest rate, or maximum cash-out of a refinance, and the lowest or the most would win the business. A typical borrower talking to 3 or 4 mortgage originators would of course go with the lowest rate or max cash, so the originators would try to find the highest value of the home to make their quote the best. For example if you were an originator and the borrower needed an $80,000 loan. If an originator thought that your home would only be appraised at $100,000 (80% LTV) they would quote the borrower on the terms and conditions and rates associated with an 80% LTV loan. However, if the originator thought that the house could be appraised at $107,000, the LTV is now 75% and the terms, conditions and rates improve dramatically. You can see the problem. With 3 people competing for the loan, the lowest loan to value means the most favorable terms (and usually a new customer).

How are the originators getting these new values precisely? They’re getting the recent comparable sales data from title reports for homes that have recently been financed in the area. They look at 10-12 homes, find ones that are comparable and estimate the value of the home. Then they assume that in a rising market that prices are naturally going up and build their assumption from there. Since they’ve never seen the property or the neighborhood this is all the information they go on. But it makes for a thinly plausible guess and that’s the number they work with.

Delivering the Value

Now comparable sales from title reports do not an appraisal make. The originator needs to “hire” the appraiser (even if they have the borrower pay for it they’ve chosen the appraiser to do the work (in most instances)). They send the appraiser a request for appraisal. On that request for appraisal they note the estimated value of the property. This is the number that they “need” to make the loan work at the terms they’ve quoted their recently-won customer. If this value doesn’t come in the terms of the loan changes and the customer walks (or is extremely upset about the bait and switch). This value while not explicitly stated as the needed value definitely has that need implied. Often the originator will talk to an appraiser about the value before even ordering the appraisal, just to make sure the appraiser can “get it.”

Rock and a Hard Place

This puts appraisers in an extremely difficult situation. Appraisers, often sole-propreitors or small shops, need business to feed their families, etc. They don’t get paid unless they complete an appraisal. And they often don’t get an appraisal order unless they can confirm that they can get the value requested ahead of time on the phone. While this is certainly illegal and not the way it is supposed to work (because the appraisal is supposed to be an independent valuation) it is a common practice. Now laws are going in place so that brokers and other folks can’t have business relationships with their appraisers for just this reason to eliminate this conflict. Additionally, if the appraiser goes out and assigns a value to the property that does not meet the “needed” value by the originator that appraiser will never (likely) receive another order from that company. If it’s a large company that appraiser will likely be noted in the system as “difficult” or “can’t get value” and they lose tons of business as the company goes with other appraisers in the area who are more “flexible” or those that “can get max value”.

Banks Worked to Protect Themselves

This is not rocket science. And banks and underwriting departments knew this. Often underwriters and appraisers had to bear ugly confrontations from originators and sales managers when the value didn’t “come in” as anticipated and the deal was lost. At my company I was responsible for running Automated Valuation Models on each of our banked loans to ensure that we weren’t being hung out to dry by aggressive appraisals. These AVMs were sophisticated models that tried to put a price on a property through all sorts of data. If the appraisal and the AVM were outside of 10% of one another we ordered a drive by appraisal or a desk review from a certified appraiser to ascertain a realistic value of the property. This double-checking did not make the sales people happy – as often, surprise, surprise, appraised values would be modified downward.

But no system is perfect and eventually we got burned on one appraisal on one loan. To the tune of about $70,000 when all was said and done.

Pushed Appraisals and the Effect of Falling Home Prices

Where this really gets interesting to me though (because malfeasance and greed-driven actions of the industry have been well-documented) is the plight that these home owners with “pushed” appraisals face today. Assume your home was worth $300,000 in 2005 and you decided to take out a loan of $180,000 to fix some things up and redo your higher-interest rate first mortgage. You’re at 60% LTV. If the value of your home over the course of the last two years has fallen 20% your LTV is now is now 75% (property $240,000 loan approx still $180,000). This means that if you had to you can still sell, or even refinance in to a lower rate, an FHA loan or some other type of program (say if your ARM loan was adjusting). However, assume that the $300,000 was really pushed 5% (so the actual value was $285,000. Now with home prices dropped 20% (plus your pushed ghost equity wiped out) you’re effective property value is now $228,000 which gives you a LTV of 79% (still a “doable” loan but very close). And if property values fall greater than 20% you’re basically stuck in a loan as underwriting guidelins get exceptionally difficult above 80% on refinances.

Getting Screwed

So the folks that bought or refinanced in the bubblicious markets are now duly screwed, because their home value was so jacked up that their properties are outliers to the average price value in the area. This means that for them a 20% drop in prices is really something like 22-25% or higher loss in their value. This reduces their options and may eliminate the chance at refinancing. I wonder how many homes out there are like that. When they see a 20% drop in home values but know that they are far worse off than that? It must be a nightmarish feeling. Because in going for the “best” they ended up in a situation far more damaging then if they had received the proper valuation in the first place.

Mea Culpa

Right now I’m saying that it’s late at night while I’m writing this, I have no internet access, I’m terrible at math and the math above is a little fuzzy. Also, I’ve been out of the industry for almost two years now, so I don’t know the guidelines for refinancing today. Maybe it’s still easy to get financing above 80% and this is all a worthless exercise. So apologies if the math or the severity of the changes is off. You’ve been warned, but hopefully you still catch my drift.

Continued here:
Gaming Home Values and Their Consequences

Related Posts:

• No Related Posts

Another guest post from MG Dungan who went from Wharton to Wall St. to real estate to Blown Mortgage.

It’s going to be all lawsuits all the time, as filings and indictments come fast and furious after January 20. In fact, a number are in the works already.

From the perspective of Wall St. crime, it will be interesting to see what Elliot Spitzer and Rudy Giuliani do. Keeping his hand in by writing for Slate, Spitzer’s wounded and has nothing to lose. Giuliani has got to smell blood and a loyal-to-the-point-of-absurdity Republican he is not.

Let’s start with . . .

Criminal Law

There’s a big one pending of the type that made the reputations of Spitzer and Giuliani in their US Attorney days—Insider Trading! As you remember, Giuliani’s high-profile conviction was Ivan Boesky and Spitzer’s was Martha Stewart.

Conveniently domiciled in their former district, Robert Rubin—former co-Chairman of Goldman Sachs, former Treasury Secretary under Clinton and on the board of, counsel to and briefly Chairman of Citigroup— was on the short list to be Treasury Secretary again. What happened?

When you want the low down, the New York Post is the paper of record. On December 4 it reported: “A new Citigroup scandal is engulfing Robert Rubin and his former disciple Chuck Prince for their roles in an alleged [CDO-related] Ponzi-style scheme that’s now choking world banking. [The two] are named in a federal lawsuit for an alleged complex cover-up of toxic securities that spread across the globe, wiping out trillions of dollars in their destructive paths.” However—and here’s the indictable offense—before Citi’s stock collapsed, Rubin and other top insiders cashed out of more than $150 million in “suspicious stock sales” according to the lawsuit filed on behalf of investors. They never know when to stop, do they.

An Astounding Conflict of Interest

The disposition of this case is going to set quite a precedent. Apparently, stealing investors’ money is a crime.

Bernard Madoff, former head of the NASDAQ, surrendered to the FBI on December 11, after having been turned in by his sons Mark and Andrew for running a several-decades-long Ponzi scheme. Investors have been wiped out to the tune of $50 billion. What makes this case interesting is not only Madoff’s insider status, but that Mary Schapiro, nominee for SEC Chairman, has recently announced the appointment of Mark Madoff to a prominent role with the security-industry oversight agency. And there’s more.

According to the FBI, the SEC and other regulatory bodies received several written complaints about Madoff over the years, which were never pursued. It now has been learned that “Ms Schapiro, currently chief executive of the Financial Industry Regulatory Authority (Finra), employed (son) Mark Madoff to serve on the board of the National Adjudicatory Council — the division that reviews disciplinary decisions made by Finra,” according to the UK TimesOnline on December 18. Madoff père is currently confined to his Park Avenue apartment awaiting trial.

Strange Treatment of Small Fry

This next case is small in terms of money—what’s a few hundred mil these days—but has an interesting twist. In another action by federal prosecutors of the Southern District of New York, they have arrested attorney Marc Dreir for stealing at least $380 million in “a brazen swindle of some of New York’s savviest investors by one of New York’s more accomplished lawyers,” as reported in the New York Times on December 14. Another $35 million is missing from escrow accounts at his 250-member law firm.

Why this case stands out is that the accused is actually in jail being held without bail. Can you believe it. He must be really dangerous. Or he lives in New Jersey.

Constitutional Law

This should be getting more ink, imo.

On December 10, the WSJ reported that the Fed “is considering issuing its own debt for the first time . . . which . . . would provide the central bank with more flexibility to tackle the financial crisis.”

Ordinarily, when short of cash the Fed turns to the Treasury. The Treasury can no longer fund the Fed because of its own massive borrowings set for 2009 and debt limits imposed by congress.

Issuing debt is not in the Fed’s charter. According to the Constitution as it is currently written, only congress through the Treasury has the power to borrow against the credit of the United States. What’s proposed by the Fed would give it extra-legal authority to exceed the debt ceiling set by congress. It also would usurp powers of congress and the Treasury and transfer them to the Fed, which is a private entity owned by member banks.

Paul Volker would be turning in his grave if he were dead.

Credit:
Growth Industry 2009: Criminal and Constitutional Law

Related Posts:

• No Related Posts

A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

As we prepare for the Fed to lower rates to an all time low and more consumer hitting the daunting certainty of foreclosure and bankruptcy, it’s easy to forget about the even littler guy in the housing picture, the renter. As I mentioned in a previous post, renters have been feeling their share of pain in this market, too. Many landlords, either overwhelmed and taking what they can or simply abandoning their properties altogether, have left many renters out in the cold. Despite continuing to bleed, it appears that the government controlled mortgage giant, Fannie Mae, may have a soft spot for us consumers after all (well, now that they’re done loading up risk to their eyeballs and paying the price). They’ve officially launched efforts to help renters stay in their homes, even if the property they’re renting heads into foreclosure.

The move, according to Fannie, will allow tenants to sign new leases, and should affect about 4,000 renters that are staying in properties that have hit foreclosure. This is definitely a positive development, considering that the renters have been dutifully paying their rent but still would face eviction without help. The policy is expected to go into place on January 9, according to Brian Faith, a Fannie spokesperson. I’d expect Freddie Mac will follow suit on those efforts as well. Both of them have agreed to temporarily hold evictions.

Of course it wasn’t exactly compassion that moved Fannie to action. An advocacy group, the New Haven Legal Assistance Association recently accused the company of obeying Federal requirements to let renters stay in properties that have hit foreclosure. As part of the bailout, Both Fannie and Freddie are required to allow tenants to stay “where permissible” in their homes. I guess that was open to interpretation until now.

I suppose it’ll be somewhat comforting to renters to know no matter what happens they’ll have a chance to stay where they are. If the Fed rate cut goes through and credit remains tight..we’ll all be renting soon enough, anyway.

More here:
Renters Find Relief

Related Posts:

• No Related Posts

This week, we had economic data coming in that reported much higher jobless benefits claims than had been expected. Over 573,000 claims were filed, nearly 50,000 than the benchmark estimate that economists had predicted. Of course, economists being wrong is by and large as reliable an event as the sunrise, so interpret that statistic as you will. The larger implication of the jobless numbers is the rather severe uptrend. Remember, the job market functions just like any other (relatively) free market. The laws of supply and demand largely determine hiring (or firing) cycles, which fluctuate naturally according economic conditions.

But when firms are doing as much housecleaning as they have been over the past several months, the effects are not going to limited to the job market. In several articles, I have argued my thesis that the worsening employment situation means that the downtrend in the housing markets will continue. I have predicted that while demand will, and indeed has, started to return, prices in many areas have yet to hit bottom.

There is another connection that jobs play in the real estate market, and that is in commercial real estate. Commercial real estate refers to the portfolios of office building, apartments, retail stores and lots held by developers and commercial leasing trusts, also known as REIT’s (real estate investment trusts).

I can’t speak with certainty for other areas of the country, but my suspicion is that the trend I’m noticing in southern California is playing out in other locations as well. The number of commercial real estate vacancies has increased exponentially over the past three months, with stores and offices either downsizing or just going out of business, even at once busy strip malls and shopping centers. Grocery stores, malls, and Targets/Wal-Marts are still thriving, but the number of privately or family-owned businesses being forced to close is a bit depressing, both from a sentimental and economic perspective. The fact is that there are a greater number of consumers who are cutting back on personal spending, which will be further exacerbated by credit card rate hikes and limitations on personal credit lines by banks.

A microcosm of the burden that this places on commercial real estate portfolios would be the conditions that have forced the New York Times to take out a new mortgage on its New York headquarters in order to avoid the fate of the Tribune company, who last week filed for bankruptcy.

Stock charts for REITs would seem to show that they are heavily oversold. The chart for IYR, an ETF which tracks the aggregate performance of REITs, is down roughly 50% on the year.

Some analysts might claim that this is an indication that any future bad news has been discounted in the stock price. Yet with jobless numbers and consumer spending proving so difficult to predict, how can any such speculation about discounted prices be taken seriously? As conditions worsen, I would not be surprised at all if commercial real estate investments took a turn for the worse.

See the original post here:
Commercial Real Estate: The Next Domino to Drop?

Related Posts:

• No Related Posts

On Monday, all of the financial world turned its ears to announcement that the United States is indeed in a recession, confirmed by the National Bureau of Economic Research. Of course, most of us who have followed the state of the economy already knew this, and are likely shaking their fists at the powers that be and the Kool-Aid drinkers, collectively crying “Told you so!”

The recession, as many of you are already aware of, began as a result of declining home values, and many analysts have stated that the economy will continue to deflate until the housing markets show signs of recovery.

There have already been some positive news bubbling up in the housing market. Mortgage applications increased by a record amount last week, spurred by the Federal Reserve’s announcement that it would purchase mortgage-backed securities, and would be open to making further cuts in prime interest rates.

Additionally, sales in some of the country’s most depressed regions have been recovering, including California and Florida. These regions happen to be the wealthiest of wealthy, so as always in real estate, location is everything. Last month in California’s Orange County region (where yours truly spent some of his college years, yes that OC) sales rose 66% year-over-year. That figure is an astonishing jump, something that should have the market cheering.

Now, the Treasury is mulling a plan that will push mortgage interest-rates down to 4.5% with some help from Fannie and Freddie, after last week announcing that they would be purchasing mortgage-backed securities in an effort to restore liquidity. It’s hard not to be suspicious of plans to artificially inflate a sagging market, especially when it is beginning to show signs of recovery on its own. Artificially low interest rates are what contributed to the boom and bust in the first place. Touting them as a solution seems astoundingly short-sighted, especially when our nation’s spending limits could be cut by nearly $2 trillion, via lines of credit that banks will be reducing or eliminating in order to shore up their balance sheets. Analysts are saying that this could potentially cause housing prices in some areas to drop by another 20%. By that line of thought, banks would essentially be corroding their own balance sheets. Is that what million-dollar executive salary structures are for? To restrict liquidity to consumers when the Fed and Treasury are trying their hardest to restore that liquidity?

One thing is for sure: anyone who has waited until now to buy a home in this decade should be feeling fairly good about themselves.

Share This

Here is the original:
Signs of Recovery, Signs of Stupidity

Related Posts:

• No Related Posts

Possession, they say, is nine-tenths of the law. Unfortunately, when the remaining tenth is a mortgage, both homeowners and renters can find themselves evicted as part of the foreclosure process.

Results of an email survey of community and state homeless coalitions conducted by the National Coalition for the Homeless indicate that nearly 61 percent of respondents were already seeing an increase in homelessness before April 2008 when the report was published. More than 37 percent of those responding stated people were able to rent which researchers believe was an indication that they were former homeowners who had lost their homes through foreclosure. The number of foreclosures has continued to increase since the survey was taken so the number of people who are homeless as a result of foreclosure is also probably grown.

Although the housing market has also slowed, not all of the homes vacated because of foreclosure are remaining empty. Across the country foreclosed and abandoned properties are being occupied by squatters. Most squatting is random and unorganized. People seek temporary shelter then move on. Recently, however, some organized attempts to move homeless people into vacant properties for extended residency are being made.

In California, SignOnSanDiego.com reports that individuals claiming to be part of a religious order called the Sovereign Solomon Brothers Archbishop Corporation Sole are filing flase grant deeds on foreclosed properties. They aren’t stopping there, either. They a moving tenants into the properties. some of the tenants may have been made homeless by foreclosure themselves. It is unclear whether the tenants knew their occupation of the property is based on questionable legal grounds. Since the recorder’s office is not responsible for verifying the authenticity of the documents being filed, it is often not until a property is resold and a new owner tries to move in that the situation is recognized. By then, determining who the rightful owner of the property is and who has the right to occupy it can take weeks or longer. At least one person has been arrested and charges with filing false documents in connection with this scheme.

A group of homeless activists calling themselves Take Back the Land has helped six families move into foreclosed properties in Miami, FL, according to the Associated Press (AP). This group also helps the families with used furniture, cleaning supplies and even landscape maintenence. No charges have been filed against either the group or the squatters. The City says it is the responsibility of the prpoerty owner, in this case the mortgage lender, to remove squatters or to file complaints that would allow law enforcement to take action.

It is not only recently vacated property that is being occupied or the homeless who are moving in. An “old house that was not properly locked up” became the hiding place for a fugitive in Vermont, WCAX.com reports. This situation demonstrates the dangers of squatting, both for the squatters and the community. In addition, vacant properties can pose health and fire hazards, as well as attracting criminal elements.

There are no quick fixes for the mortgage crisis, vacant properties or homelessness. The National coalition for the Homeless recommends requiring lenders nationwide to file foreclosure deeds within 30 days of the foreclosure sale in order to help identify the reighful owners and tenants of foreclosed properties. They also advocate protecting any existing agreements with tenants or renters and allowing their leases to survive the foreclosure process rather than automatically evicting them when the ownership fo the property is transferred to the mortage company or bank. Of course, the best solution is to help homeowner avoid foreclosure and prevent homelessness, not just during the current crisis but over the long term.

Share This

The rest is here:
Squatters and Foreclosure: Who Lives Here?

Related Posts:

• No Related Posts

In a recent story published on BusinessWeek’s website, the subprime mortgage industry is taken under the microscope and picked apart, bit by scandalous bit. The article, entitled “Sex, Lies, and Subprime Lending,” presents many of the familiar excesses of subprime lending (pressure from investment banks and mortgage-backed securities brokers, data manipulation by loan officers) with a new twist: that’s right, a Babylonian saga of loan officers and mortgage lenders exchanging sexual favors for subprime loans to unqualified borrowers. For what purpose? Commissions of course.

At this point, it would be virtually impossible to further demonize the world of subprime lending. It doesn’t get much worse than the predatory and sinful actions that are described by the “Sex, Lies, and Subprime Lending” article. So do these tales of excess spell an end for the subprime lending industry?

The simple answer is yes and no. Everyone now understands that the much of subprime loan origination functioned on the sort of irrational exuberance that are often induced by bubbles in economies. That bubble is burst, and the lending practices that went along with it have all but disappeared. Subprime lending, however, has been in practice for over two decades, gaining traction in the 1980s after Congress eased lending laws for first-time home buyers. For a bubble to exist, there has to some sort of substantive material to prop it up.

An article written for Slate by Daniel Gray highlights a number of virtuous institutions in the business of lending to subprime borrowers, some of whom have also been able to turn million dollar profits for the services. These include credit unions and other community-based banks, and CDFI’s (Community Development Financial Institutions), and they do share a few things in common with the Ameriquests and Countrywides who are now infamous for inflating the housing bubble. Most significantly, they intentionally look past the credit scores of applicants in determining creditworthiness. Where they differ is what they look for in applicants, which is significant.

Where the Ameriquests and Countrywides were willing to manipulate and disregard data in order to originate loans, the CDFI’s simply used a different set of criteria when evaluating applicants. These criteria included their ratio of savings to income, affordability of the house in relation to income, and their ability to manage their budgets and monthly bills.

These institutions also do not incentivize lending or bundle and re-sell loans, and thus were able to avoid the excessive risk taken on by others in the subprime industry. Tellingly, their delinquency and foreclosures statistics are much lower than the national average. For example, compared to the national rate of subprime delinquencies as cited by the Mortgage Bankers Association, which is nearly 19 percent, the National Federation of Community Development Credit Unions delinquency rate is 3.1 percent. That is an absolutely staggering difference. For Clearinghouse CDFI, a California-based institution, the difference is even greater. Less than 1 percent of their subprime loans have been foreclosed on, compared to the national average, which is over 11 percent. Clearinghouse, a for-profit company, expects to report record profits, proof that trickle-up economic

While the era of the subprime bubble may have ended, responsible subprime lending will, and should be, a part of any healthy economy. For further macroeconomic insight into the virtues of this sort of lending, I would point you to the success and benefits generated by the microfinance industry in the developing world, for which Bangladeshi economist Muhammad Yunus won the Nobel Peace Prize 2006. Responsible microfinance lending, which conceivably includes the practice of subprime lending in the developed world, is an example of trickle-up economics having a perceivable and beneficial effect on society. And correct me if I’m wrong, but isn’t that why we chase the promise of economic growth?

Share This

Read the original post:

Related Posts:

• No Related Posts