Sunday, June 28, 2009

Talking About a Housing Revolution – Predictions on Housing

The Beatles song comes to mind when I consider what the bottom of the housing market and recovery will look like.

June 28, 2009 -- DETROIT, MI – Recent housing reports brought apparently good news on housing as it was reported that Housing Starts in May jumped 17.2% and Building Permits jumped 4% in April. Also, the National Association of Realtors (NAR) reported that Existing Home Sales, the Pending Home Sales Index and New Home Sales were all up in recent months.

According to Lawrence Yun, chief economist for NAR, "We are at or near bottom in terms of sales."

So, it’s a great time to put that home of yours on the market that you desperately want to sell?

Not even close.

One month of good news doesn’t mean the housing crisis is over. On top of that, it’s spring – a time when home sales invariably go up after winter. Look at the following graph, the same thing happens just about every year:

As for the housing starts and building permit numbers – it’s amazing how theses numbers were skewed to look good. The numbers reported by NAR and the media compared May of 2009 numbers to April of 2009. If one references the source of these numbers, the U.S. Census Bureau website, the May numbers for 2009 when compared to 2008 are actually down – by 45.2% for Housing Starts and 47.0% for Building Permits. How does that qualify as good news?

Yesterday it was also reported by NAR that May home sales were up 2.4% over April. Yet again, when compared to May of 2008, sales were actually off 3.6%. Not really good news as it doesn’t show we’ve reached a bottom yet.

Looking at the big picture, it’s obvious that the housing market is not out of the woods yet.

The FNMA/FHLMC foreclosure moratorium from Thanksgiving through March (waiting for Obama’s housing plan) created an artificial shortage of foreclosed properties on the market. Not surprisingly, April foreclosure filings set a record.

Last week, California announced its own 90 day moratorium on foreclosures which will further hide the true extent of the housing problems in that state. Michigan recently passed legislation that will have a similar, albeit more limited, effect. Several other states have passed or are considering doing the same.

All the Adjustable Rate Mortgages (ARM) that borrowers took out at the peak of the housing market so they could afford to buy or cashout of their homes, are starting to reset in record numbers and will continue to do so for the next two years. The ugliest situation is for those with “Option ARMS” also known as “Pick a Payment” plans, but technically called “Negative Amortizing” ARMs. Anything with the word “negative” in it is usually not good. In the case of these products, they were originally designed for sophisticated borrowers that understood how they worked and the inherent dangers. Only two lenders, WAMU and World Savings, initially offered them. At the height of the housing boom, many more banks jumped on the bandwagon to offer them and pushed mortgage brokers to sell them to their clients by offering insane commissions. Of course, many unscrupulous brokers, few understanding the product themselves, pushed these loans onto borrowers that didn’t take the time to understand anything but the artificially low payment. Now, many of these borrowers will see their payments increase by 50% or even double. Many won’t be able to afford the payment shock and will eventually be added to the foreclose statistics.

There’s also the issue of a “Shadow Inventory” of homes. How many of you see vacant homes in your neighborhoods that aren’t for sale? Many of these are foreclosures where the lender is just sitting on the home instead of trying to sell it at a loss. There’s also the inventory of homes where owners aren’t making payments, but haven’t been foreclosed on yet, despite being well past the point where they should’ve been. Several sources have estimated this shadow inventory at 600,000 homes. Now do you understand why banks were forced to take TARP funds?

Real estate investors are also contributing to the problem. I know of many that are struggling with rentals where the rents don’t cover their payments. Many of them will eventually throw in the towel as their reserves run dry or the value of the rental falls to where it just doesn’t make sense to keep throwing good money after bad.

Finally, we have the unemployment situation. May’s unemployment figure hit 9.4%, the highest since 1983. June’s number is expected to hit 9.6%. Since the recession begin in December 2007, we’ve lost 6 million jobs. These numbers are bad, but actually are worse if you include all the workers that have had to settle for part-time jobs or are making less than half of what they used to. Housing won’t stabilize until unemployment does. Even then, there’ll be a lagging effect as households paydown debt, replenish reserves and proceed cautiously.


The highly touted, and over referenced, Case-Shiller Index predicted that housing prices would fall 10-20% this year. As of May, the median price of a home is off 16.8% from last year.

Faced with these numbers and all this information, what would you do if you were in charge of our government?

Would you let housing free-fall and probably put the country into a Great Depression II?

Or would you use every financial tool at your disposal to soften the landing, wherever that may be?

Obviously, the current administration has chosen the soft-landing option and is pulling out all the stops to make it happen:

The real reason for the Thanksgiving to March foreclosure moratorium was to come up with a plan to force banks to modify mortgages and slow the flow of foreclosures hitting the market and driving down prices. Obama’s administration had to do something dramatic after the disaster of Bush’s “Hope for Homeowners” plan that resulted in only 50 or so homeowners being helped. TARP funds were probably used as “bribes” to get banks to go along with the new plan.

Ben Bernanke is doing his best to keep mortgage rates low. Not only does this encourage home buying, it also encourages people to refinance to lower their payments and not let them go to foreclosure. After a brief spike to 6%, when Wall Street bluffed the Fed, rates are back to the mid 5’s, still historically low.

FNMA/FHLMC, now under government control, currently allow homeowners to refinance up to 105% of their home’s value so they can lower their monthly payment. Again, this was done to keep people in their homes through lower monthly payments. I expect to see the 105% increased to at least 115%, or done away with altogether, as housing prices have fallen faster than expected and the number of homeowners qualifying for a 105% refinance are much lower than the original target.

The $8,000 tax credit to buy a home has generated quite a bit of home buying activity as intended. I predicted a couple of months ago that the tax credit program would probably be extended past its December 2009 deadline. There’s now talk in Congress about not only extending the program, but increasing the tax credit to $15,000 and opening it up to anyone that buys a home. It’ll be interesting to see what they do with the income restrictions as the current plan has propped up the lower end of the housing market, but left the rest of the market struggling.


So far, the housing market is down over 30% from its 2006 highs.

The government is doing its best to prop up our housing market, but it’s expected to fall further. How far is anyone’s guess, as one can’t predict it any better than one can predict where the stock market is going.

I don’t think we’ll see housing bottom until late 2010 at the earliest. That being said, I think the pace of the decrease will slow after this winter.

I also think that we won’t see a rebound for quite some time and it won’t be the rebound that many are hoping for. We won’t see double digit appreciation of housing for decades, if ever again. Nationally, we’ll see very slow anemic appreciation as homebuyers will be extremely cautious after this crisis.

There will be a rebound bounce in areas where prices dropped ridiculously low. Detroit immediately comes to mind. The median price of a home in Detroit (the actual city) stands at $6,000 as of today. As long as one buys in a decent area of the city, that price could easily double, triple, even quadruple once unemployment improves. A house at $24,000 is still quite a bargain, especially when it would cost at least $80,000 to build a new one. The southern Florida condo market is another place that might have a double digit rebound as prices there are quite low due to over building. Understand that any double digit rebound in areas like these will be a quick, one-time thing as values bounce back from their oversold positions. Then they’ll follow the national trend of anemic appreciation.

It could take a generation (25 years) for nationwide home values to return to the peaks of this decade.


We’re also going to see residual effects from this crisis, much the same as we saw after the Great Depression. People that lived through the scarcity of those years tended to be savers and hoarders, not throwing anything away. Going forward, I think we’ll see a large increase in the number of people that never buy another home. After going through the trauma of getting foreclosed on or watching their parents, family, neighbors and/or friends go through it, they’ll choose to be lifetime renters. That’s good news for real estate investors as many of these people will still want to raise their families in houses, not apartments.

I also think we’re seeing the end of the “McMansions” and sprawling suburbia. Inland California was overbuilt, in the middle of nowhere (that’s why it was cheap to develop) and is now turning out near vacant ghost towns due to all the foreclosures. Values have already dropped over 50% in many of these areas and show no signs of slowing yet. Why? It’s too far to commute to work. Eventually population growth will fill these towns back up, but that could take a decade or more.

Millennial’s, those born after 1980, are flocking to urban landscapes and smaller homes. They don’t want to be house poor or commute more than minutes to work, preferably via mass transit. As gas and energy prices rise when the world economy recovers, more of us will be forced to address these same issues. This will eventually be good news for decaying urban areas and those that invest there ahead of the curve.

People will also stop looking at their homes as a source of wealth. Homes will be seen less as “castles” and more as just places to live. Europe and Asia are already like this. People there don’t socialize in their homes as much as we do (most are too small), they meet at cafes, restaurants, parks, etc.


No one can predict the bottom of the housing market. So, if you’re in the market for a home, you should buy something that fits your budget, that you think is a good deal, when you think you’re ready for the monthly liability. Notice I didn’t say a great deal or a steal of a deal. Too many people still fall into the trap of following the herd lining up for the sensationalism the media peddles to get our attention. They want to hit the jackpot with the deal of a lifetime on a home. Well, keep in mind that very few hit the jackpot in Las Vegas and even fewer win the lottery. It’s usually better to play it safe and follow you head than gamble your future away by listening to others.

Buy a home you can afford now that fits your lifestyle. Don’t stretch to afford something and put yourself in a tenuous financial situation. You also don’t need to be keeping up with the Jones’ and getting in over your head by doing so.

Homes should be bought that fit one’s monthly budget. I can’t believe all the homebuyers I talk to that have never sat down and put together a monthly budget to figure out what they can afford for a monthly housing payment. They expect ME to tell THEM what they can afford! I’d be very appreciative if this was because they trusted me, but it’s actually due to laziness. Don’t they realize that they’re looking at buying a foreclosure where the previous owner probably made this same mistake?

Consider how long you plan to live in a home before deciding whether to buy it. Don’t count on buying something and being able to break even if you sell it 2 years from now. You’ll probably need 5 years or so to be able to do that.

Overall, homes are now more affordable than they’ve been in over a decade. Foreclosures have created unique opportunities for many to get solid deals on homes. Throw in the current $8,000 tax credit (with talk of it going to $15k soon) and this could be the time for many to buy a home. Not for everyone, but for many.

If all of this is a bit much to take in and analyze, find professionals that can assist you. Run from those that are pushy. They should ask a lot of questions and rarely tell you what to do, but rather help you find your own answers.

Thursday, June 18, 2009

Michigan tries to Slow Foreclosures with New Laws

Three new laws make foreclosures tougher on lenders to force them to do more loan modifications.

June 18, 2009 -- DETROIT, MI – On May 20th, Governor Granholm signed new laws into effect that will put more pressure on lenders to work out loan modifications as opposed to just foreclosing.

The new laws, PA 29, PA30 & PA 31, go into effect July 5th and force lenders to perform several addition steps before foreclosing. Interesting that the effective date falls right after Independence Day.

The new laws only apply to foreclosures started after July 5th and only on real estate that is the primary residence of a mortgage borrower. The laws also expire in two years. The state legislators appear to be pretty optimistic the housing crisis will be over by then. More likely, there won’t be anyone with a mortgage that hasn’t been foreclosed on or had their mortgage modified by then.

Lenders will be required to give written notice to a defaulting borrower, providing the name and phone number for a real person the borrower can speak with. What’s more, this person has to have the authority to negotiate and approve a loan modification. Anyone that’s had to deal with the customer service department at a lender can tell you how frustrating it is to get someone on the phone that can make a decision. So, this is great news.

Lenders will also be required to send a defaulting borrower a list of state approved housing counselors and gives borrower the right to require a lender’s authority person to meet with the borrower and the counselor to work out a loan modification. Once a borrower asks for this meeting, the foreclosure is put on hold for 90 days.

The laws basically mimic Obama’s “Making Home Affordable” program by requiring a borrower’s housing related debt be no more than 38% of their gross monthly income. Also outlined is how to get to the 38% figure – lowering the interest rate to as low as 3% for at least 5 years, and/or extending the loan term to up to 40 years, and/or deferring up to 20% of the principal balance until the end of the loan term, sale or future refinance.

If the borrower qualifies under this outline, but the lender refuses to approve the loan modification, then the lender must go through a judicial foreclosure. This means they have to take the borrower to court, a lengthy and costly endeavor. In other states where judicial foreclosure is required, it can easily take 18 months for this to happen. This is a huge penalty to lenders and should force most of them to approve a loan modification.

The new laws were written so that federally chartered lenders cannot claim “federal pre-emption” and ignore state laws. A great move by the state legislators.

The laws also have exceptions that defer to FNMA and FHLMC loan modification plans.

There are doubts about the number of available counselors to meet with borrowers and representatives from their lenders. This may work in a borrower’s favor though as lenders may prefer to wait until a counselor is available versus pursing the judicial foreclosure process.

Of special interest is how the new laws will affect FHA and VA mortgages. FHA & VA loans were not addressed in the Obama loan modification plan. So, will the new Michigan laws force FHA & VA lenders to modify loans down to 38% of a homeowner's gross monthly income?

Sunday, June 7, 2009

Fed Losing Battle to keep Mortgage Rates Low?

Mortgage rates spike almost 1% in just over two weeks, what’s going on?

June 6, 2009 -- DETROIT, MI – One of the government’s stated goals this year is to stabilize the housing market. The thinking is that a long as home values continue to fall, homeowners will lack confidence in the economy and in response, won’t spend money.

To stop home values from falling, the number of foreclosures must be curtailed. One of the ways the government has been trying to curtail foreclosures is by keeping mortgage rates low. Low rates allows homeowners to refinance and lower their payments, so they don’t let their homes go to foreclosure and makes buying homes more affordable, so it increases homes sales to absorb the homes that have been foreclosed on.

Recent events might have put a damper on those plans. The chart below shows the price of Mortgage Backed Securities (MBS) over the last three months. Keep in mind that the price is the opposite, or inverse, of interest rates. The higher the price of the MBS, the lower the corresponding interest rate. To keep it simple, “green” is a good day for mortgage rates on the chart and “red” is a bad day. (MBS are sold by FNMA and FHLMC to fund their purchases of mortgages from banks and brokers)
Starting May 21st the chart shows four bad days in a row, culminating in one of the worst days for mortgage rates ever on May 26th. Intermixed with attempts to rally, mortgage rates have continued to worsen since then. Rates haven’t been this high since late November 2008.

What caused the sudden spike in mortgage rates?

To answer that, we have to go back a bit to look at why they were so low to begin with.

At the end of 2008, there was a lot of doom and gloom on Wall Street about the economy due to the bankruptcy of Lehman Brothers, the forced sale of Merrill Lynch, and the federal bailouts of AIG, Goldman Sachs, Morgan Stanley and a slew of banks deemed too big to fail.

In response, money flowed away from high-risk to low-risk investments. U.S. Treasuries and MBS are considered fairly low-risk, so prices on them were bid up, lowering interest rates.

On top of that, the Federal Reserve announced in early December that it was buying up to $500 billion in MBS over the next several months to lower mortgage rates even further. In mid March this figure was increased to $1.25 trillion.

The result of these two factors was the lowest mortgage rates in over 50 years.

Nothing Lasts Forever

Recent positive news on the economy now has Wall Street investors thinking that the worst recession in memory, may be ending. Over the last two weeks, economic reports are showing signs that unemployment, housing and consumer confidence may be stabilizing. The key word there is, “may”. The stock markets though, have responded to this news by increasing, pulling money away from the MBS market and causing rates to rise.

So, has the government’s stimulus working to lift us out of the recession? Will a turn around in the economy lead to lower unemployment, higher wages and housing prices, making rising mortgage rates a minor issue?

The chart below compares several recessions to our current one. The chart shows that historically, recessions tend to last around 30 months, a tad longer than the 20 months we’ve experienced in the current one.

The term, “Bear Market Rally, is used on Wall Street to describe a false rally in the stock markets, that’s followed by further downturn. The chart below shows that during the Great Depression, there were six bear market rally’s that were followed by the market dropping to new lows.

Is the current stock market rally something similar and we have several months to go until we see a true end to the recession?

What about the Fed’s $1.25 trillion allocated to buy MBS to keep mortgage rates low? So far, they’ve only used about $370 billion of that total, so there’s a lot left that could be used to attempt to drive mortgage rates back down. The problem is, that may not work much longer.

The game only works to lower mortgage rates when Wall Street investors play along. There’s growing concern on Wall Street that the amount of borrowing by the federal government to fund all the economic plans, including the Federal Reserve, is simply becoming a game of “borrowing from Peter to pay Paul” and vice versa.

Figure 2 shows that when the federal government borrowers too much to fund its stimulus packages, the effect of the stimulus funds loses steam. So, throwing more money at the economy doesn’t help.

Our concern is that the same rules may apply to the Federal Reserve’s game on mortgage rates. The markets may have arrived at the point where even if the Federal Reserve increases its purchases of MBS, mortgage rates may not respond and go lower.


I wish I had a crystal ball and could accurately predict what mortgage rates are going to do. We’re in this economic mess because people way smarter than I, thought they had a good grasp on the financial markets.

It is my opinion (only) that we’ll soon find out if this is all a bear market rally or not. If it is, we’ll see the stock market drop and rates will improve. I don’t think we’ll see the same recent lows though, unless there’s major bad news on the horizon.

On the other hand, if this is the end of the current recession, than better days are ahead for the economy and all of us. Higher interest rates won’t be that big of an issue when sanity returns to the housing market and unemployment drops.

Wednesday, June 3, 2009

Someone says, "Crud my Name is Mud!" for HUD's Dud

HUD issues then retracts a letter, "Using First-Time Home Buyer Tax Credits" and then releases it again.

May 29, 2009 -- DETROIT, MI - Oops! Someone has some explaining to do to their boss at HUD. In case you missed all the hoopla, on May 11th HUD issued Mortgagee Letter 2009-15 on its website and then pulled it later that same day. The letter, with an important change, was released again on May 29th.

It sounds like someone didn't follow protocol and jumped the gun in releasing the letter the first time. Hope they still have a job.

If you've been out of touch with the housing news of late, President Obama's housing recovery plan includes an $8,000 tax credit for anyone buying a home that hasn't owned one in the last three years. Home purchases between January1, 2009 and December 1, 2009 qualify.

Unlike President Bush's homebuyer incentive, which was really a $7500 loan that had to be paid back over 15 years, the $8,000 tax credit is a real credit. Qualifying homebuyers just have to file their federal tax return to claim it. They can even amend their 2008 return after buying a home to get the credit this year.

HUD was basically forced to release their letter and play catch up, in response to several state governments creating programs using second mortgage and/or short-term loans to advance the tax credit money to qualifying homebuyers. The homebuyers than used this money as their down payment to buy homes with FHA financing.

At this time there are 10 states with these "tax credit advance programs" and several more working on and considering them.

HUD now allows the following entities to offer tax credit advance programs:
  • Federal, state and local government agencies
  • Non-Profit Instrumentalities of government
  • FHA-approved non-profits
  • FHA approved lenders

These entities can either advance the tax credit through a second mortgage or by purchasing the tax credit from the homebuyer.

If using a program with a second mortgage:
  • No cash back to a borrower.

  • The loan amount can't exceed the total needed for down payment, closing costs and prepaids.

  • Secondary financing may OR may not require monthly payments.

  • If payments are required, they must be included in debt ratios for the FHA mortgage.

  • If payments are deferred, the deferment must be at least 36 months in order to exclude the payment from qualifying ratios.

  • If the tax credit advance loan has a short term for repayment and the borrower fails to repay by the designated deadline, principal and interest payments begin automatically or the loan converts to a "soft" second (no payments).

  • No balloon payments before 10 years.

If using a tax credit purchase program:
  • Proceeds of the sale of the tax credit may not exceed the anticipated tax credit due.

  • Borrower must sign a certification that the tax credit is not subject to offset of other debt.

  • Copy of form IRS 5405 must be retained by the FHA lender.

  • Costs associated with the tax credit purchase cannot exceed 2.5% of the anticipated credit. (Example: $8k tax credit means maximum $200 cost)

  • The proceeds of the sale of the tax credit to FHA approved lenders, the seller, or any other person or entity that financially benefits from the transaction (or any third party or entity that is reimbursed, directly or indirectly, by the financially benefiting person or entity), may not be used to meet the 3.5% minimum downpayment, but may be used as additional downpayment, buying down of interest rate, or other closing costs.

This last condition is mainly what HUD changed when they retracted the first letter they released.

Many real estate agents and mortgage lenders are misinterpreting HUD's announcement to mean that Down Payment Assistance (DPA) programs are back. (DPA programs allowed a seller to basically give the buyer their down payment funds). They're hoping the $8k tax credit can be used to fund the DPA. Not going to happen. Let me be clear - HUD will not allow the $8k tax credit to be used for the 3.5% down payment required on FHA loans.

HUD was pretty adamant about stopping the use of DPA programs and finally succeeded in April of 2008. Their internal statistics showed default rates on loans with DPA were three times higher than the rest of their portfolio.

The revision HUD made to their mortgagee letter was specifically done to avoid the return of DPA programs. The language, "any third party or entity that is reimbursed, directly or indirectly" is the key to that goal. Any entity that advances the tax credit can only be paid back by the borrower, no one else. On top of that, they can only charge 2.5% of the tax credit, which means a maximum of $200.

I don't think many lenders are going to go through the hassle of setting up a special program to take advantage of this allowance by HUD, given that the tax credit program ends December 1st.

So, that leaves buyers in the other 40 states without a tax credit advance program hoping that one develops in their state soon - or else the opportunity will be gone.

Of course, they can also hope that President Obama extends the program past its December 1st deadline. That might actually happen as the housing crisis is far from over.