There probably isn’t any way to fully illustrate the pain and suffering that is involved with a real estate transaction that involves a home owned by a bank or lending institution. I’m not sure that I can even come up with a comparison to demonstrate how unorganized, inefficient and ridiculous the procedure is for trying to help someone buy bank-owned property, like short sales.
Consumers become charmed and enamored by the fabulous price of a home they find on the Internet. But they often have no clue, no matter how carefully it is explained to them, that the percentage of successful short sale offers that work out is slim, at best. On top of that, let’s not forget that the buyer will probably have a home inspection on the as-is property and maybe sink in a couple hundred bucks for a survey while they’re rolling the dice. The bank might have even agreed to the purchase price but then changed its mind because an unexpected fee popped up on the settlement statement and they didn’t like it.
My desk is currently piled with fossilized contracts involving short sales. Many trees have sacrificed their lives for those pipe dreams. Weeks and months go by with no answer to the question, “Mr. Lender, can I take the burden of this property off of your hands?” It takes weeks and months just to get the “package” assigned to a representative in many cases. The representative in the majority of circumstances has two or three hundred other files keeping company on his desk. There appear to be no systems in place whatsoever to process the glut of short sales and foreclosures. One thing is for sure, no two banks do anything alike.
The days of an agent working with a short sale are consumed with phone call after phone call to the lender. Last week, I was sitting in the office eating lunch in a cubicle. I listened to the agent on the other side of the wall make dozens of phone calls to dozens of banks. They all sounded something like this: Hello, this is so-and-so. I am calling in reference to the contract for file number 23413433, I have left a message every day for over three weeks and I’m just trying to get some indication that the package was received, or yes or no or anything. After a while it almost sounded like a jilted lover trying to get their boyfriend back. I just need to talk to you, please call me back. Why won’t you call me?
Hey, that agent was lucky she got voicemail. Often times the voicemail boxes are full so you can’t even leave a message. Employees at the banks also get shifted around and you end up losing your bank contact or they just quit because they’re sick of it, too. Plus, there is nothing more infuriating than being months into a transaction and the file is nowhere to be found at the bank. Poof! Gone. I call that a Hoffa file.
While all of these shenanigans are going on at the bank, people that desperately need to sell their home are suffering and people that desperately need to be in a home are losing patience. Many times a buyer is months into the transaction and they just give up. Funnily enough, the bank representative will call months later and say, “We approve the sale.” We then let the bank know that the buyer walked months ago. Guess they didn’t get the memo or it got Hoffa’d, too.
Sometimes the buyers just end up finding a home where the owner has a little equity and priced their home competitively. They’ll switch up their dancing partner for a sure thing faster than you can say “banks can’t sell real estate.”
All of this leaves most of us wondering why the banks just haven’t figured this out. They’re just ignoring the elephant in the room. First, they could make more efforts to try to keep people in their home by adjusting their rate or principal. It has to be cheaper to discount a mortgage or the interest rate than it is to have a buyer default on their loan. When did banks quit running their business like a business? If you think the short sales and foreclosures happening to others aren’t affecting you, think twice. The only way to market recovery is to get excessive inventory, the short sales and foreclosures off the market and sold. It’s doable. The banks are just prolonging the whole sordid mess by dragging out this blood bath with their inefficiency.
What the mortgage industry needs is a hero like a CEO of a bank that “gets it,” will take ownership of the situation, man up and champion the industry by creating systems and developing a standard. So far it looks like everyone is just passing the buck and hiding behind their golden parachutes.
Saturday, August 23, 2008
Friday, August 22, 2008
lender restrictions, good or bad?
Cupertino accountant Richard Smith wants to buy a few bank-repossessed houses in Antioch and Brentwood priced at about $200,000 and rent them out. He can make down payments of about 30 percent, and can afford the mortgage payments. But he can't find a bank who will make him the loans.
"I'm a very active investor, I'm self-employed with a solid income, and every one of my properties have positive cash flow," said Smith, who has been buying rentals in California and Texas for 30 years. "I've never had a problem getting a loan. All of a sudden I've just run into a solid wall."
The problem? Few if any lenders these days will make loans to those who already have four or more mortgages. Smith has about 100 current mortgages, he said.
Banks' new restrictions on the number of mortgages available to borrowers won't bother typical home buyers. But it's hobbling people like Smith who invest in rental properties, and could even prolong California's housing slump, some observers say. That's because investors are among the most likely buyers for many of the bank-owned foreclosures now lingering on the market in the state's inland valleys.
"If we can't participate, we can't burn through these inventories and help the market correct," said Geraldine Barry, president of the San Jose Real Estate Investment Association and a friend of Smith's. More often lately, she said, "What I'm hearing from our members now is, "I have a deal; I can't get money'.''
Barry and her husband recently bought a foreclosed house in Sacramento for $114,000; the previous owner owed about $250,000 on the property when the bank repossessed it. Even with a 25 percent down payment, they were unable to find a loan because they have more than four outstanding mortgages, so they paid in cash.
Lenders have curtailed what's available to investors for good reason, said Chris George, president of lender CMG Mortgage in San Ramon and a board member of the California Mortgage Bankers Association. Over the past several years, many financial institutions funded loans for "non-owner-occupied" property purchases by borrowers who provided little documentation of their income or assets, then got slammed by losses as thousands of those borrowers defaulted on their loans.
Consequently, the industry has "dramatically retrenched" on non-owner-occupied loans, George said, and is reverting to lending guidelines last seen eight or 10 years ago.
That means banks once again view these loans as riskier than loans for primary residences, and to qualify borrowers typically need down payments of between 15 and 30 percent, credit scores of 720 or higher, and income and assets they can prove. Lenders also charge higher interest on such loans. Smith, for example, is paying 8.25 percent on the three most recent loans he obtained to buy properties in Dallas. The national average rate for 30-year mortgages for owner-occupied properties, however, was 6.43 percent last month, according to Freddie Mac.
In general, George said, making credit available to consumers is good for the economy and can help the housing market. "However, making credit available that will just create another round of defaults two years from now is not sound decision-making," he said. "We can't afford to continue to do this wrong."
With banks turning them away, those determined to invest in multiple properties will seek alternatives. One option is private-money lenders, who typically demand high rates for short-term loans. Smith said some of his clients who own a dozen or more rentals will add to their portfolios, using money taken from the equity in their primary residences to buy in cash. Community banks might also be a source, George said, even though major banks are shunning investors' business.
Geraldine Barry said she wants to buy more bank-owned California properties in coming months, but has yet to figure out exactly how she will finance deals, if lender restrictions remain in place.
"There are only so many houses I can buy in cash," she said.
"I'm a very active investor, I'm self-employed with a solid income, and every one of my properties have positive cash flow," said Smith, who has been buying rentals in California and Texas for 30 years. "I've never had a problem getting a loan. All of a sudden I've just run into a solid wall."
The problem? Few if any lenders these days will make loans to those who already have four or more mortgages. Smith has about 100 current mortgages, he said.
Banks' new restrictions on the number of mortgages available to borrowers won't bother typical home buyers. But it's hobbling people like Smith who invest in rental properties, and could even prolong California's housing slump, some observers say. That's because investors are among the most likely buyers for many of the bank-owned foreclosures now lingering on the market in the state's inland valleys.
"If we can't participate, we can't burn through these inventories and help the market correct," said Geraldine Barry, president of the San Jose Real Estate Investment Association and a friend of Smith's. More often lately, she said, "What I'm hearing from our members now is, "I have a deal; I can't get money'.''
Barry and her husband recently bought a foreclosed house in Sacramento for $114,000; the previous owner owed about $250,000 on the property when the bank repossessed it. Even with a 25 percent down payment, they were unable to find a loan because they have more than four outstanding mortgages, so they paid in cash.
Lenders have curtailed what's available to investors for good reason, said Chris George, president of lender CMG Mortgage in San Ramon and a board member of the California Mortgage Bankers Association. Over the past several years, many financial institutions funded loans for "non-owner-occupied" property purchases by borrowers who provided little documentation of their income or assets, then got slammed by losses as thousands of those borrowers defaulted on their loans.
Consequently, the industry has "dramatically retrenched" on non-owner-occupied loans, George said, and is reverting to lending guidelines last seen eight or 10 years ago.
That means banks once again view these loans as riskier than loans for primary residences, and to qualify borrowers typically need down payments of between 15 and 30 percent, credit scores of 720 or higher, and income and assets they can prove. Lenders also charge higher interest on such loans. Smith, for example, is paying 8.25 percent on the three most recent loans he obtained to buy properties in Dallas. The national average rate for 30-year mortgages for owner-occupied properties, however, was 6.43 percent last month, according to Freddie Mac.
In general, George said, making credit available to consumers is good for the economy and can help the housing market. "However, making credit available that will just create another round of defaults two years from now is not sound decision-making," he said. "We can't afford to continue to do this wrong."
With banks turning them away, those determined to invest in multiple properties will seek alternatives. One option is private-money lenders, who typically demand high rates for short-term loans. Smith said some of his clients who own a dozen or more rentals will add to their portfolios, using money taken from the equity in their primary residences to buy in cash. Community banks might also be a source, George said, even though major banks are shunning investors' business.
Geraldine Barry said she wants to buy more bank-owned California properties in coming months, but has yet to figure out exactly how she will finance deals, if lender restrictions remain in place.
"There are only so many houses I can buy in cash," she said.
real estate market beginning to climb out
The statistical evidence shows the real estate market on Martha’s Vineyard remains in a hole, but the anecdotal evidence suggests it might at last be beginning to climb out.
Figures for the period up to the start of August this year show sales numbers and prices both down sharply compared with the same period in 2007 — which was itself a bad year for real estate.
The median price paid for family homes to August 4 was down in all the Island towns, according to figures from Banker and Tradesman online, which compiles its figures from sale documents.
In some cases, the drops were dramatic, such as in Chilmark, where the year-on-year drop was 50 per cent. But the small sales numbers there as in other smaller towns (in Chilmark just three sales this year, and only one last year), can make the price slump appear more dramatic than it really is.
Still, averaged across the Island, sales numbers were down almost 15 per cent compared with the same period in 2007, and prices were off by more than nine per cent.
In Aquinnah, the median sale price was $1.15 million, compared with $1.4 last year; in Chilmark, $1.46 million, compared with $3.19; in Edgartown, $640,000 compared with $699,000; in Oak Bluffs, $540,000 compared with $645,000; in Tisbury, $449,000 compared with $673,000; and in West Tisbury, $700,000 compared with $816,000.
Total sales numbered 93, compared with 109.
That’s the bad news. The good news is that the number of foreclosures on the Island is relatively low; only 11 so far this year, although there has been a significant (but hard to quantify exactly) number of so-called short-sales — that is sales at prices below the mortgage value.
And while total sales for the year are still down on last year, both agents and the figures indicate a recent increase. For July this year there were 19, compared with just 14 in 2007.
“We’re having a petty good quarter,” said Fred Roven of Martha’s Vineyard Buyer Agents.
“The number of sales has been increasing since about March. I think there were about 15 in March, and in June it was close to 40, compared with 28 in June 2007.
“There are a lot more people looking this summer, compared with the past couple of summers. [It’s] firming up.”
He was not ready to predict that the market had bottomed out, though.
“It might be short-lived, depending on interest rates,” he said
“And the low end of the market is still a problem. Prices might still be dropping, which is really a shame. The opportunities for local people are shrinking; a lot are being bought by investors. It’s hard for people to get mortgages, particularly first buyers,” Mr. Roven said.
As for the relatively low number of foreclosures on the Vineyard, he pointed to a number of factors.
First, despite the decline in prices — maybe 15 or 20 per cent down since the top of the market in early 2006 — values were still strong enough that people could in most cases refinance.
Second, banks themselves were more willing to negotiate terms, because they did not want to get stuck with the properties in a bad market.
“Banks really want if possible to get rid of them even before foreclosure,” Mr. Roven said. “Banker and Tradesman magazine has a foreclosure Web site now. Right now they show just one bank-owned property on the Island.”
Mr. Roven said agents generally are leery of bank-owned sales, in large part because they tend to involve financial institutions based off-Island, sometimes halfway around the world.
The alternative to foreclosure, short-selling, also could be problematic because it means dealing not just with the buyer and selling, but also the mortgage provider — again typically a large, far-away institution.
“I know every office has a few they’re working on,” Mr. Roven said. “I’ve worked on a couple; I’m working on what I think is our third one now.
“I hope and think it will go through, but it’s just the luck of the draw who you get. In a huge company it’s just luck whether you get someone capable or not.
“With short sales and bank-owned [properties] sometimes they can take months to get back to a year. And sometimes you never hear back.”
Martha’s Vineyard Savings Bank president Chris Wells said he is cautiously optimistic about the real estate market, and rather more optimistic about the future role in it of smaller local institutions like his.
The number of new mortgages being sought was “pretty solid” in July, traditionally the slowest of the summer months, he said.
But he also said real estate — and other related businesses like building — is by no means out of the woods yet.
“There are still some pretty considerable transactions in some towns. But the $500,000 and down properties are not moving as fast as you would like to see, and I think the average number of days on the market [before it sells] has climbed again for like the third year in a row,” Mr. Wells said.
“We look at that and it is something to be concerned about. And when we talk to local contractors — plumbing and heating and building — where last year at this time they might be scheduling three or four jobs into the fall and winter season, they might be booking one or still waiting for a job,” he said, adding:
“That’s anecdotal. I don’t know if that’s every contractor.”
For banks like his, though, which did not get involved in the risky business of selling loans, these are times of opportunity.
“If you look at the top 10 mortgage lenders as of the end of 2007,” Mr. Wells said, “I think eight of them are gone. As you look down the list they have either stopped lending, or they don’t exist anymore.
“Our bank and other community banks have benefitted . . . a lot of buyers are turning to smaller community banks, where, as little as a year ago they would go to IndyMac or Countrywide — the larger, more nationwide providers.
“It seems that whenever I see a foreclosure I see Wells Fargo, Washington Mutual, I see names that are not local.
“We’ve had three or four loans that have had active attorney involvement, that have been posted in newspapers, for notice of foreclosure. But we’ve had no foreclosure sales, no classified. We don’t own any foreclosed property.
“We’ve been fortunate.”
He credited it in part to local knowledge. “We have a cyclical economy and we typically see loan delinquency climb in January, February, March. And we’ve had some months higher than normal,” he said.
But in the end it paid to know the people to whom you were lending.
Figures for the period up to the start of August this year show sales numbers and prices both down sharply compared with the same period in 2007 — which was itself a bad year for real estate.
The median price paid for family homes to August 4 was down in all the Island towns, according to figures from Banker and Tradesman online, which compiles its figures from sale documents.
In some cases, the drops were dramatic, such as in Chilmark, where the year-on-year drop was 50 per cent. But the small sales numbers there as in other smaller towns (in Chilmark just three sales this year, and only one last year), can make the price slump appear more dramatic than it really is.
Still, averaged across the Island, sales numbers were down almost 15 per cent compared with the same period in 2007, and prices were off by more than nine per cent.
In Aquinnah, the median sale price was $1.15 million, compared with $1.4 last year; in Chilmark, $1.46 million, compared with $3.19; in Edgartown, $640,000 compared with $699,000; in Oak Bluffs, $540,000 compared with $645,000; in Tisbury, $449,000 compared with $673,000; and in West Tisbury, $700,000 compared with $816,000.
Total sales numbered 93, compared with 109.
That’s the bad news. The good news is that the number of foreclosures on the Island is relatively low; only 11 so far this year, although there has been a significant (but hard to quantify exactly) number of so-called short-sales — that is sales at prices below the mortgage value.
And while total sales for the year are still down on last year, both agents and the figures indicate a recent increase. For July this year there were 19, compared with just 14 in 2007.
“We’re having a petty good quarter,” said Fred Roven of Martha’s Vineyard Buyer Agents.
“The number of sales has been increasing since about March. I think there were about 15 in March, and in June it was close to 40, compared with 28 in June 2007.
“There are a lot more people looking this summer, compared with the past couple of summers. [It’s] firming up.”
He was not ready to predict that the market had bottomed out, though.
“It might be short-lived, depending on interest rates,” he said
“And the low end of the market is still a problem. Prices might still be dropping, which is really a shame. The opportunities for local people are shrinking; a lot are being bought by investors. It’s hard for people to get mortgages, particularly first buyers,” Mr. Roven said.
As for the relatively low number of foreclosures on the Vineyard, he pointed to a number of factors.
First, despite the decline in prices — maybe 15 or 20 per cent down since the top of the market in early 2006 — values were still strong enough that people could in most cases refinance.
Second, banks themselves were more willing to negotiate terms, because they did not want to get stuck with the properties in a bad market.
“Banks really want if possible to get rid of them even before foreclosure,” Mr. Roven said. “Banker and Tradesman magazine has a foreclosure Web site now. Right now they show just one bank-owned property on the Island.”
Mr. Roven said agents generally are leery of bank-owned sales, in large part because they tend to involve financial institutions based off-Island, sometimes halfway around the world.
The alternative to foreclosure, short-selling, also could be problematic because it means dealing not just with the buyer and selling, but also the mortgage provider — again typically a large, far-away institution.
“I know every office has a few they’re working on,” Mr. Roven said. “I’ve worked on a couple; I’m working on what I think is our third one now.
“I hope and think it will go through, but it’s just the luck of the draw who you get. In a huge company it’s just luck whether you get someone capable or not.
“With short sales and bank-owned [properties] sometimes they can take months to get back to a year. And sometimes you never hear back.”
Martha’s Vineyard Savings Bank president Chris Wells said he is cautiously optimistic about the real estate market, and rather more optimistic about the future role in it of smaller local institutions like his.
The number of new mortgages being sought was “pretty solid” in July, traditionally the slowest of the summer months, he said.
But he also said real estate — and other related businesses like building — is by no means out of the woods yet.
“There are still some pretty considerable transactions in some towns. But the $500,000 and down properties are not moving as fast as you would like to see, and I think the average number of days on the market [before it sells] has climbed again for like the third year in a row,” Mr. Wells said.
“We look at that and it is something to be concerned about. And when we talk to local contractors — plumbing and heating and building — where last year at this time they might be scheduling three or four jobs into the fall and winter season, they might be booking one or still waiting for a job,” he said, adding:
“That’s anecdotal. I don’t know if that’s every contractor.”
For banks like his, though, which did not get involved in the risky business of selling loans, these are times of opportunity.
“If you look at the top 10 mortgage lenders as of the end of 2007,” Mr. Wells said, “I think eight of them are gone. As you look down the list they have either stopped lending, or they don’t exist anymore.
“Our bank and other community banks have benefitted . . . a lot of buyers are turning to smaller community banks, where, as little as a year ago they would go to IndyMac or Countrywide — the larger, more nationwide providers.
“It seems that whenever I see a foreclosure I see Wells Fargo, Washington Mutual, I see names that are not local.
“We’ve had three or four loans that have had active attorney involvement, that have been posted in newspapers, for notice of foreclosure. But we’ve had no foreclosure sales, no classified. We don’t own any foreclosed property.
“We’ve been fortunate.”
He credited it in part to local knowledge. “We have a cyclical economy and we typically see loan delinquency climb in January, February, March. And we’ve had some months higher than normal,” he said.
But in the end it paid to know the people to whom you were lending.
Thursday, August 21, 2008
Falling home sales
Home prices continue to tumble across the country, making homes more affordable in most U.S. cities, according to a new report released Tuesday.
Nationally, 55% of homes sold from April through June were affordable to families earning the U.S. median income of $61,500, according to a quarterly report released Tuesday by the National Association of Home Builders (NAHB).
That's up from 53.8% in the first quarter of 2008, and the most affordable home prices have been since the second quarter of 2004.
"Homes became more affordable because median income and interest rates remained about the same throughout the country, as home prices continued to fall," said Gopal Ahluwalia, an NAHB economist.
Median home prices dropped to $215,000 in the quarter, which are about 10% below year-ago levels of $240,000, according to NAHB.
"This is definitely positive news, because more people can afford to buy a home," said Ahluwalia. "Still, actual sales haven't picked up, because people are waiting on the sidelines as they fear home prices will continue to decline."
Falling home sales have battered the homebuilding industry. The NAHB study followed a Census Bureau report also released Tuesday that showed home building fell sharply in July to a 17-year low. Monday, a monthly NAHB report showed homebuilders' confidence in the housing market remained at record low levels.
Tale of two cities: Indianapolis and New York
Indianapolis led the the nation's major metro areas in home affordability for the 12th straight quarter. The median price of homes sold during the second quarter was $108,000, down from $122,000 last year. And 91.6% of the households there earning the median income of $65,100 could afford to buy a median priced home. That's up from 86.8% last year.
New York was the least affordable major housing market in the country, according to the report. It was the first time that a major metropolitan area outside of California was the least affordable home market in the 17-year history of the report. Los Angeles was the least affordable housing market at this point last year.
"Prices went down a lot in both areas, but they fell a lot more in Los Angeles," said Ahluwalia. "Prices are declining very rapidly in California because of a large supply and low demand."
In New York, the median home price fell slightly year over year to $481,000 from $510,00. That led to an increase in affordability; 11.4% of households earning the median income of $63,000 could afford to buy a median priced home, up from 6.3% in the second quarter of 2007.
Despite that change, New York still fell to the least affordable area from second-least affordable last year, according to this survey.
Nationally, 55% of homes sold from April through June were affordable to families earning the U.S. median income of $61,500, according to a quarterly report released Tuesday by the National Association of Home Builders (NAHB).
That's up from 53.8% in the first quarter of 2008, and the most affordable home prices have been since the second quarter of 2004.
"Homes became more affordable because median income and interest rates remained about the same throughout the country, as home prices continued to fall," said Gopal Ahluwalia, an NAHB economist.
Median home prices dropped to $215,000 in the quarter, which are about 10% below year-ago levels of $240,000, according to NAHB.
"This is definitely positive news, because more people can afford to buy a home," said Ahluwalia. "Still, actual sales haven't picked up, because people are waiting on the sidelines as they fear home prices will continue to decline."
Falling home sales have battered the homebuilding industry. The NAHB study followed a Census Bureau report also released Tuesday that showed home building fell sharply in July to a 17-year low. Monday, a monthly NAHB report showed homebuilders' confidence in the housing market remained at record low levels.
Tale of two cities: Indianapolis and New York
Indianapolis led the the nation's major metro areas in home affordability for the 12th straight quarter. The median price of homes sold during the second quarter was $108,000, down from $122,000 last year. And 91.6% of the households there earning the median income of $65,100 could afford to buy a median priced home. That's up from 86.8% last year.
New York was the least affordable major housing market in the country, according to the report. It was the first time that a major metropolitan area outside of California was the least affordable home market in the 17-year history of the report. Los Angeles was the least affordable housing market at this point last year.
"Prices went down a lot in both areas, but they fell a lot more in Los Angeles," said Ahluwalia. "Prices are declining very rapidly in California because of a large supply and low demand."
In New York, the median home price fell slightly year over year to $481,000 from $510,00. That led to an increase in affordability; 11.4% of households earning the median income of $63,000 could afford to buy a median priced home, up from 6.3% in the second quarter of 2007.
Despite that change, New York still fell to the least affordable area from second-least affordable last year, according to this survey.
Wednesday, August 20, 2008
interest rate
The average contract interest rate for 30-year fixed-rate mortgages decreased to 6.47 percent from 6.57 percent, with points decreasing to 1.10 from 1.14 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.
The average contract interest rate for 15-year fixed-rate mortgages decreased to 5.99 percent from 6.17 percent, with points increasing to 1.18 from 1.06 (including the origination fee) for 80 percent LTV loans.
The average contract interest rate for one-year ARMs decreased to 7.07 percent from 7.15 percent, with points increasing to 0.42 from 0.38 (including the origination fee) for 80 percent LTV loans
The average contract interest rate for 15-year fixed-rate mortgages decreased to 5.99 percent from 6.17 percent, with points increasing to 1.18 from 1.06 (including the origination fee) for 80 percent LTV loans.
The average contract interest rate for one-year ARMs decreased to 7.07 percent from 7.15 percent, with points increasing to 0.42 from 0.38 (including the origination fee) for 80 percent LTV loans
Tuesday, August 19, 2008
rates continued to move higher
Last week, rates continued to move higher early in the week, until rates managed to rally and end up close to where they began. The week ahead might appear to be light on economic news, however there are several economic reports scheduled for this week that can have an impact on rates. So where are rates headed?
Last week, rates began on an upward trek, however after several dismal earnings reports from large retailers like Macys and Deere & Co. the inflow of investment from stocks to bonds helped bonds rally and rates decline to just about where they started.
The week ahead features two key reports for the housing industry, both Building Permits and Housing starts will be released on Tuesday. In addition to these housing industry reports the Producer Price Index (PPI) will also be released on Tuesday. However, with the recent retreat in crude oil prices many economists believe the PPI report might be unjustly inflated. Will the bond investors agree, or will they take this report at face value?
Also in store for this week is the Philadelphia Fed Report, scheduled for release on Thursday. This monthly survey of manufacturing purchasing managers conducting business around the tri-state area of Pennsylvania, New Jersey, and Delaware is one of the most-watched manufacturing reports. If this report is strong investors might see fit to move a significant portion of their investments back into stocks, at the detriment of bonds. If this occurs rates will likely move higher.
The bottom line: There is a strong possibility that rate movement may be exactly opposite of last week, that is moving lower at the beginning of the week and higher before the week comes to a close. In any case, Tuesday and Thursday's economic news will likely influence rate movement for the week.
Last week, rates began on an upward trek, however after several dismal earnings reports from large retailers like Macys and Deere & Co. the inflow of investment from stocks to bonds helped bonds rally and rates decline to just about where they started.
The week ahead features two key reports for the housing industry, both Building Permits and Housing starts will be released on Tuesday. In addition to these housing industry reports the Producer Price Index (PPI) will also be released on Tuesday. However, with the recent retreat in crude oil prices many economists believe the PPI report might be unjustly inflated. Will the bond investors agree, or will they take this report at face value?
Also in store for this week is the Philadelphia Fed Report, scheduled for release on Thursday. This monthly survey of manufacturing purchasing managers conducting business around the tri-state area of Pennsylvania, New Jersey, and Delaware is one of the most-watched manufacturing reports. If this report is strong investors might see fit to move a significant portion of their investments back into stocks, at the detriment of bonds. If this occurs rates will likely move higher.
The bottom line: There is a strong possibility that rate movement may be exactly opposite of last week, that is moving lower at the beginning of the week and higher before the week comes to a close. In any case, Tuesday and Thursday's economic news will likely influence rate movement for the week.
Monday, August 18, 2008
No Income loans
In the mortgage industry, they are called "liar loans" — mortgages approved without requiring proof of the borrower's income or assets. The worst of them earn the nickname "ninja loans," short for "no income, no job, and (no) assets."
The nation's struggling housing market, already awash in subprime foreclosures, is now getting hit with a second wave of losses as homeowners with liar loans default in record numbers. In some parts of the country, the loans are threatening to drag out the mortgage crisis for another two years.
"Those loans are going to perform very badly," said Thomas Lawler, a Virginia housing economist. "They're heavily concentrated in states where home prices are plummeting" such as California, Florida, Nevada and Arizona.
Many homeowners with liar loans are stuck. They can't refinance because housing prices in those markets have nose-dived, and lenders are now demanding full documentation of income and assets.
Losses on liar loans could total $100 billion, according to Moody's Economy.com. That's on top of the $400 billion in expected losses from subprime loans.
Fannie Mae and Freddie Mac, the nation's largest buyers and backers of mortgages, lost a combined $3.1 billion between April and June. Half of their credit losses came from sour liar loans, which are officially called Alternative-A loans (Alt-A for short) because they are seen as a step below A-credit, or prime, borrowers.
Many of the lenders that specialized in such loans are now defunct — banks such as American Home Mortgage, Bear Stearns and IndyMac Bank. More lenders may follow.
The mortgage bankers and brokers who survived were more cautious, but acknowledge they too were swept up in the housing hysteria to some extent.
"Everybody drank the Kool-Aid" said David Zugheri, co-founder of Texas-based lender First Houston Mortgage. They knew if they didn't give the borrower the loan they wanted, the borrower "could go down the street and get that loan somewhere else."
The loans were also immensely profitable for the mortgage industry because they carried higher fees and higher interest rates. A broker who signed up a borrower for a liar loan could reap as much as $15,000 in fees for a $300,000 loan. Traditional lending is far less lucrative, netting brokers around $2,000 to $4,000 in fees for a fixed-rate loan.
During the housing boom, liar loans were especially popular among investors seeking to flip properties quickly. They were also commonly paired with "interest only" features that allowed borrowers to pay just the interest on the debt and none of the principal for the first several years.
Even riskier were "pick-a-payment" or option ARM loans — adjustable-rate mortgages that gave borrowers the choice to defer some of their interest payments and add them to the principal.
While some borrowers were aware of their risky features and used them to gamble on their home's value or pull out money for vacations, others like Salvatore Fucile insist they were victims of predatory lending.
Fucile, who is 82, and his wife, Clara, wound up in an option ARM from IndyMac after consolidating two mortgages on their suburban Philadelphia home. Fucile was attracted by the low monthly payments, but says the mortgage broker who signed him up for the loan didn't tell him the principal balance could increase. It has risen about $24,000 to $276,000.
"He put me in a bad position," said Fucile, who fears he will be forced into foreclosure. "He misled me."
IndyMac was taken over by the Federal Deposit Insurance Corp. last month.
FDIC spokesman David Barr declined to discuss the Fuciles' case, but said the agency has temporarily frozen all IndyMac foreclosures and is working on a broad plan to modify mortgages held by the Pasadena, Calif-based bank.
The low monthly payments of liar loans helped many home buyers afford to purchase in areas of the country where prices were skyrocketing. But they also helped drive up prices by allowing people to buy more than they could truly afford. Case in point: about 40 percent of loans made in California and Nevada in 2005 and 2006 were either interest-only or option ARMs, according to First American CoreLogic.
"It was pretty evident that the only thing that was supporting these loans was higher home prices" said Tom LaMalfa, managing director at Wholesale Access, a Columbia, Md.-based mortgage research firm.
Now that prices have fallen, almost 13 percent of borrowers with liar loans were at least two months behind on their payments in May, nearly four times higher than a year earlier, according to First American CoreLogic.
Countrywide Financial Corp., now part of Bank of America Corp., was one of the top providers of liar loans. The company is now is paying the price. More than 12 percent of Countrywide's $25.4 billion in pick-a-payment loans are in default, and 83 percent had little or no documentation, according to a Securities and Exchange Commission filing last week.
Critics say Fannie Mae and Freddie Mac, which bought or guaranteed liar loans from lenders including Countrywide and IndyMac, should have stuck with traditional 30-year, fixed-rate mortgages.
"I personally think that they ventured beyond their mission," said Richard Smith, a mortgage broker in Chattanooga, Tenn. Because of their decision to back shakier loans, he said, "the home-buying public is going to have to pay."
Fannie and Freddie entered the market for risky loans just as they emerged from accounting scandals. At the time, Wall Street giants such as Bear Stearns and Lehman Brothers Holdings Inc. were backing a growing share of ever-riskier loans, and both government-sponsored companies felt pressure to compete.
Freddie Mac wanted "to stay competitive in the market and take steps to preserve market share," spokesman Michael Cosgrove said.
Fannie Mae increased its purchases of liar mortgages "at the requests of many of our customers," according to spokesman Brian Faith.
Both companies also were able to use subprime and liar-loan investments to meet government-set affordable housing goals.
Now Fannie, Freddie and other mortgage investors are reviewing defaulted loans to see if lenders committed fraud. If they find enough evidence, they could force lenders to assume responsibility for losses.
But it's unclear how much money they might recover, especially from lenders that have gone under or been seized by the government.
As with any product the consumer must assume some responsibilty. These liar loans would not have been so popular if not for the greed of the investor. The investor thought the home fliping party would never end.
The nation's struggling housing market, already awash in subprime foreclosures, is now getting hit with a second wave of losses as homeowners with liar loans default in record numbers. In some parts of the country, the loans are threatening to drag out the mortgage crisis for another two years.
"Those loans are going to perform very badly," said Thomas Lawler, a Virginia housing economist. "They're heavily concentrated in states where home prices are plummeting" such as California, Florida, Nevada and Arizona.
Many homeowners with liar loans are stuck. They can't refinance because housing prices in those markets have nose-dived, and lenders are now demanding full documentation of income and assets.
Losses on liar loans could total $100 billion, according to Moody's Economy.com. That's on top of the $400 billion in expected losses from subprime loans.
Fannie Mae and Freddie Mac, the nation's largest buyers and backers of mortgages, lost a combined $3.1 billion between April and June. Half of their credit losses came from sour liar loans, which are officially called Alternative-A loans (Alt-A for short) because they are seen as a step below A-credit, or prime, borrowers.
Many of the lenders that specialized in such loans are now defunct — banks such as American Home Mortgage, Bear Stearns and IndyMac Bank. More lenders may follow.
The mortgage bankers and brokers who survived were more cautious, but acknowledge they too were swept up in the housing hysteria to some extent.
"Everybody drank the Kool-Aid" said David Zugheri, co-founder of Texas-based lender First Houston Mortgage. They knew if they didn't give the borrower the loan they wanted, the borrower "could go down the street and get that loan somewhere else."
The loans were also immensely profitable for the mortgage industry because they carried higher fees and higher interest rates. A broker who signed up a borrower for a liar loan could reap as much as $15,000 in fees for a $300,000 loan. Traditional lending is far less lucrative, netting brokers around $2,000 to $4,000 in fees for a fixed-rate loan.
During the housing boom, liar loans were especially popular among investors seeking to flip properties quickly. They were also commonly paired with "interest only" features that allowed borrowers to pay just the interest on the debt and none of the principal for the first several years.
Even riskier were "pick-a-payment" or option ARM loans — adjustable-rate mortgages that gave borrowers the choice to defer some of their interest payments and add them to the principal.
While some borrowers were aware of their risky features and used them to gamble on their home's value or pull out money for vacations, others like Salvatore Fucile insist they were victims of predatory lending.
Fucile, who is 82, and his wife, Clara, wound up in an option ARM from IndyMac after consolidating two mortgages on their suburban Philadelphia home. Fucile was attracted by the low monthly payments, but says the mortgage broker who signed him up for the loan didn't tell him the principal balance could increase. It has risen about $24,000 to $276,000.
"He put me in a bad position," said Fucile, who fears he will be forced into foreclosure. "He misled me."
IndyMac was taken over by the Federal Deposit Insurance Corp. last month.
FDIC spokesman David Barr declined to discuss the Fuciles' case, but said the agency has temporarily frozen all IndyMac foreclosures and is working on a broad plan to modify mortgages held by the Pasadena, Calif-based bank.
The low monthly payments of liar loans helped many home buyers afford to purchase in areas of the country where prices were skyrocketing. But they also helped drive up prices by allowing people to buy more than they could truly afford. Case in point: about 40 percent of loans made in California and Nevada in 2005 and 2006 were either interest-only or option ARMs, according to First American CoreLogic.
"It was pretty evident that the only thing that was supporting these loans was higher home prices" said Tom LaMalfa, managing director at Wholesale Access, a Columbia, Md.-based mortgage research firm.
Now that prices have fallen, almost 13 percent of borrowers with liar loans were at least two months behind on their payments in May, nearly four times higher than a year earlier, according to First American CoreLogic.
Countrywide Financial Corp., now part of Bank of America Corp., was one of the top providers of liar loans. The company is now is paying the price. More than 12 percent of Countrywide's $25.4 billion in pick-a-payment loans are in default, and 83 percent had little or no documentation, according to a Securities and Exchange Commission filing last week.
Critics say Fannie Mae and Freddie Mac, which bought or guaranteed liar loans from lenders including Countrywide and IndyMac, should have stuck with traditional 30-year, fixed-rate mortgages.
"I personally think that they ventured beyond their mission," said Richard Smith, a mortgage broker in Chattanooga, Tenn. Because of their decision to back shakier loans, he said, "the home-buying public is going to have to pay."
Fannie and Freddie entered the market for risky loans just as they emerged from accounting scandals. At the time, Wall Street giants such as Bear Stearns and Lehman Brothers Holdings Inc. were backing a growing share of ever-riskier loans, and both government-sponsored companies felt pressure to compete.
Freddie Mac wanted "to stay competitive in the market and take steps to preserve market share," spokesman Michael Cosgrove said.
Fannie Mae increased its purchases of liar mortgages "at the requests of many of our customers," according to spokesman Brian Faith.
Both companies also were able to use subprime and liar-loan investments to meet government-set affordable housing goals.
Now Fannie, Freddie and other mortgage investors are reviewing defaulted loans to see if lenders committed fraud. If they find enough evidence, they could force lenders to assume responsibility for losses.
But it's unclear how much money they might recover, especially from lenders that have gone under or been seized by the government.
As with any product the consumer must assume some responsibilty. These liar loans would not have been so popular if not for the greed of the investor. The investor thought the home fliping party would never end.
Sunday, August 17, 2008
State pension fund to buy SC real estate., the new money is here
South Carolina’s state pension managers see a chance for that $29 billion fund to profit from the real estate collapse that has affected much of the country.
Armed with their new ability to invest in real estate, the pension managers see commercial real estate as a good value, saying it could return double-digit profits for the state’s current and future retirees.
Using only a small portion of the pension fund to buy real estate minimizes the risk, they say.
But critics worry the commercial real estate market — including office buildings, malls and shopping centers — could suffer the same drop in prices that has hit homeowners, threatening money meant to pay for the retirements of tens of thousands of state workers.
Is the state smartly buying low — or is South Carolina hitching its fate to investments that have lost value and could lose more?
MEASURING RISK
Those responsible for the state’s pension system say there are bargains to be had in a down economy.
A volatile market — hurt by bad loans, tight credit, high energy prices and inflation — has decreased the price of most securities. As a result, the value of the state’s pension system, which holds primarily stocks and bonds, now is worth less than it was last quarter.
In expanding its investments into real estate, “we’re making sure we’ve done all the right things to shore up our decision-making process,” said State Treasurer Converse Chellis.
He says the state has purchased mortgage-backed commercial real estate securities for only a fraction of what those investments are worth. The goal, Chellis said, is to buy low and sell high, paying 20 cents on the dollar for securities and, later, selling them for 40 cents or 60 cents on the dollar.
Robert Borden, chief investment officer of the South Carolina Retirement Systems Investment Commission, said because real estate has lost so much value in the past two years, now is the time to buy.
The panel has invested about 1 percent of the state’s $29 billion in pension money in real estate.
Borden said the investment panel has hired two firms to advise it.
Even assuming foreclosure rates of 30 percent or losing half the value of the collateral behind its real estate securities, Borden said, analysis shows the state should make money on its real estate investments, up to double-digit returns.
But critics, such as New York University economist Nouriel Roubini, think the worst is yet to come for the real estate market.
“There are plenty of new residential ghost towns in the West in places like Nevada, California, Arizona,” Roubini wrote in the RGE Monitor in November. “Why would anyone want to build new shopping strips/malls, hotels and offices in such ghost towns?”
University of South Carolina Moore School of Business professor William Harrison Jr. says commercial real estate values have suffered “mild to moderate fallout” in the real estate collapse.
Whether the state’s decision to invest in commercial real estate was wise depends on the price it paid, he added.
Harrison frequently advises real estate developers and said most have reported banks clamping down on loans. With fewer loans available, Harrison said, prices are likely to fall.
But, for an investor, the reward often justifies the risk, he said.
“It’s not like they don’t know what’s going on out there,” Harrison said. “If I got the right price, I might go out and buy residential mortgage-backed securities.”
LOOKING FOR A BIGGER BANG
Moving into real estate is only the latest change that South Carolina has made in how it invests pension fund money.
The theory, the Retirement Systems’ Borden said, is that by diversifying the types of investments it has, the fund reduces its overall risk.
After pension plan funds for decades had been invested solely in low-risk, low-return bonds, voters in 1996 approved allowing the pension plan to buy stocks. In 2006, voters approved allowing it to buy foreign stocks, real estate and other private equity options.
Voters will decide this fall whether to allow local government pension plans the same investment options.
The retirement system has 400,000 current and future retirees. They include state and local government workers, university employees and teachers.
Since plan officials acquired more investment options, the state’s total return on its investments has risen to the 78th percentile from the sixth among 121 large pension funds, according to the retirement system. That means South Carolina is doing better than 78 percent of pension funds.
The pension fund also has raised its projected profits to 8 percent a year, expectations Gov. Mark Sanford has said are too optimistic. According to the pension fund’s most recent quarterly report available, the value of its investments is down 4.16 percent this year.
The state previously has struggled with the timing of its investments. For instance, it increased its stock holdings just after the late 1990s bull market peaked.
But Harrison said the reward on real estate investments often justifies the higher risk. He noted the New York-based Morgan Stanley investment bank made billions during the last recession buying cut-rate real estate.
"If the State of South Carolina is smart enough to invest in it's own real estate it will only be a matter of time before other investors will be following this investment plan" says local real estate agents. Top market investors have been waiting for "new money" to start the real estate recovery process and it looks like it' here.
Armed with their new ability to invest in real estate, the pension managers see commercial real estate as a good value, saying it could return double-digit profits for the state’s current and future retirees.
Using only a small portion of the pension fund to buy real estate minimizes the risk, they say.
But critics worry the commercial real estate market — including office buildings, malls and shopping centers — could suffer the same drop in prices that has hit homeowners, threatening money meant to pay for the retirements of tens of thousands of state workers.
Is the state smartly buying low — or is South Carolina hitching its fate to investments that have lost value and could lose more?
MEASURING RISK
Those responsible for the state’s pension system say there are bargains to be had in a down economy.
A volatile market — hurt by bad loans, tight credit, high energy prices and inflation — has decreased the price of most securities. As a result, the value of the state’s pension system, which holds primarily stocks and bonds, now is worth less than it was last quarter.
In expanding its investments into real estate, “we’re making sure we’ve done all the right things to shore up our decision-making process,” said State Treasurer Converse Chellis.
He says the state has purchased mortgage-backed commercial real estate securities for only a fraction of what those investments are worth. The goal, Chellis said, is to buy low and sell high, paying 20 cents on the dollar for securities and, later, selling them for 40 cents or 60 cents on the dollar.
Robert Borden, chief investment officer of the South Carolina Retirement Systems Investment Commission, said because real estate has lost so much value in the past two years, now is the time to buy.
The panel has invested about 1 percent of the state’s $29 billion in pension money in real estate.
Borden said the investment panel has hired two firms to advise it.
Even assuming foreclosure rates of 30 percent or losing half the value of the collateral behind its real estate securities, Borden said, analysis shows the state should make money on its real estate investments, up to double-digit returns.
But critics, such as New York University economist Nouriel Roubini, think the worst is yet to come for the real estate market.
“There are plenty of new residential ghost towns in the West in places like Nevada, California, Arizona,” Roubini wrote in the RGE Monitor in November. “Why would anyone want to build new shopping strips/malls, hotels and offices in such ghost towns?”
University of South Carolina Moore School of Business professor William Harrison Jr. says commercial real estate values have suffered “mild to moderate fallout” in the real estate collapse.
Whether the state’s decision to invest in commercial real estate was wise depends on the price it paid, he added.
Harrison frequently advises real estate developers and said most have reported banks clamping down on loans. With fewer loans available, Harrison said, prices are likely to fall.
But, for an investor, the reward often justifies the risk, he said.
“It’s not like they don’t know what’s going on out there,” Harrison said. “If I got the right price, I might go out and buy residential mortgage-backed securities.”
LOOKING FOR A BIGGER BANG
Moving into real estate is only the latest change that South Carolina has made in how it invests pension fund money.
The theory, the Retirement Systems’ Borden said, is that by diversifying the types of investments it has, the fund reduces its overall risk.
After pension plan funds for decades had been invested solely in low-risk, low-return bonds, voters in 1996 approved allowing the pension plan to buy stocks. In 2006, voters approved allowing it to buy foreign stocks, real estate and other private equity options.
Voters will decide this fall whether to allow local government pension plans the same investment options.
The retirement system has 400,000 current and future retirees. They include state and local government workers, university employees and teachers.
Since plan officials acquired more investment options, the state’s total return on its investments has risen to the 78th percentile from the sixth among 121 large pension funds, according to the retirement system. That means South Carolina is doing better than 78 percent of pension funds.
The pension fund also has raised its projected profits to 8 percent a year, expectations Gov. Mark Sanford has said are too optimistic. According to the pension fund’s most recent quarterly report available, the value of its investments is down 4.16 percent this year.
The state previously has struggled with the timing of its investments. For instance, it increased its stock holdings just after the late 1990s bull market peaked.
But Harrison said the reward on real estate investments often justifies the higher risk. He noted the New York-based Morgan Stanley investment bank made billions during the last recession buying cut-rate real estate.
"If the State of South Carolina is smart enough to invest in it's own real estate it will only be a matter of time before other investors will be following this investment plan" says local real estate agents. Top market investors have been waiting for "new money" to start the real estate recovery process and it looks like it' here.
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