Smart Real Estate News & Commentary by Chris McLaughlin October 12, 2011
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Short sale incentives
Bank of America is testing Florida’s foreclosure waters with an incentive program for defaulting homeowners to “short sell” their homes instead of enduring a foreclosure, which can take years. Guidelines for Bank of America’s new Florida Enhanced Short Sale Relocation Assistance program state that a borrower may use the incentive to pay off existing liens or for relocation expenses. FHA, Ginnie Mae, VA and USDA loans are not eligible. Details are available by calling 1-866-880-1232.
Short-sale incentives are an outgrowth of earlier, “cash for keys” programs offered by lenders and real-estate companies. Also, the US Treasury Department has tried to boost the number of short sales with its Home Affordable Foreclosure Alternatives program, which provides $3,000 for borrower-relocation assistance, $1,500 for servicers to cover administrative and processing costs, and as much as $2,000 for investors who meet certain requirements.
Other programs currently available:
- Wells Fargo offers incentives of $10,000 to $20,000 to certain homeowners who opt for a short sale or who transfer a home’s title back to the bank. The program is aimed at properties in Florida and other states known for protracted, judicial foreclosures. The money is available only on first-lien loans that the company owns, which is about 20% of its portfolio. Details: 1-800-678-7986.
- JPMorgan Chase has not reported how much it offers for short-sale incentives, though real-estate agents have reported sellers getting $20,000. The lender also has declined to specify how it determines the amount of its incentives. Details: 407-248-3945.
- Citibank has reported it offers an average of $12,000 for borrowers when it owns the mortgage. The amount is determined upfront and varies depending on a borrower’s financial circumstances and mortgage-payment history. The money is disbursed when the short sale closes. Details: 1-866-272-4749.
More regulations on the way
US regulators on Tuesday are set to give nervous insurance companies, mutual funds and other big players in financial markets a better idea of whether they will be tapped for the same type of additional government scrutiny facing large US banks. On Tuesday, the Financial Stability Oversight Council is scheduled to release a new proposal on how it will determine which non-bank firms are important enough to the financial system that they merit greater oversight by the Federal Reserve. Also on Tuesday, banking regulators are scheduled to vote on a proposal banning most proprietary trading done by banks, known as the Volcker rule. Both rules are parts of the 2010 Dodd-Frank financial oversight law. Companies that are tapped for greater Fed supervision will be designated systemically important financial institutions (SIFIs), and will be subject to new capital and liquidity rules. They will also be required to draft detailed plans on how they could be broken up if the company falters and is seized by the government.
Olick – where to find demand
“Given record low interest rates and still-falling home prices, you would think housing demand would be surging, but these are strange, strange times. Difficult credit conditions, combined with a steep drop in consumer confidence have cancelled out housing’s positives. Most concerning is a generational shift in housing demand. While the overall home ownership rate fell a little more than one percentage point over the last decade, the numbers were much worse for younger Americans. ‘Particularly hard hit were households headed by those age 25 to 54, who experienced homeownership rate declines ranging from 3.5 to 3.9 percentage points,’ according to a Fannie Mae analysis of new Census data. The change in home ownership has been geographically widespread. As home prices seem to be taking a turn for the worse again now, potentially a triple dip, consumer confidence in housing has fallen right in line. Fannie Mae’s September housing survey, ‘showed a marked deterioration in consumer expectations of home prices over the next year—their weakest outlook since monthly tracking began in June 2010,’ said Doug Duncan, vice president and chief economist of Fannie Mae. This even as negative headlines over the potential US debt crisis abated in September. Oddly, this pessimism came at the same time that the share of consumers expecting mortgage rates to go up dropped sharply to the lowest level recorded. That is further evidence that even record-low mortgage rates are having a minimal effect on any housing recovery.
If housing demand cannot be spurred by low interest rates, low prices or even a slightly brighter economic picture, then where can we find it? For now, it’s with investors. Investors do not rely on credit as much as the general population and the potential revenue stream from increased rental demand can overcome fears of any further declines in home values. As leaders in the industry and government mull potential new housing incentives and fixes, they should focus more on investors. With little newly-built rental inventory coming to market and still-surging rental demand, investors can help on many levels, sopping up distressed supply and providing more housing to limit the surge in rent rates.”
60% chance of recession
The bond market indicator that has predicted every US recession since 1970 shows that the economy has about a 60% chance of contracting within 12 months. The so-called Treasury yield curve, adjusted for distortions caused by the Federal Reserve’s record low zero to 0.25% target interest rate for overnight loans between banks, shows that two-year notes yield 20 basis points, or 0.20 percentage point, less than five-year notes, according to Bank of America Corp. research. The unadjusted gap of 79 basis points at the end of last week indicates the chance of recession at about 15%.
Short-term rates have been higher than longer-term yields, or inverted, before each of the seven recessions since 1970. Unemployment has held at or above 9% every month except two since May 2009, including a reading of 9.1% in September. “The adjusted curve is giving a powerful signal for an upcoming US recession,” said Ruslan Bikbov, a fixed-income strategist in New York at Bank of America, one of the 22 primary dealers of US government securities that trade with the Fed. “If that happens, the Fed’s target rate could remain near zero beyond 2014,” more than a year longer than the central bank has indicated, he said in an interview on Oct. 3.
Bank of America’s research is sending the same message as the Economic Cycle Research Institute and Bill Gross, manager of the world’s biggest bond fund, which say the US may be headed into a decline. Fed Chairman Ben S. Bernanke said last week in testimony to Congress that the central bank can take further steps to sustain a recovery that’s “close to faltering” after almost three-years of near-zero interest rates and $2.35 trillion of bond purchases. The Organization for Economic Cooperation and Development cut its forecasts for the US last month, saying the $15 trillion economy likely grew 1.1% in the third quarter and will expand just 0.4% in the fourth.
WSJ – US gambles with mortgage retreat
Three years after virtually nationalizing the US mortgage market, the government has embarked on a pullback to see whether private industry picks up the slack. Some people in the housing industry worry that Washington’s move will cause fresh pain in many regions where demand has yet to recover amid the sluggish economy. At issue are the loan limits that Congress expanded in 2008, allowing Fannie Mae and Freddie Mac to buy mortgages that exceeded the national cap of $417,000. When the mortgage market melted down four years ago and sent private mortgage investors fleeing, interest rates rose sharply on “jumbo” mortgages—those too large for backing by Fannie, Freddie or agencies such as the Federal Housing Administration. That accelerated home-price declines in high-end markets throughout California and the Northeast, where many pricey homes couldn’t be bought with a government-backed loan.
To stem the fallout in prices, Congress raised the loan caps to as high as $729,750 in markets such as Los Angeles and New York. It then passed a series of one-year extensions to keep the higher limits in place. But this year, Congress and the Obama administration opted against an extension. As a result, the limits in hundreds of counties fell by 10% or more on Oct. 1. For loans backed by Fannie and Freddie, the limits declined to between $417,000 and $625,500 in about 200 counties. More worrisome to real-estate agents are declines in the FHA limits, which fell to between $271,050 and $625,500 in 600 counties. Those changes are causing heartburn because the FHA allows buyers to make down payments of just 3.5%, and it has financed as many as half of all home purchases in recent quarters.
Policy makers allowed the limits to fall because they want private companies to hold more mortgage risk, and dialing down loan limits is one way to carve out space for those investors. Fannie, Freddie, and the FHA currently back nine in 10 new mortgages. Taxpayers already are on the hook for $141 billion in losses at Fannie and Freddie, and the FHA’s reserves have plunged to razor-thin levels. Mortgages that don’t qualify for government backing typically have higher borrowing costs, including interest rates around 0.75 percentage point above conforming loans. Mortgage rates currently are very low, but jumbo loans also require bigger down payments—at least 20%—and can have tougher qualification rules. “The net-net here is that the available pool of credit for housing is shrinking. Prices will have to decline,” said Christopher Whalen, co-founder of risk-management consultant Institutional Risk Analytics.
On one side of the debate are mortgage investors who say the government needs to give the private sector more room to compete if a vibrant market for nongovernment-backed loans is to re-emerge. “The banking industry, flush with excess deposits, will fund those loans,” said Mike McMahon of Redwood Trust, a real-estate investment firm in Mill Valley, Calif. Assuming a 20% down payment, the new limits still allow homeowners in parts of California to qualify for a government-backed mortgage on a $780,000 home. Critics say there’s little public policy rationale to subsidize loans for those borrowers, who need substantial incomes. On the other side are real-estate agents and some economists who say sellers are in for a nasty surprise when they find that fewer potential buyers qualify to purchase their properties. They say the changes also could hamstring “trade-up” buyers who typically used home equity, which has plunged during the bust, as their down payment to move to a bigger residence. The loan limits wouldn’t appear to have much of an impact on the overall housing market. In 2009, about 1.5% of home-purchase loans backed by government entities wouldn’t have been eligible under the new limits, according to a study by the Furman Center for Real Estate and Urban Policy at New York University. But the same study emphasized the outsize local impact. Some 9% of purchases would have been affected in San Jose, Calif., and 5% in San Diego.
Meanwhile, banks would have to increase the number of jumbo loan originations by 56% to make up the gap, “which the private sector could be hard pressed to fill,” said Mark Willis, one of the study’s authors. “If you want to get the market moving, why would you decrease the availability of credit for any part of it?” Ultimately, the loan-limit issue shows the broader challenge in bringing back private capital and reducing taxpayer exposure: Housing markets are shaky, and the government is still offering better terms than private lenders. Steps that raise borrowing costs could attract private investors, but if that pushes home prices down in the process, it may do more harm to the economy and to individual housing markets still reeling from the real estate bust.
“Systemic risk” in Europe?
European Central Bank President Jean-Claude Trichet warned of threats to the financial system as the conflict among political leaders intensified over how to extricate Europe from the debt crisis. “The crisis has reached a systemic dimension,” Trichet told European lawmakers in Brussels today. “Sovereign stress has moved from smaller economies to some of the larger countries. The crisis is systemic and must be tackled decisively.” European officials are toiling to meet an end-of-month deadline set by French President Nicolas Sarkozy to get to grips with the crisis, which has propelled Greece to the brink of default, shaken world markets and fueled speculation that the 17-nation currency might not survive in its current form. Trichet’s message coincides with a shift in the focus of Europe’s crisis response today to Slovakia, where the government may struggle to achieve a majority of lawmakers needed to ratify the euro region’s retooled bailout fund. The country is the only member of the 17-nation euro area that hasn’t ratified the measure agreed between leaders on July 21 to fight turmoil that has spread from Greece to larger nations including Italy. In many ways, what happens in Europe impacts what happens in the US.
Americans expect further house declines
Americans believe home prices will drop another 1.1% over the next year while mortgage rates maintain record low levels, Fannie Mae said in its September national housing survey. Fannie Chief Economist Doug Duncan said the September survey showed a marked deterioration in consumer expectations for home prices, making it the weakest month on record over the last 18 months. “Despite a decline in negative economic headlines during September — in contrast to their ubiquity during the debt ceiling debate in August — consumers continue to demonstrate very negative attitudes,” Duncan said. “At the same time, the share of consumers expecting mortgage rates to go up dropped sharply to the lowest level we have recorded, likely influenced by the news that the Federal Reserve will attempt to keep interest rates low for years to come. All these factors together do not bode well for the housing market.” In fact, pessimism abounds in the housing market, with one-third of respondents expecting mortgage rates to go up in the next year. And for the fourth consecutive month, most Americans taking the Fannie survey said they expect home prices to decline from year-ago levels. About 68% of those surveyed said it’s a good time to buy a home, while only 10% believe it’s a good time to sell a house.
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
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