Smart Real Estate News & Commentary by Chris McLaughlin October 4, 2011
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California pulls out of foreclosure talks
The state of California pulled out of multi-state mortgage negotiations with large US banks, dealing a sharp blow to long-running efforts to secure a broad settlement over allegations of lending abuses. California Attorney General Kamala Harris wrote in a letter on Friday that she will pursue her own investigation. “California was being asked for a broader release of claims than we can accept and … the relief contemplated would allow too few California homeowners to stay in their homes,” Harris said in the letter to government officials leading the talks. New York had exited the talks in August over a disagreement about how much legal immunity the banks should receive in any settlement. Representatives of the banks met with Harris last week in an attempt to keep California on board. The state has faced some of the worst default rates in the country, with an unemployment rate of 12.1% and two million residents who owe more on their mortgage than their home is worth. Eight of the 10 hardest hit US cities in terms of foreclosure rates are in California, Harris said. State and federal officials have discussed penalties totaling roughly $20 billion from institutions that include Bank of America, JPMorgan Chase, Wells Fargo and Citigroup.
Public sector pensions go on a diet
To fix their persistent pension problems, some US states are looking to reshape their retirement plans to resemble those in the private sector. Over the last few decades, the private sector has ditched traditional pension plans with their defined benefits. They have been replaced with defined contribution accounts, such as 401(k)s, in which employees allocate a set amount each month to invest — often partly matched by employers — and then cash out at retirement. This has left the public sector as the main provider of defined benefit plans, which pay employees a fixed amount each month after retiring. But pension funds have been stung by the recent financial crisis and recession, leaving taxpayers and political leaders agonizing over the possibility they will be unable to afford those defined payments. Estimates of a total shortfall range from around $700 billion to $3 trillion, due to differing forecasts of investment returns. “If the idea is that tax revenues are down and state budgets are crunched, and they surely are … I think it’s worthwhile to take a step back and look at the actual costs,” said Ilana Boivie, director of programs for the National Institute on Retirement Security, or NIRS.
No rise in home prices till 2020?
A survey of bank risk managers says that home prices are unlikely to recover before 2020 and mortgage defaults will persist for years. The survey, conducted by the Professional Risk Managers’ International Association for FICO, found that 49% of respondents do not expect housing prices to rise back to 2007 levels for another nine years. Only 21% of respondents said they would. The findings, which authors called “a decidedly pessimistic outlook”, are a sharp reversal from cautious optimism the survey respondents expressed late last year and in early 2011. In addition, 73% of surveyed bankers say they expect mortgage defaults to remain elevated for at least another five years. And 46% believe mortgage delinquencies will increase over the next six months. Only 15% of respondents expect mortgage delinquencies to decline during that period. A large number of respondents says they also expect to see an uptick in delinquencies on auto loans, credit cards and student loans. Small businesses are expected to continue face a challenging credit environment. More than one-third of respondents forecast an increase in delinquencies on small business loans. Bankers also appear to be pessimistic about recovery in consumer spending, with 64% of respondents expecting credit card usage to remain below pre-recession levels for at least five more years. Half of the respondents expect credit card balances to increase over the next six months, due to higher spending by some households and smaller monthly payments by others.
Fed will act if it needs to
The US Federal Reserve will act if the economy weakens further and has the tools to do so, a top Fed official said on Friday. St. Louis Fed President James Bullard said he expects the economy to grow modestly over the next year—though the sluggish pace leaves it vulnerable to shocks. “Should economic performance deteriorate, monetary policy will respond,” Bullard said, according to slides of a presentation he was scheduled to make. “The Fed is not now, or ever, ‘out of ammunition’.” With interest rates near zero, Bullard said, the Fed can support the economy through inflation and inflation expectations and asset purchases are a “potent tool”. Dealers polled by Reuters earlier this month gave a median chance of 32% that the Fed will embark on a third round of quantitative easing. The Fed said last week it plans to buy $400 billion of longer-term Treasurys and sell the same amount of shorter-term Treasurys by the end of June 2012, in an effort to lower longer-term borrowing costs. It also said it would support the mortgage market by reinvesting principal payments from its mortgage-related debt into mortgage-backed securities.
Housing market has hit bottom?
The US housing market hit bottom this year and will remain flat until 2014, when it will start to slowly recover, said Rick Sharga, an executive vice president with Carrington Mortgage Holdings. “We’re looking at a catfish recovery,” he told attendees at the Asian Real Estate Association of America conference in San Francisco Friday, saying the market will bump along the bottom for some time before starting to revive. More than a million foreclosure actions that should have taken place this year have not yet moved forward, and that delay pushes a resolution of the housing market’s problems into next year and beyond, he said, citing data from RealtyTrac, where Sharga served as a senior vice president until this week. “We can’t expect to see home price appreciation until we work through these distressed assets,” he said. Since 2005, there’s only been one quarter in which US banks have sold more properties than they’ve taken back through foreclosure, leaving a huge overhang of real estate-owned assets that need to be cleared out.
Banks hold about 800,000 REOs, and three-quarters of those are not listed for sale, said Sharga. Another 800,000 homes are in foreclosure and 1.5 million loans are delinquent. This “shadow inventory” will slow down a housing market recovery, he said, as monthly foreclosure numbers will remain elevated through 2012 and REO inventories will stay high through 2013. Even with the continuing distress in the housing market, the country is not likely to enter a double-dip recession, said Eugenio Aleman, a director and senior economist at Wells Fargo & Co. Although US workers have suffered as the nation has lost 9 million jobs over a two-year period, the manufacturing and service sectors are expanding, he noted. “The rest of the economy is not booming, but it’s doing fine,” said Aleman. Wells Fargo is projecting that the US economy will expand over the next few years, but at anemic rates: 1.6% this year, 1.4% in 2012 and 1.9% in 2013. “We are standing firm,” said Aleman of Wells Fargo’s economic forecast. “We are not going to go into a recession.”
ECRI says recession inevitable
Weakness in leading economic indicators has become so pervasive the Economic Cycle Research Institute now predicts a new recession is unavoidable. “The vicious cycle is starting where lower sales, lower production, lower employment and lower income [leads] back to lower sales,” co-founder Lakshman Achuthan declares in the accompanying video. Whereas Achuthan said the jury is still out in late August, the weakness in leading economic indicators — and ECRI uses a dozen for the US alone, he notes — has become a “contagion” that is spreading like “wildfire.” Although the recovery has been “subpar” by nearly every measure, Achuthan refutes the idea the economy never got out of recession in the first place. “Just because it looks and feels a certain way doesn’t mean it’s a recession,” he says. “You haven’t seen anything yet. It’s going to get a lot worse.” It’s too soon to predict just how bad it’s going to get, but he expects another spike in unemployment and further expansion of the federal government’s $1 trillion deficit. This forecast has huge ramifications for the 2012 election and the already struggling US consumer and Achuthan says a “mild” recession is the best-case scenario. By now you may be wondering what separates ECRI’s recession call from the myriad other recession calls out there. First, ECRI’s primary raison d’etre is predicting recession and recovery calls. Second, and more importantly, The Economist reports ECRI has never issued a “false alarm” on a recession call, meaning many of the Chicken Littles currently declaring “the sky is falling” might actually be right this time around.
Mortgage help for unemployed disappears
The federal government can’t even give money away to help the unemployed pay their mortgage. A $1 billion program to assist the jobless will likely end up spending only half the funds, at most, because so few people met the strict criteria. The Housing Department, which had to approve the applications for the Emergency Homeowners’ Loan Program by Friday, expects that only 10,000 to 15,000 people will qualify. That’s only a small sliver of the roughly 100,000 who applied. “No one could have anticipated how difficult the statutory requirements make it to reach homeowners,” said Lemar Wooley, a HUD spokesman. Those who make the cut are expected to receive between $35,000 and $45,000 in aid, he said. Many had high hopes for the loan program because it was targeting a segment of delinquent homeowners not being helped by other federal initiatives, such as mortgage modifications.
The initiative quickly became a quagmire of delays and requirements, however. The rollout was postponed for months, finally launching in late June. HUD originally gave people less than six weeks to apply, but then pushed back the deadline to mid-September. But it was the income and delinquency guidelines that prevented many seemingly eligible people from getting assistance, housing counselors say. HUD used a complicated formula that took into account monthly payments, income and arrears. Only 34 of the 174 homeowners who came to Tierra del Sol Housing Corp. in Las Cruces, N.M., met the criteria, said Rose Garcia, the agency’s executive director. Some people were turned away because they were already too far behind in their payments or because their income fell because of a family member’s illness. “This program could have made a difference to save people from being homeless,” she said. “But it doesn’t meet people’s needs.” In Philadelphia, Michelle Lewis is waiting to see how many of the 400 applications her Northwest Counseling Service received will be approved. She fears it will be few. One problem she ran into was that many applicants lost their jobs more than a year ago. Under HUD’s rules, the circumstance that caused the delinquency had to have occurred within the past 12 months. The Pennsylvania loan program, which ended in June because of state budget cuts, allowed for many more hardship conditions so it was able to reach more people than the federal effort, she said. “The [HUD] guidelines were so restrictive that it knocked out a lot of otherwise eligible and worthy consumers,” said Lewis, the agency’s chief executive.
See you at the top!
Chris McLaughlin
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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 150 high-value, high-profit
properties
* Owner of one of Florida’s largest Real Estate firms,
running 4 different offices, supporting over
420 agents, uniquely positioning him to help
thousands of investors make money in the
biggest market opportunity ever!
* In 2010, Chris’ 4 Central Florida real estate offices
closed 2,786 sides for a closed sales volume of
$392,912,927!
* 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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