Archive for December, 2013

Real estate news coverage is suspended from December 21 through December 31. Regular real estate related news posts will resume on January 1, 2014. For those who stopped by expecting real estate coverage, I apologize for the inconvenience. Since the end of the year is a time of family and reflection, and since it's not a time many people focus on real estate, I decided to offer something different. Tony Bliss was a close friend of mine who lost his heroic battle with cancer in late 2012. He wrote about his experience in a series of gripping posts that reveal a beautiful and courageous man. I was deeply moved by these posts -- some of which are admittedly difficult to digest. This writing is raw. Real. Be forewarned that if you read what follows, you will never be the same. You will laugh, cry, fear, hope, and stare into the abyss[READ MORE]

Every loan product has its place. Option ARMs, interest-only, reverse mortgages, adjustable rates, high LTV, subprime, all mortgage products serve some borrower's unique financial circumstances. Contrary to popular belief, exotic loan products were not inventions of the housing bubble. The problem during the housing bubble was the proliferation of these products outside their usual niche caused by the mispricing of risk. If risk were priced properly, these exotic loan products would have been prohibitively expensive, and far fewer borrowers would have used them. Exotic loans become toxic when they escape their specialized niche and spread like a virus among borrowers who lack the qualifications to handle them. The widespread use of exotic loans inflated the housing bubble and catalyzed the catastrophic crash. The new qualified mortgage rules only discourage exotic loans. These loans are not illegal; no lender will go to[READ MORE]

Lenders mastered kicking the can. When millions of borrowers stopped paying their debts, rather than foreclose on delinquent borrowers, lenders collectively decided it was in their best interest to cut deals, entice borrowers to make payments, and pray house prices would recover when they could foreclose without losing billions. Can-kicking became the policy of necessity; Politicians encouraged it, some legislatures mandated it, most borrowers asked for it, but lenders required it, which is really why it happened. If lenders had foreclosed on all the delinquent mortgage squatters and liquidated the inventory, house prices would have retreated to Great Depression levels, and our entire banking industry would have gone bankrupt. My fantasy was averted. For the next several years, the housing market is a waiting game as lenders wait for higher prices to finally resolve their legacy loan problems. MLS[READ MORE]

I strive to educate this blog's many readers and dispel the fallacies surrounding residential real estate. Sometimes, the public impresses me with their wisdom; For example, adjustable-rate mortgage use is very low despite rising rates. However, sometimes I am shocked at how many people become confused by simple concepts. For example, Redfin recently took a poll and showed that 83% of homebuyers thought a 5% interest rate was normal. They were rightfully disturbed by the financial illiteracy of buyers. Mortgage interest rates only recently fell below 5%. The only time in US history interest rates were as low as the last two years was in the aftermath of the Great Depression and World War II.

(Chart below shows federal funds rate. Mortgage rates are at least 1.5% higher)
Five percent interest rates are certainly not[READ MORE]

[dfads params='groups=165&limit=1']Nothing interesting happens in real estate in December. Few people hunt for houses, inventory usually declines, and both inventory and sales hit a low for the year. This year is similar to others. The differences in the housing market this December arise from the unique circumstances of today's market. Ordinarily, house prices also decline in December because sellers are motivated and reduce their price to sell. This December, we witnessed no decline in price--mostly because cloud inventory sellers can't lower their price--so instead we endured a larger than normal decrease in sales volumes. Housing bulls interpret the steady price as a sign of strength; they ignore the dramatic decline in sales volumes brought about because sellers didn't reduce their asking prices. Higher house prices fatigue weary investors who no longer find bargains. Potential owner-occupants lack jobs so sales to this group remains muted. Only the cloud inventory restrictions that keep inventory[READ MORE]

Blair Christopher Hanloh will go to prison for four years. He stands convicted in October of filing false or forged documents that allowed him to fraudulently assume ownership of several houses and rent them out to unsuspecting tenants. Similarly, thousands of borrowers during the housing bubble, and many Rob-signing lenders filed false or forged documents. Both dishonest borrowers and lenders sins are forgiven, and rather than endure prison sentences, the dastardly doers collect bailout checks and spar over properties obtained through subterfuge. Mr. Hanloh should go to jail, but what should become of the miscreants from the housing bubble? Mr. Hanloh isn't the first person to figure out this scam. When the housing bust was fresh, many people walked away from their properties; Many unscrupulous realtors (is that modifier redundant?) took advantage of the situation, rented empty properties,[READ MORE]

Just like FHA mortgage insurance premiums, Fannie and Freddie are also increasing their Guarantee Fee (G-fees).   They have been increasing since 2008, when the government purchased 79.90% ownership in each government sponsored enterprise.  The initial reason for increasing the G-fees was due to the cost of all those GSE-backed loans going into default.  In subsequent years there were other reasons for G-fee increases for example the mortgage tax (collected through the G-fees), and the stimulation of the private mortgage market.   If fact, Federal Government collects so much revenue it's used to help fund the government during the sequester for an extra couple of days

FHFA Announces Increase in Guarantee Fees

The Federal Housing Finance Agency (FHFA) has directed Fannie Mae and Freddie Mac to raise their guarantee fees (g-fees).

The g-fee increase consists of three distinct components. First, the base[READ MORE]

Landlords profit by charging high rents and spending little on maintenance. Good landlords charge reasonable rents to avoid excessive turnover, and they spend wisely to maintain the quality of their property. Slumlords charge unreasonable rents, and spend only what they are forced to by regulation and code. Landlords maintain properties to the quality of the neighborhood whereas slumlords deteriorate neighborhoods through deferred and avoided maintenance of their properties. Lenders behave as slumlords. Technically, lenders are not true slumlords; most often they stay off title to avoid any direct responsibility. However, borrowers who are on title but owe more than the property is worth technically own the property, but since the lender's encumbrance exceeds the value, the loanowner rents from the bank with only the hope of future equity. The underwater borrower's financial position resembles an option contract currently out-of-the-money. The borrower pays the lender to stay in the property like a[READ MORE]

House prices carry price momentum. Once prices start moving up -- or down -- they tend to continue in the same direction for long periods; however, sustainable house price momentum propels on job and income fuel. The only viable source of sustainable housing demand springs from owner-occupants who gain new jobs and increase their incomes. Job creation drives housing demand because new employees relocate to areas near work and bid up prices of available housing stock, both rental and resale. Irrespective of what may happen with financing costs or supply availability, the relentless push of increased housing demand caused by job creation spurs housing momentum. For the last few years economists believed a resurgent housing market was key to economic recovery. They posited that more housing demand would put housing industry people back to work. This in turn would[READ MORE]

Mel Watt now runs the Federal Housing Finance Agency (FHFA). As FHFA director, Mel Watt establishes policy for Freddie Mac and Fannie Mae, the government sponsored entities (GSEs). This responsibility gives Mr. Watt tremendous influence over mortgage qualification standards, the secondary mortgage market, and ultimately house prices. As new agency leader, Mel Watt replaces Edward DeMarco, and many housing experts anticipate changes in key policies that may reflate the housing bubble. My disdain for Mel Watt roots in his public statements and policies as a US Representative. While in Congress he steadfastly supported lending quotas to unqualified borrowers, and after the housing bust, he championed efforts to award these unqualified borrowers free money through principal reductions. I asked the question What would Watt do as the new head of the GSEs? Most conservative analysts believe [READ MORE]

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