Smart Real Estate News & Commentary by Chris McLaughlin August 9, 2010
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20% still underwater
According to real estate website Zillow.com, more than 20% of the nation’s mortgage borrowers owe more than their homes are worth. At 21.5% for the third quarter, it is a small improvement over the previous quarter, when 23.3% of loans were underwater, and in any event most of the improvement comes because so many people lost their homes to foreclosure. Negative equity is a hotly watched statistic because it is a prime predictor of foreclosure — second only to loss of income. In some markets, residents were helped by improving home prices. As prices rise, it narrows the gap between what home owners owe and what they could sell for. As a result, hard-hit metro areas such as Merced, Calif., and Orlando, Fla., recorded huge declines in the number of underwater borrowers.
Merced was down to 40% while Orlando fell to 64.6%. In fact, most markets trended up. Only 25 of 142 markets surveyed lost ground, led by Lansing, Mich., where negative equity grew to 31.5%. Neighboring Detroit also worsened, jumping up to 31.4%, as did Grand Junction, Colo., where the it grew to 31.2%. Las Vegas continued to lead the nation, with 73.9% of all mortgage borrowers owing more than their properties are worth. In Phoenix, that total is 66.8%; in Orlando, 64.6%; and in Reno, 61.9%.
Wall Street Journal: Is Obama going to cancel debt on underwater mortgages?
DON’T JUST STAND THERE, DO SOMETHING. That’s the increasingly nervous vibe going through Washington as the economy slows and November’s mid-term elections quickly approach. The latest trial balloon would have Fannie Mae (FNMA) and Freddie Mac (FMCC), the mortgage giants operating under Treasury conservatorship, forgive the portion of loans that exceed the now-deflated value of the properties to which they’re attached. Or Fannie and Freddie could loosen the standards for current mortgage borrowers to refinance. A mortgage-forgiveness “Hail Mary” pass could put hundreds of dollars a month into pockets of some of the 15 million underwater homeowners with negative equity totaling $800 billion. That would come 100 days before November’s election in which Democrats face even bigger than usual midterm losses with President Obama’s approval ratings languishing at lows. All without additional “stimulus” funds that would expand the federal deficit. Sounds like a great idea, win-win for everybody. Except for the unfortunate principle of economics known as TANSTAAFL—There Ain’t No Such Thing as a Free Lunch. And the Treasury denied Thursday that any such changes are afoot. Just as well.
Suddenly changing to make it easy to refinance, either through principal forgiveness or lowering lending standards for Fannie and Freddie, would cause chaos in the mortgage-backed securities market. The Fed, with a massive MBS position, would be a big loser. So would be Fannie and Freddie. And that ultimately means the American taxpayer. Moreover, a plunge in the MBS market would mean huge losses for other investors, including those with stakes in mutual funds with big MBS exposure. And a plunge in mortgage securities prices could wind up pushing up mortgage rates in the end, conceivably pricing out some prospective buyers trying to get their proverbial foot in the door of their first house. And politically, it could backfire. There could be many more folks resentful that they couldn’t get a special deal to reduce their mortgage because they did the right thing—put down an ample downpayment on a house they could afford with a margin of safety.
Fannie Mae Finds No Merit in HAMP Whistleblower Allegations
Caroline Herron, a consultant who told National Public Radio she was fired after revealing the company was hindering progress for the Home Affordable Modification Program (HAMP), says the Treasury Department hired Fannie to run HAMP for $113 million. After she left Fannie, she returned as a consultant for the HAMP project, but said the company ran HAMP to push its own bottom line, not to help borrowers. She’s now suing Fannie Mae, alleging the company fired her for pushing HAMP reform. Fannie Mae says there is no merit to the allegations, and says Herron, through her attorney Lynne Bernabei, notified the company in early March of her potential allegations. Fannie then hired the law firm Fried Frank, which specializes in corporate matters, to conduct an independent investigation into the allegations.
Former Inspector General of the Department of Justice Michael Bromwich led the investigation, according to Fannie Mae. “Ms. Herron was invited to participate in that investigation but she declined to do so. The investigation found no merit to her allegations,” Fannie Mae said. The Treasury launched HAMP in March 2009 to provide servicers incentives for the modifications of loans on the verge of foreclosure. To date, participating servicers have provided 389,198 permanent modifications, just over 13% of the mark set by the 3m to 4m by 2012 set by the Obama Administration when the program launched last year. Not to jump to any conclusions, has anyone fallen down in shock at the news that Fannie investigated itself and found no merit to an allegation against it?
Unemployment
With a 9.5% jobless rate and 15 million Americans looking for work, a surprising number of employers say they are having trouble filling open positions. “This is as bad now as at the height of business back in the 1990s,” says Dan Cunningham, chief executive of the Long-Stanton Manufacturing Co., a maker of stamped-metal parts in West Chester, Ohio, that has been struggling to hire a few toolmakers. “It’s bizarre. We are just not getting applicants.” Employers and economists point to several explanations. The Democrats extending jobless benefits to 99 weeks gives the unemployed less incentive to search out new work. Millions of homeowners are unable to move for a job because the real-estate collapse leaves them owing more on their homes than they are worth. The job market itself also has changed. During the crisis, companies slashed millions of middle-skill, middle-wage jobs. That has created a glut of people who can’t qualify for highly skilled jobs but have a hard time adjusting to low-pay, unskilled work like the food servers that Pilot Flying J seeks for its truck stops.
Longer-term trends are at play. For one, the U.S. education system hasn’t been producing enough people with the highly specialized skills that many companies, particularly in manufacturing, require to keep driving productivity gains. “There are a lot of people who are unemployed, but those aren’t necessarily the people employers are looking for,” says David Autor, an economist at the Massachusetts Institute of Technology. Manufacturers of high-precision products such as automobile and aircraft parts are in a particularly tough spot. Global competition keeps them from raising wages much. But they need workers with the combination of math skills, intuition and stamina required to operate the computer-controlled metalworking machines that now dominate the factory floor. At Mechanical Devices, which supplies parts for earthmovers and other heavy equipment to manufacturers such as Caterpillar Inc., part owner Mark Sperry says he has been looking for $13-an-hour machinists since early this year. The lack of workers is “the key limitation to the growth of our business and to meeting our customers’ expectations,” says Mr. Sperry.
He estimates the company could immediately boost sales by as much as 20% if it could find the 40 workers it needs. Trips to several job fairs yielded almost nothing, so the company set up a 10-week training program to create its own machinists. Out of the first group of 24 trainees, 16 made it to graduation. Mr. Sperry sees extended jobless benefits as one of the main culprits behind his company’s hiring difficulties. Many of the applicants he saw at job fairs, he says, were just going through the motions so they could collect their unemployment checks. Some workers agree that unemployment benefits make them less likely to take whatever job comes along, particularly when those jobs don’t pay much. Michael Hatchell, a 52-year-old mechanic in Lumberton, N.C., says he turned down more than a dozen offers during the 59 weeks he was unemployed, because they didn’t pay more than the $450 a week he was collecting in benefits. One auto-parts store, he says, offered him $7.75 an hour, which amounts to only $310 a week for 40 hours.
DSNews.com – Recouping money from GSEs
Leaders of the House Financial Services Committee say they are looking for ways to recoup the billions of dollars the federal government has sunk into the GSEs over the past two years. Taxpayer support to shore up the nation’s two largest mortgage companies – Fannie Mae and Freddie Mac – stands at $145 billion so far. Estimates from the federal government put the tab for subsidizing the two GSEs at $389 billion, when all is said and done – the costliest bailout of the crisis. Rep. Barney Frank (D-Massachusetts), chairman of the House Financial Services Committee, and his lieutenant, Rep. Paul Kanjorski (D-Pennsylvania), have summoned their committee members for a series of hearings in September on the GSEs and the housing finance system. And Kanjorski says they will explore possibilities for recovering the costs that taxpayers have incurred from the 2008 decision to place Fannie Mae and Freddie Mac into conservatorship. “Twenty years ago, we found a way for industry to pay back the sizable U.S. Treasury payments for resolving the savings-and-loan crisis. We can do it again,” Rep. Kanjorski said.
The congressman also plans to look into the Federal Housing Finance Agency’s (FHFA) recent efforts to recoup funds from the issuers of underwater securities purchased by the GSEs, as well as whether Fannie and Freddie are accurately pricing guarantee fees to cover risks and provide a reasonable return. Chairman Frank says now that the GSEs have been under government control for two years and financial reform legislation has been enacted to prevent reckless, predatory lending in the private sector, it’s time to “move to the next phase, a complete restructuring of the tangle of housing finance tools so that we move forward in a way that protects taxpayers, prevents economic turmoil, and appropriately serves all aspects of the housing market.” That’s certainly putting lipstick on a pig, given that the last two years of government control are responsible for so much of the problem and so much of the money sunk into the GSEs. But hey, that’s Barney Frank for you.
Now for our real estate education section…
The Grapes of Math: What’s Better – Fine Wine or Short Sales?
What’s better? Exotic alternative investments like fine wine or short sale real estate? Unlike many of our former “what’s better” scenarios, this one has a distinct advantage…fine wine grows better with age just like real estate! Let’s face it, unless the property has a vineyard, it also tastes better than real estate. But, to be perfectly fair, we will take the time to actually crunch the numbers in order to arrive at the most unbiased conclusion possible.
Investing in Liquid Assets
Investment grade wine may not be a part of the average portfolio but it does provide a fair estimation of many forms of alternative investments enjoyed by the affluent such as art, wine, jewels and other investments. All tend to hold their value or increase over time (good inflationary hedge) just like real estate. For example, consider a 1961 Chateau Latour which originally sold for 25 Pounds…and which now would fetch an estimated 35,000 Pounds…over a 15 percent annualized return (Not Bad!) which decimates long term returns in the stock market, bonds or cash holdings. But, how does it hold up against short sale real estate?
While fine wine may be the winner in the “liquid assets” category when taken literally, there are some very real limitations. Not only is it subject to breakage or spoilage (egads!) but it has zero residual value when not in use. Unlike real estate, wine rarely generates cash flow…in fact, once it’s used, the value is all but gone. In short, it’s an all or nothing proposition. Fine wine is difficult to impossible to leverage in order to purchase additional assets, requires a specialized type of buyer and is subject to additional costs including storage fees. Comparatively, real estate is easily rented when not in use, can be leveraged or refinanced to purchase additional assets and is also subject to additional costs but with the advantage of strong tax incentives/write-offs.
What about downturns? Believe it or not, there is a fine wine index (actually a couple of them) including the Liv-Ex based Fine Wine 100 Index tracked via Bloomberg which is up just over 14 percent annually since summer of 2001…an impressive feat given the current economy. The U.K. based Wine Investment Fund found that investment grade wines generate about 15 percent per year in average returns. However, fine wines also degrade (literally and fiscally). For example, during the most recent global downturn, the LivEx index lost roughly 22% (a surprisingly similar percentage as that experienced in the real estate market) but has since rebounded and out-performed the stock market by a substantial margin.
So…which is the better investment? There is plenty of room for both in a well balanced portfolio but for those just starting out, real estate provides the flexibility, tax incentives and “real life” access that will allow you the means to fully enjoy that fine wine once the time is right.
See you at the top!
Chris McLaughlin
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Copyright Loss Mitigation Institute LLC 2010.
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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