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September 14, 2008

Fannie and Freddie fall to foreclosure, but, still, lenders lend

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Sun City Real Estate Broker

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This is my column for this week from the Arizona Republic (permanent link).

 
Fannie and Freddie fall to foreclosure, but, still, lenders lend

I write this column at the beginning of the week, and it appears at the end of the week. My topics are usually timeless, but, if I turn my attention to current events, there’s always the chance that I’ll end up with my foot in my mouth.

Even so, the news that matters most in residential real estate this week is the takeover by the federal government of the Federal National Mortgage Association (FannieMae) and the Federal Home Loan Mortgage Corporation (FreddieMac). These two quasi-private corporations define the lion’s share of the secondary mortgage market in the United States.

What does that mean? If you got a conforming loan for your home, it will have been sold into the secondary mortgage market in short order. FannieMae or FreddieMac would have guaranteed the loan to investors, this so your lender could have had a renewed supply of capital from which to make new loans. Federal Housing Authority and Veterans’ Administration loans would have been guaranteed by those entities, and sub-prime (non-conforming) loans would have been marketed directly to private investors. The secondary mortgage market exists to keep loan originators liquid in a market where very few people keep their savings in banks.

Given the federal takeover, has the sky fallen on the secondary mortgage market? No, although things may be a little sluggish as the newly-installed management teams learn the ropes. But as San Diego real estate broker Jeff Brown says, “Lenders lend.” There are still plenty of dollars chasing mortgages, so there will be mortgages chasing dollars. It’s plausible that interest rates could even go down, now that the secondary mortgage market has a rich Uncle Sam to back its loans.

What is not so plausible is the notion that investors will suddenly abandon housing altogether. Things will shake out. The ideal situation would be for a new free-market clearinghouse for the secondary mortgage market to arise. A business like that could cherry-pick the strongest loans, those least likely to go into foreclosure, leaving the more marginal loans to the Feds — the FederalExpress principle.

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August 16, 2008

What went wrong in the Phoenix real estate market? We told homeowners to treat their homes like investments — and they did…

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Sun City Real Estate Broker

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This is my column for this week from the Arizona Republic (permanent link).

 
What went wrong in the Phoenix real estate market? We told homeowners to treat their homes like investments — and they did…

If you were to turn back the clock on the Phoenix real estate market by four years — that would be just about right.

Judging by prices for bread-and-butter homes, it’s just as if the last four years didn’t happen. The average stucco and tile suburban dream home sold in July of 2008 for almost the same price you would have paid for it in July of 2004.

A lot has happened since then, of course. The 1,400 square foot single family home you could have had back then for $150,000 soared to $250,000 by December of 2005. That seemed like $100,000 in free money, and, regrettably, many people borrowed against that paper equity in their homes. Even if they did not, it has proved difficult to eradicate that entirely imaginary $100,000 from list prices.

The real estate market got hammered good and hard by two very bad ideas. The first is that homeownership is an unlimited good, that everyone should own a home regardless of their circumstances. Governments — and the National Association of Realtors — came up with program after program to induce more and more people to buy homes — regardless of their income, regardless of their credit, regardless of their debt load.

At the same time, lenders threw away all of their old, time-tested, flinty-eyed ideas about thrift, declaring that real estate investment was just like securities investment, the leveraged path to assured wealth.

By the old rules, a homeowner or rental property investor had worked and saved for years to accumulate a down payment. That down-payment was more than enough to cover the foreseeable losses of a foreclosure action, so the loan was secured by the property. Buyers and investors didn’t abandon homes when the market went down, dumping the investment like a declining stock in the face of a margin call.

The market is what it is, but it would be a boon for all of us if we could turn back the clock on those four years and play the game over — by the old rules.

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August 9, 2008

There’s more to the mortgage relief bill than just mortgage relief

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Sun City Real Estate Broker

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This is my column for this week from the Arizona Republic (permanent link).

 
There’s more to the mortgage relief bill than just mortgage relief

Having trouble making your mortgage payments? You might be able to make a change in your loan, thanks to the mortgage relief bill President Bush recently signed into law. Under the bill, you can convert your high-interest adjustable-rate loan to a lower-interest fixed-rate note if you meet what might, in a declining market, seem to be Catch-22-like guidelines: Your payment must be more than 31% of your income, and your new loan cannot exceed 90% of your home’s value. Help is available — provided you don’t need it.

Starting October 1st, seller-paid down-payment assistance grants will be outlawed for FHA loans. This is bad news for lower-priced neighborhoods in Metropolitan Phoenix, where as many as nine out of ten homes are being sold with down-payment assistance. Expect to see a flurry of this activity in the next two months.

But the left hand gives where the right hand takes away: Buyers who have not owned a home for three years can take a $7,500 “refundable” tax-credit if they buy between April 9, 2008 and July 1, 2009. The credit is to be repaid over the next 15 years.

Perhaps the biggest change introduced by the bill is a revision of the capital gains exclusion rules. Since 1997, sellers have been able to deduct up to $250,000 of the capital gain on the primary residence from their tax burden — up to $500,000 for married couples — if they lived in the home for at least 24 months out of the preceding 60. Under the new law, the deduction will be pro-rated over those 60 months. If you live in the home for the full five years, you will take the full deduction. If you live there for three years out of the five, you’ll deduct only 60%.

In the long run, this will slow down the level of residence-churning seen among monied home-owners. In the short run, expect a lot of pricey homes to sell between now and January 1st, when the old exclusion goes away.

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July 15, 2008

Don’t learn all the wrong lessons about creative mortgages

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Sun City Real Estate Broker

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This is my column for last week from the Arizona Republic (permanent link).

 
Don’t learn all the wrong lessons about creative mortgages

Arguably, the Phoenix real estate market is in a state of incipient recovery. Will there be more bad news? Certainly. There are still thousands of homes stuck in the foreclosure process. But prices are low enough, by now, that our surplus inventory will be absorbed — by investors, new-comers and second-home bargain-hunters.

The bad news is that, at the end of all this, we will have learned all the wrong lessons from the real estate market downturn.

Are Adjustable Rate Mortgages a bad thing? People learned to hate the first generation of ARMs, so lenders built in guaranteed flat starter rates, fixed adjustment periods, maximum adjustment caps. But even with all that, ARMs came through the down market with a sullied reputation. With fixed rates still riding so low, ARMs don’t make a lot of sense right now, but that doesn’t mean they never make sense.

How about stated-income loans? Many of the foreclosed homes in the Valley were bought on stated income. But the problem wasn’t the loans, it was the buyers — who lied about their income — and the lenders — who let them get away with it.

Negative-amortization loans were another source of foreclosures, even though the idea behind the loan product itself is perfectly sound — in an appreciating real estate market.

The problem with all these loan products — and other “exotics” — was not the particular loan program. The problem was the profligacy of a surging real estate market — coupled with the securitization of mortgages.

Everyone acted as if the party would never end, that home prices would continue to rise indefinitely. Still worse, lenders had socialized the risk of their poorly-vetted loans to securities investors. Ultimately, lenders didn’t have to care if their loans were properly secured by good credit, steady income and valuable assets.

You can blame the people involved if you want, but don’t blame creative mortgage programs. Everything’s a trade-off, and it could make sense for you to get a stated neg-am ARM for your next home. But this time around there will be a hefty down payment.

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April 13, 2008

Zillow.com’s Mortgage Marketplace brings anonymous apples-to-apples mortgage rate quotes to consumers, free consumer leads to lenders

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Sun City Real Estate Broker

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This is my column for this week from the Arizona Republic (permanent link):

 
Zillow.com’s Mortgage Marketplace brings anonymous apples-to-apples mortgage rate quotes to consumers, free consumer leads to lenders

Wouldn’t it be great if you could get a broad array of mortgage quotes without having to make dozens of phone calls? And what if you could make a true apples-to-apples comparison among quotes? Better still, what if you could remain anonymous, making yourself known to the lender only when you are ready to do business?

Seattle-based real estate start-up Zillow.com last week released its long-anticipated mortgage lending product, called the Mortgage Marketplace, and it offers all those features and more.

Unlike Zillow’s “Zestimates,” the loan quotes are generated by real people, working lenders. Zillow will basically be acting as a hands-off intermediary between borrowers and loan originators.

Consumers using Zillow’s new Mortgage Marketplace will be able to anonymously solicit bids for loans from participating lenders. The consumer will fill out a detailed form disclosing all pertinent financial details.

The form will be submitted anonymously to participating lenders, who will, in their turn, produce estimated loan quotes, submitting them, through Zillow, to the consumer. The consumer will then have the choice to make direct contact with particular lenders to decide whom to do business with.

To a very large degree, the information asymmetry between lender and borrower will be done away with, since the loan quote will detail every fee associated with the loan. Moreover, Zillow will be implementing a reputation-management system whereby borrowers will be able to rate lenders on their performance.

In return, the lenders will receive Zillow’s mortgage leads at no cost.

What’s in it for Zillow.com? When you fill out a form requesting a loan quote, Zillow will be writing “cookies” to your local browser. They won’t be storing your financial details on their own servers, but they will be able to access those cookies in the future to target specific ads at you according to your demographic characteristics. Zillow will also be selling access to these cookies to other ad-supported sites.

So, just as with free-TV, in exchange for looking at advertising, you will get free anonymous mortgage quotes and lenders will get free mortgage leads.

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February 19, 2008

Down Payment Assistance is another creative financing option you can deploy to make sure yours is the home that sells

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Sun City Real Estate Broker

Author website

This is my column for this week from the Arizona Republic (permanent link):

 
Down Payment Assistance is another creative financing option you can deploy to make sure yours is the home that sells

It’s a hard world for home sellers right now. It’s possible that things are slowly getting better, but a qualified buyer still has at least ten suitable homes to choose from.

Does this mean you might sell now, or you might sell a little later? Probably not.

Does it mean you might sell for your price, or you might have to accept a little less? Probably not.

What it means is that, if your home is not the one that answers most of a potential buyer’s needs, it probably won’t sell at all in this market.

We’ve talked before about being the most appealing — best priced, best prepared, best presented. These are the homes that will sell to the best qualified buyers — while the near-misses languish month-after-month.

We’ve talked about using seller-financing to help less-qualified buyers. Carrying back a note for a third mortgage entails a risk of loss, but, again, that marginal difference can be moot if the house wouldn’t sell otherwise, or if it sells months later for a much lower price.

There is another creative financing avenue you can pursue, although this one comes with an assured loss to the seller. It’s called Down Payment Assistance. Through programs like AmeriDream or Nehemiah, sellers contribute a portion of the sales price to serve as down payment or closing cost assistance to the buyers, who receive those funds at close of escrow as a grant.

This is what I call Psycho Lender Math at its worst, since the lender is permitting the sellers to discount the home by a huge percentage while pretending that that same pile of money is coming to the buyers as a grant from a neutral third party.

The house still has to appraise for the full purchase price, so it really is just a seller discount disguised as a shell game — but if it means your house sells while all the others languish, you still might be ahead of the game.

These programs require advance legwork, so talk to your Realtor about what you need to do to participate. Note also that both programs are slated to be discontinued and are being kept alive, for now, by court intervention. If you do initiate a transaction involving Down Payment Assistance, it probably makes sense to act fast.

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January 12, 2008

Seller financing can give you an edge over your competition in the Phoenix real estate market

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Sun City Real Estate Broker

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This is my column for this week from the Arizona Republic (permanent link):

 
Seller financing can give you an edge over your competition in the Phoenix real estate market

If you have significant equity in your home, you have a potent weapon at your disposal on resale.

The big news this year is likely to be more and more stories of people with little or no equity trying to get their homes sold. Values for an average suburban Phoenix home were down 14.66% year-over-year. That doesn’t sound too bad, but prices were down almost six percent just in December. We’re down 24% from the peak in December of 2005, on average.

But here’s the silver lining: If you bought that average home in December of 2003, and if you resisted the impulse to refinance your loan, you’re still up over 40% from your purchase price.

That equity gives you a source of leverage on resale that you might not have considered.

First, as always, for your home to sell it must be priced right, prepared right and presented right to the marketplace. You can’t do any kind of elaborate negotiations if buyers don’t even see your house.

But because you have equity in the home, you have the ability to help a willing buyer navigate the suddenly-more-perilous shoals of the lending process.

Suppose your buyer has five percent for a down payment, but the lender is willing to make a much more attractive deal for ten percent down. If the lender is willing to accept the arrangement, you can offer to carry back a note for the extra five percent, using part of your equity as seller financing.

You’ll be taking a second or third position in the line of creditors, should the buyer default — and it’s always possible that you will lose every cent you are lending. But given the direction of the market, you could be a lot better off risking five percent now, rather than accepting ten percent less a few months from now.

As with everything, read the fine print, ideally in the company of your accountant. But seller financing is one more weapon you can deploy to set your home apart from the competition in this very competitive market.

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January 8, 2008

Your real estate improvement goals for 2008 will be more financial than physical

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Sun City Real Estate Broker

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This is my column for this week from the Arizona Republic (permanent link):

 
Your real estate improvement goals for 2008 will be more financial than physical

Do you want to set some workable real estate goals for 2008? If so, sharpen your pencil.

Does the house need a new roof? Does the kitchen need an update? Should the pool be resurfaced? Doing regular maintenance is usually not profitable on resale, but deferring those repairs and upgrades can be very costly.

But the most important real estate work you will do this year will be financial, not physical.

If you’ve been prudent enough to buy a home — and 70% of Americans have — you’ve done well for yourself. You have a roof over your head and an asset to fall back on if times get tough. But refinancing your home or getting a home equity line of credit is not as easy as it used to be.

If you’re a first-time buyer, you have an even steeper hill to climb. Most homeowners have at least some equity to borrow against, but many first-timers have little more to bank on than a willing heart and an eager smile. Two years ago, that was enough. Lately, not so much.

The problem is that loan underwriting guidelines are a lot tougher than they have been in the past few years. Verifiable income matters. Debt-to-income ratios matter. For most home loans, a down payment is no longer optional.

What’s changed? For one thing, lenders have lost a ton of money on nothing-down and limited-documentation loans. For now, at least, they would rather write fewer but more promising mortgages. But the real estate market has changed, too. Lenders were free and easy until lately because they assumed the appreciation of the home would make up for lax underwriting procedures.

So what should you be doing to prepare for these changed circumstances? Boost your income if you can. Cut your debt ratios any way you can. If you will be buying a home for the first time, start saving for that down payment. If you plan to sell and move-up or downsize, maintain your equity in your current home — and watch your credit rating like a hawk.

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January 1, 2008

For real estate in Metropolitan Phoenix, the pain of currency inflation may be enduring

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Sun City Real Estate Broker

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This is my column for this week from the Arizona Republic (permanent link). It’s important to understand that the long-run prognosis for the Phoenix area is good. We’re the fastest-growing major metropolitan market in the United States, adding 200,000 new residents a year. The short-run is not great, however, and the help the Federal government is proposing to provide will probably do more harm than good. Next week, I’ll be talking about some financial goals you can adopt to put yourself on a sound footing for the current real estate market.

 
For real estate in Metropolitan Phoenix, the pain of currency inflation may be enduring

The universal punch-line, the killer finish to an infinite number of jokes, might just be, “Sure, but it feels so good when you stop!”

If you had been banging your head against the wall, it might be true. For most things in life, though, no matter how painful they might be, the real pain doesn’t even start until you stop.

Want proof? Quit smoking. Smoking is a dirty, costly habit, we all know this. If you don’t quit, there’s a good chance it will kill you. But if you do, you’re looking at three truly agonizing days, followed by three pretty awful weeks, followed by three grim months. It might be three years before you’re complete rid of cigarettes.

The same goes for other physical addictions. The addiction can have painful consequences, but the sharpest pain comes when you go cold turkey.

This is exactly what happens to the economy when the Federal Reserve Bank stops inflating the currency. Practically speaking, we’ve spent much of the last ten years “high” on funny money. In consequence, we made “investments” that had nothing to do with anticipated returns, first with dot.com stocks and then with residential real estate.

Here’s the worst part, though: We’re not going cold turkey. A recession occurs when we wake up and stop despoiling the currency. The immediate effect is that the bad investments we made while we were drunk on free money lose their artificially-inflated value. This is very painful, but it only lasts about three years — eighteen months peak to trough, eighteen months trough to peak.

But instead, the Fed is attempting to keep the economy going with maintenance doses of funny money — sort of like the methadone treatment for heroin addiction.

Will it work? Maybe. The economy is out-performing currency inflation in many market categories. But real estate is not one of them. We’re already two years into our market correction, with no signs of a reversal in direction. So will the whole thing be over by this time next year? I wish I could say yes, but I don’t believe it.

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December 15, 2007

Government interference will prolong housing woes

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Sun City Real Estate Broker

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This is my column for this week from the Arizona Republic (permanent link):

 
Government interference will prolong housing woes

Want to make an economic problem worse? Interfere with it.

As I write this, the Federal Reserve Bank just cut the Federal Funds Rate by another quarter-point. Why? To try to stimulate the housing market.

Last week President Bush put together an attestedly voluntary agreement among lenders to freeze interest rates on certain adjustable rate mortgages for five years. The plan is voluntary in the same way that your rowdy Uncle Sid volunteered for the Marines instead of serving 90 days in the clink. Even so, Congress is still rumbling about involuntary solutions to the housing crisis.

So what’s the beef? Everybody’s just tying to help, right?

The problem is that all investment is based on planning. Before I risk my capital, I need a reasonable assurance that it will be returned to me — ideally with a healthy profit. There is always some risk in investing, but if the government can change the rules of the game at any moment, then the risk of investing soars. Doing anything else becomes much more attractive.

Consider: If I plant the right seeds and cultivate them properly, I can expect a bountiful harvest. But if the government were able to control the weather, and if it announced that it might or might not schedule a hard freeze for mid-July, I would be better off doing almost anything other than farming.

If I have capital available to lend, should I lend it where I know for sure I’ll get five percent interest, or should I lend it to a borrower who will promise to pay me eight percent — until Big Mother cuts that back to four percent as an act of mercy. If it were your money — and in many cases it is, in the form of insurance and pension funds — what would you do?

It’s plausible that we’ll go through the same amount of economic pain, with or without government involvement. But free markets self-correct quickly, liquidating bad investments and getting back to business. Government interference will almost certainly prolong our agony — to no good end, and therefore probably to our net detriment.

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