Smart Real Estate News & Commentary by Chris McLaughlin January 10, 2011
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Refi wave cooling
Mortgage refinancings through the Home Affordable Refinance Program known as HARP increased 26% in the third quarter of 2010. Strategists for Fannie Mae and Freddie Mac investors, however, say the spike is likely to be short lived. Fannie Mae and Freddie Mac loan modifications through HAMP increased 16% in the third quarter of 2010, according to Federal Housing Finance Agency, which oversees the government-sponsored enterprises. Overall, the spike remains muted as the Mortgage Bankers Association refinance index remains near a multiyear low and Braver Stern Securities reports that it would look for the December prepayment report to hit the high-water mark for prepayment speeds for this cycle. The MBA reported on Wednesday that refinancings accounted for 70.3% of all mortgage applications for the week ended Dec. 24 and 71% for the last week of the year. Expected rises in mortgage interest rates, however, do not bode well for future refinancings.
The 5.0% coupon remains on the 40 bps refinancing cusp given the 5.04% effective mortgage rate, which moves almost 45% of the 30-year mortgage universe out of the refinancing window. “Many investors are total return in nature and the 5.0 coupon is going to prove very sensitive to small changes in interest rates with 4.5% now completely out of the money,” said Scott Buchta head of investment strategy at the firm. “Prepayment speeds will slow higher up in the coupon stack, but to a lesser degree.” Aggregate Fannie 30-year prepayments slowed 5% month on month, according to analysts at Barclays Capital. “The slowdown in overall speeds suggests that there is not much backlog left in the origination pipeline, and, therefore, there should be a sharp slowdown in speeds next month,” they wrote in a note to clients. Buchta adds that unless originators expand the credit window, the refinancing window will shut for many more borrowers than simple economics would indicate. Currently 45% of the 30-year mortgage borrowers are currently out of the money from a rate point of view, with added fees prohibiting many marginal borrowers from refinancing their existing loans. “It doesn’t seem likely that banks will be looking to refinance marginal credit borrowers whose loans they did not underwrite in the first place because of uncertainties associated with reps and warrants,” he added.
The Barclays analysts also pointed to harsh realities that will lower the rate of mortgage refinancings. “While a significant easing of underwriting standards would lead to a rebound in speeds, the likelihood of that happening in 2011 is slim, in our view, because recent developments have been pointing to continued tightening,” they said. The latest examples include Fannie and Freddie’s new increase to the loan-level delivery fees, the Federal Housing Administration’s plan to aggressively pursue put-backs in 2011, and originators’ raising the DTI and FICO requirements. “Given this, it should take a while for underwriting standards to stabilize,” they add. “Credit easing does not seem to be on the horizon yet.”
Less worry about layoffs
A steady decline in layoffs is giving the vast majority of adults who have jobs the confidence to spend more freely and help energize the economy. Their renewed confidence has boosted retail sales — just what’s needed to spark what economists call a “virtuous cycle”: Higher consumer spending raises company profits, which spurs hiring, which fuels more spending and growth. Consumer spending is critical because it powers about 70% of the economy. It rose for five straight months through November, kicking off the strongest holiday shopping season since 2006. Many shoppers are showing enough confidence to splurge on new cars: Auto sales rebounded 11% in 2010, the first increase since 2005.
“The strongest showing for consumers since the peak years of the last expansion signals that the broader economy is near a threshold of self-sustaining growth,” analysts at Citi Investment Research & Analysis wrote last week. Federal Reserve Chairman Ben Bernanke echoed that point Friday. He told a Senate panel he sees evidence that a “self-sustaining” recovery is taking hold because consumers and businesses are spending more. Morgan Stanley economists say 4% growth is “likely, perhaps even conservative” in 2011, up from an estimated 3.1% last year. Late this month, the government will estimate economic growth for the final quarter of 2010.
DSNews – MA court voids foreclosures
The Massachusetts Supreme Court ruled Friday that U.S. Bank and Wells Fargo did not have the legal right to foreclose on two homes in the state, invalidating the lenders’ seizure of the properties and raising further questions about foreclosure documentation – this time related to the proper transfer of ownership on mortgages packaged as securities. Analysts warn that the decision could have far-reaching implications on loans that have already been liquidated, those in the process of foreclosure, and sales of foreclosed bank-owned homes. In a unanimous 6-0 ruling, the Massachusetts Supreme Court upheld a lower court’s decision that U.S. Bank and Wells Fargo did not have the proper documentation to prove that they owned the mortgages at the time of foreclosure. U.S. Bank and Wells Fargo were not the originators of the mortgages, but served as trustees of the two separate securitization trusts holding the loans. Interestingly enough, both foreclosures – U.S Bank’s on the mortgage of Antonio Ibanez, and Wells Fargo’s on the mortgage of Mark and Tammy LaRace – occurred on the same day, July 5, 2007.
The lenders then turned around and bought each of the respective homes themselves at the foreclosure auction. At the core of the issue is that the lenders both failed to ensure the assignment of the mortgage notes were executed and recorded in the registry of deeds before the dates of the foreclosure sales. Justice Robert J. Cordy wrote in a court opinion, “…what is surprising about these cases is not the statement of principles…regarding title law and the law of foreclosure in Massachusetts, but rather the utter carelessness with which the plaintiff banks documented the titles to their assets.” He went on to say, “There is no dispute that the mortgagors of the properties in question had defaulted on their obligations, and that the mortgaged properties were subject to foreclosure. Before commencing such an action, however, the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order.” The Supreme Court rejected the two banks’ requests to apply the ruling only to future cases, which could have implications for thousands of foreclosures in the state that have already been completed. Wells Fargo said in a statement, “Wells Fargo believes the court’s ruling does not prevent foreclosures on loans in securitizations. The court simply set forth a standard legal process that mortgage servicers must follow in Massachusetts.” The analysts at Barclays Capital described the case as “problematic for banks and non-agency investors, since it overturns completed foreclosure sales.” They say the ruling could raise title issues in the minds of the potential buyers of REO properties, could further reduce prices on distressed sales, and slow foreclosure to REO rolls and liquidations.
Olick – what the MA court ruling means
“Now that the Massachusetts Supreme Court has upheld a lower court’s ruling that Wells Fargo and U.S. Bancorp did not have the proper paperwork to foreclose on two homes, the question is what that means for the broader mortgage market and the future of millions of foreclosures in or about to be in process? Not only does this decision affect individual foreclosures, but it throws into question the entire mortgage securitization process. We’ve spent a lot of time on this blog discussing the process of how loans were divided, mixed, bundled and sold over and over during the heat and height of the housing boom. The issue in contest over foreclosures now lies with the ‘note,’ or the IOU on the mortgage. The mortgage is the security that says the house is the collateral. Ownership of the note is critical because that note must be transferred when the mortgage is traded around.
During securitization a process called ‘endorsements in blank’ are used, so that mortgages can be transferred quickly. But you still need that note when you foreclose. ‘This is really about endorsed/assigned in blank,’ says JT Smith of Aristar Funding. ‘Judges didn’t understand and transfer taxes were not paid. This is going to get very ugly. The mortgages became like bearer bonds in that whoever had possession of original wet copy was the owner, and if you didn’t have that you could not foreclose. Then if you did why didn’t you pay transfer taxes?’ It’s exactly what Prof. Adam Levitin told me way back in October: ‘The mortgage is still owed, but there’s going to be a problem figuring out who actually holds the mortgage, and they would be the ones bringing the foreclosure. You have a trust that has been getting payments from borrowers for years that it has no right to receive. So you might see borrowers suing the trusts saying give me my money back, you’re stealing my money. You’re going to then have trusts that don’t have any assets that have been issuing securities that say they’re backed by a whole bunch of assets, and you’re going to have investors suing the trustees for failing to inspect the collateral files, which the trustees say they’re going to do, and you’re going to have trustees suing the securitization sponsors for violating their representations and warrantees about what they were transferring.’”
So now what? 95% of troubled borrowers currently do not contest their foreclosures, Paul Miller of FBR tells me. He sees this less about the specific case as the perception of this case: ‘If you see more and more of these headlines, many people might look at this and say ‘I can get my house free and clear if I just contest the foreclosure and get a favorable judge that sides on my side. All of the sudden I have a free mortgage.’ That’s not what’s going to happen in this case,’ Miller said in an interview. He believes these two homes will eventually go to foreclosure. In fact, this Massachusetts case may not be exactly as the headlines are screaming. The American Securitization Forum, immediately after the ruling, put out a statement saying, ‘The ASF is pleased the Court validated the use of the conveyance language in securitization documents as being sufficient to prove transfers of mortgages under unique aspects of Massachusetts law. Importantly, unlike the lower court, tithe Court also said assignments of mortgage can be executed in blank, as long as a complete chain of transfers can be shown through the applicable deal documents.’
ASF says those documents were not introduced in the lower court and that the lower court would have ruled otherwise if they had. ‘The ASF is confident securitization transfers are valid and fully enforceable,’ concludes the ASF’s Executive Director, Tom Deutsch. That remains to be seen, as lawsuits abound over this very issue all over the country. Clearly investors didn’t like the ruling, as they sent shares of bank stocks into a despair spiral. This may be the final Massachusetts court ruling, but it will not be the final word in this chapter of the foreclosure mess.”
WSJ – Late 2011 Fed exit?
A top Federal Reserve official said he would set the bar “very high” for the central bank to stop short in its planned $600 billion in bond purchases, but that the Fed may need to begin considering a reversal of policy by year end. Kocherlakota, who rotates into a voting slot on the Fed’s policy panel this year, said in an interview with the Wall Street Journal published today, “There would have to be a disorderly reaction of some kind in inflation expectations or in the behavior of the dollar. We’re talking about relatively extreme events.” Kocherlakota said he threw his support behind the bond purchase plan after colleagues argued persuasively the policy would move monetary policy in the right direction even if it would not have a large impact. He told the Wall Street Journal he did not know whether the Fed might stop short of buying the full $600 billion or end up buying more. He said, however, he would have supported the program even if he had known the economy would prove somewhat stronger than he had been forecasting. Kocherlakota said he expects the U.S. economy to grow 3% to 3.5% this year, with inflation rising about 1.5% to 2%. He said he expects the U.S. jobless rate to drop to close to 9% by the end of the year, but stay above 8% through 2012.
The Minneapolis Fed chief reiterated his argument that structural shifts in the economy had likely raised the level of measured unemployment that would be sustainable without generating unwanted inflation. He said the level of unemployment that might trigger inflation was likely in a range of 6.5% to 8%, well above the 5% to 6% Fed forecasts released in November suggest is a more widely held view among policymakers. He said that was not an immediate concern for policy, but that it might become a consideration by the end of the year. The government said on Friday that the jobless rate dropped to 9.4% last month from 9.8% in November. “Right now this debate over what the level is of structural unemployment is somewhat — I don’t want to say uninteresting — but is not immediately relevant for policy considerations,” Kocherlakota said.
“If things go as I expect, then I think it’s going to be really important toward the end of the year, toward the end of 2011, to have some notion of what this level of structural unemployment is,” he said. “If the number is 8% … and according to my forecast unemployment will be around 9 toward the end of 2011 and inflation is at 1.5% … that’s the point where you might think about exit,” Kocherlakota added. The Fed has held benchmark overnight rates near zero since December 2008. After pressing rates close to zero it bought $1.7 trillion in mortgage-related and government bonds. Then, in November, it launched the latest $600 billion bond-buying program, which has drawn heavy criticism. Kocherlakota said the backlash against the program did not change his calculation of the plan’s costs, which he called relatively small.
Now for our real estate education section…
Cloud Computing 101
Cloud computing is gaining a great deal of attention…for good reason. It’s a cost effective option for many small business owners and even real estate investors that need reliable service, easy access, open expansion and affordability. Sound too good to be true? Well until recently it was; cloud computing was considered the sole domain of large corporations and multi-nationals. Today, that has changed thanks to giants like Amazon AWS and Google; the cost of cloud computing is now well within reach of even the smallest business owner.
What is Cloud Computing?
In the past, digital files and content were stored on servers or hard drives either on-site or “off-site” but always under the direct ownership and control of the business owner. Cloud computing allows small business owners, agents and investors to harness the technology and technical support (uptime, redundancy etc) of major providers like Amazon or Google without having to invest huge up-front sums in the technology. Think of it as renting space on their server via a sophisticated virtual interface.
In addition to the reliability and redundancy advantages, cloud computing allows users to store and access digital files anytime and anywhere as long as you have access to the Internet and/or cell phone. Back-up important data, share files and even make modifications on the go.
Advantages
A few other advantages to cloud computing is the ability to scale or grow as needed. Data intensive sites or those that receive large volumes of traffic are often forced to purchase expensive hosting platforms or servers even before they have the traffic to support it. Cloud computing allows you to buy what you need when you need it without any worry of running out of space at a later date. It’s an especially attractive feature for those searching for scalable platforms able to meet the needs of a growing business.
Take a Test Drive
Not sure if cloud computing is right for you? Take a test drive by visiting a few sites to see for yourself. Two of the most popular options are Google and Amazon.
Amazon: http://aws.amazon.com/
See you at the top!
Chris McLaughlin
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All Rights Reserved.
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About the author:
Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.
* As the top Florida foreclosure and pre-
foreclosure expert, he oversees more than
100 short sale & REO closings each month
* Long-time authority on real estate investing
and rapid reselling of distressed homes. Owns
portfolio of nearly 100 high-value, high-profit
properties
* Owner of one of Florida’s largest Real Estate firms,
running 4 different offices, supporting over
400 agents, uniquely positioning him to help
thousands of investors make money in the
biggest market opportunity ever!
* Highly sought-after speaker, consultant, and
seminar leader for current trends and hot topics
in Real Estate Investing, Entrepreneurship, and
Wealth Building
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