Tag: Housing Marketplace

Quick Details On Bailout Plan’s Unsuccessful Vote

BOTTOM LINE: House vote on TARP failed 205-228. We expect legislation to reemerge in the near future, but the extent of the modications that will be necessary is unclear. There still appears to be a good chance that Congress enacts some type of stabilization package before the election. Another vote is possible in the House later this week — perhaps on Thursday — but the situation is fluid.

KEY POINTS:

1. A simple majority was needed to pass the TARP plan. 140 Democrats voted in favor, and 66 Republicans supported the bill, leaving the bill 12 votes short. Internal vote counts prior to the vote expected roughly that number of Democrats to vote for the bill, but expected a greater number of Republican votes than materialized. Assuming that Democratic votes on the bill do not change, House Republicans are likely to be the key to unlocking additional support for the bill, so the focus over coming days is likely to be on what additional concessions they may request.

2. Congress will be in recess on Tuesday, and will return to legislative business on Wednesday. Another vote then is possible, but looks likely to occur at earliest on Thursday. It is not clear whether major concessions will be necessary, or whether minor changes to the bill would be enough to secure the incremental votes necessary for passage.

3. The House can bring the bill up quickly if a compromise is reached among House and Senate leaders and the White House on potential modifications. If the House is able to pass an amended plan later this week, the Senate should prove to be less challenging. However, the legislative process in the Senate takes at least two days for procedural reasons, so passage in both chambers by the end of the week could be a challenge.

Interesting That This "Crisis" Is Happening During An Election Year

Just because of the way it shapes the discourse on the matter, the way it causes the public to value the players and the voices, the way it will shape the election, and how the election will shape the eventual path forward. I watched most of the McCain / Obama debate last week, and I have to say, when asked about their opinions on the bailout plans, I felt embarrassed that either tried to express any opinion whatsoever. Henry Paulson’s request for $700bn came with a “trust me, I know what I am doing” style plea, there wasn’t much to make an opinion of. Most of congress seemed perplexed by the details, so why should Obama or McCain represent to have a grasp of what it entailed, and then elaborate? Why can’t they just say “I dunno, my economists will advise me on that when the details become more clear…”?

The republicans have voted down the bailout plan. The market is in a panic-style reaction. Stocks are way down, treasuries are way up, flight to safety. Even if some of them support the bailout effort, they all know that if they allow it to pass on a democrat-carried vote, McCain can soapbox all the way to the November election about how the democrats are bailing out Wall Street. You have to wonder what this would have looked like if it happend after the election…

Here are some more politically charged items floating around my desk today:

1- NY Times article dated 9 years ago tomorrow, talks about the Clinton Administration urging FannieMae to make more subprime loans. From the article:

“The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.”

2- Ron Paul preaching tough medicine in today’s bailout plan vote.

3- On the fall of Lehman Brothers, Bill Bonner writes:

“… how a company that survived the Civil War, the railroad bankruptcies, the panics, WWI, the Great Depression, WWII, and the Cold War couldn’t survive the biggest financial boom in Wall Street history?…”

In fairness, they survived the boom, just not the bust. But thought-provoking enough… well said.

Where Are California’s Most Undervalued Real Estate Markets?

According to the Sept 10 Kiplinger Letter, which they admit may surprise some, they are:

San Diego 17.2% undervalued!
San Francisco 15.9% undervalued!
Stockton 13.8% undervalued!
Vallejo 13.4% undervalued!
Modesto 12.9% undervalued!
Santa Ana/Anaheim 12.4% undervalued!
Santa Barbara 12.3% undervalued!
Sacramento 11.1% undervalued!

Despite the fact that some of these areas are known to have some of the worst subprime mortgage problems, Global Insight (a forecaster) suggests that they have relatively healthy economies, strong job growth to support demand, and home prices have already dropped significantly.

hmmm… signs of a bottom? or overly optimistic?

Buy And Bail vs Note Modification

If you bought your home sometime in 2005 or 2006, you likely nailed it at the peak, depending on exactly where and exactly when you bought. And if your home has lost a significant amount of value, you have to wonder why you are still paying the bill for the mortgage, especially if the mortgage is bigger than the value of your home.

So what can you do?

+One option is to stick it out. Do nothing. Keep paying and stay put until the home value comes back… how ever long that ends up taking.

+Another is to attempt a short sale, where your lender agrees to let you sell your home for less than the balance owed on the note, and then be forgiven of any debt you cannot pay off with the proceeds from the sale.

+Less appealing is foreclosure. Let the bank take your home, walk away, etc. Bank’s problem now. Your credit will be trashed, but you won’t keep bleeding cash into a bad investment. Hope you can find a new home (even a place to rent) with that new 500 FICO score…

+Enter the Buy & Bail strategy. Buy a new home now, and once it closes, let the old one go into foreclosure. This sounds nice if you bought your home for $1MM, and now the one next door is selling for $600k. The problem is, your new lender wants to make sure you can afford the payments on both homes. So you try to off-set the costs of the home you will depart by bringing in a renter. If you can find one.

This might have worked, except that banks are concerned about fraud when you claim a renter who may just be a straw person, or suggest you are going to rent a home, and then walk away from the obligation to repay… aka “Bail”. Your intentions clearly were not honest, and the new lender now has a brand new client with a 500 FICO score. That’s not what they were signing up for.

So underwriting guidelines are responding to this practice, which has been seen before in top-heavy markets, by changing the way they value that rental income. Quite simply, if you don’t have at least 30% equity in the home you will be departing, you don’t have adequate ‘incentive’ to make good on that payment. Why would you keep paying the bill? So the new lender says: rental income is worthless in this scenario.

Here is some text from a recent FHA announcement:
This will assure that a homeowner either has sufficient income to make both mortgage payments without any rental income or has an equity position not likely to result in defaulting on the mortgage on the property being vacated. In either case, this guidance is directed to preventing the practice known as “buy and bail” where the homebuyer purchases, for example, a more affordable dwelling with the intention to cease making payments on the previous mortgage.

That will break down quite a few “buy and bail” strategies for consumers who thought they were making a crafty maneuver in this challenging market.

But is there a better alternative?

Have you considered requesting a note modification? There is a bloodbath going on out there. Banks are at the epicenter. They do not want you letting your house go into foreclosure. They can’t take it, literally. Maybe you bought more house than you could afford, maybe the payments skyrocketed based on a loan feature you were not informed of, maybe you lost your source of income, had a divorce, etc… you’re ready to throw in the towel.

Sensitive to the threat, and also under pressure from the government banks are working with consumers to renegotiate the terms of their loans. Results can include: forgiveness of debt, restructuring of payment, reduction of rate, extension of terms, etc. Any feature of your loan can be re-written. You can contact them yourself, but you’ll have much better results with an attorney in your court. Learn more about this here.

Down Payment Assistance Programs – Updates At Legislative Level

I am breaking a long inexplicable silence here to follow up to a recent post about rules surrounding seller-funded down payment assistance programs (DAP).

What’s a DAP? (or a DPA? I’m not sure if there is an official acronym; both seem prevalent at this point). With the credit markets recoiling, the ability for homebuyers to enter the market with small down payments has been hampered. Big time. Lender’s simply want the borrower to have skin in the game, so that if the value drops a little, they still have incentive to keep paying back the loan.

The DAP programs that were eliminated in the recent HR 3221 Housing Bill refer to those facilitated by a charitable organization to essentially ‘launder’ a down payment from the seller of the home. The down payment needs to be from the buyer’s funds, not the seller’s. If it came from the seller, its the same as buying the house for cheaper. Proponents of DAP argue that the borrower has equity in the house, regardless of the source. Opponents claim that the fair value of the house is really the purchase price less the seller-funded down payment, or in other words, there is no equity.

FHA was allowing these programs until they realized that default rates on borrowers with DAP assistance were 3x that of borrowers who funded their own down payment.

But without DAP in the market, fewer buyers can get into the market at entry level. And if there are no first-time buyers, who do the move-up buyers sell their homes to? They don’t, and all of the sudden, nobody is buying anything, and inventories skyrocket, and prices fall… sound familiar? This is the “plankton theory of housing”. We need first time buyers to keep everything moving…

There are also community organizations that provide down payment assistance, but do not receive funding from the seller of the home. There is no regulation on the table to curtail these programs, and with them, buyers can still obtain 100% financing in some circumstances.

Here is the latest on the seller-funded side of the practice:

At this point the ban on the use of seller-funded down-payment assistance with FHA-backed loans takes affect October 1st. But a compromise may be in the works. HR 6694, which would allow home builders to continue funneling down-payment assistance through nonprofit groups to home buyers using FHA loans, may pass. HR 6694 would automatically allow qualified borrowers with credit scores of 680 or above to use seller-funded down-payment assistance on FHA-backed loans. Borrowers with scores between 620-680, who relied on seller-funded gifts, might be subject to higher insurance premium fees. Borrowers with scores below 620 would be excluded from using down-payment assistance until mid-2009, when HUD would be permitted to expand the program to include them if the Secretary of Housing determined it could be done without putting a dent in FHA’s insurance requiring taxpayer subsidies. Chairman Barney Frank said, “The FHA loved the ban on down-payment assistance (but) hated the ban on risk-based pricing…That seemed to me to offer an opportunity. So (HR 6694) will replace both bans with middle ground.”

Down Payment Assistance Programs – Keeping An Eye On Legislation


Lots of sparks flying right now, with popular down payment assistance programs (DAP) to first-time home buyers under scrutiny, and a mortgage industry fearful of losing another business niche. This recent story brought quiet a bit of chatter into the markets.

The FHA, who lost $4.6 billion last year, may be losing their ability to accept down payment assistance money. Nearly 79,000 people last year took advantage of them, where nonprofit groups provide buyers with money for down payments and home sellers then reimburse the organizations and pay an administrative fee. The FHA said seller-funded down payments present the single biggest challenge to its solvency. Borrowers who take part in these arrangements go to foreclosure at nearly three times the rate of borrowers who put their own money down, according to the agency. The Senate version of the housing bill would have banned the programs but the House version would not. At this point a compromise bill has backed the Senate’s version on this, which also is supported by the Bush administration.

What’s The Monthly Payment On A 2 Billion Dollar Home?

A lot.

But you probably have other types of problems when you are worth $42bn than making your mortgage payment. Such as, figuring out which of your 6 levels of garage you want to park on for any given day, or deciding which in-your-house gym you’d like to lift weights in. Or finding your kids.

Due up this January, the world’s most expensive home. There are video and photo tours in this article. Not really my style, but I could manage…

Inflation Panic 2008 – What Are We Headed For?

I wonder if in a few years, when we look back at this great Credit Crunch episode, and the associated economic slowdown, if we will remember the extreme moodiness of the markets during the transition. It seems every other week the Dow is posting multi-day consecutive 3-digit gains or similar consecutive losses. The financial news media is loaded with guys who say “we are nearing bottom” or “we are at the bottom”, yet none of these guys was here telling us we were headed for this in the first place, so how are they expecting to be viewed as credible? One article I read recently (from Marc Faber, introduced by John Mauldin) labeled this a “conspiracy of optimism”. A pretty dismal prognosis for our economy is laid out in this piece. I have to admit, it was a bit jarring to read.

But the view is a slight bit different in this one, from Pimco’s Paul McCulley. With all this debate going on about stagflation, wage-price spirals, the 1930s (depression) or the 1970’s (“the lost decade”, at least economically speaking), and general financial Armageddon, eyes are on the Federal Reserve this week for an updated policy statement. Expectations, via the Fed Funds Futures trading activity, are all over the place in predicting the Fed Funds rate over the coming year. There is a general lack of consensus, the market is confused.

It will be interesting to see if “Doctor” Bernanke appears on board with McCulley’s concept of a Hippocratic Oath, and there should be a lot of attention on tomorrow’s Fed news release.

Interesting times for sure. Where exactly is this economy headed, and what’s it going to mean to you? How does it impact your investments? Your employment? Your family? Are you positioned to endure the downdrafts as well as participate in the bull runs?

How Foreclosures Increase The Risk Of West Nile Virus


A couple of interesting news headlines today, especially when you put them together. First, a 48% surge in foreclosure filings nationwide for the month of May. The ‘pig in the python’ is just beginning. If you want to learn more about this, and more about the shape of things to come, email me.

And second, public health workers in Phoenix have devised a strategy to combat a spike in mosquito populations now that so many homeowners have abandoned their homes, and their pools, leaving the water to stagnate and become a habitat for the little pests. They are concerned that thriving mosquito populations raise the risk of outbreak of West Nile.

So this is another sign of how foreclosures can drag down community integrity. We have some choppy waters ahead still, but there is opportunity across the board. You must learn to position yourself, and ownership of a home requires much more careful planning today than in recent years. Work with a qualified professional to review your position and if you must abandon your home, for the sake of the neighborhood, drain the pool on your way out the door.

Buy Or Rent – What Can We Learn From The Rent Ratio?

The New York Times has an interesting graphic illustrating the costs of renting versus owning a home in various US cities. The Rent Ratio is a useful metric for people contemplating the costs of renting versus owning a home. Bay Area residents will notice that the ownership premium is higher here than many other areas, especially non-coastal metro zones. Historical appreciation records are likely the reason why buyers are willing to pay a greater premium in these cities.

Understanding the true costs of renting relative to the true cost of owning, you need to look well beyond average rent prices and average mortgage payments for equivalent properties. A true rent vs. buy analysis will take into account:

  • inflation of rent costs
  • opportunity costs of down payment funds that could have been invested elsewhere
  • return on investment of dollars invested rather than spent on mortgage payments in excess of equivalent rent
  • tax implications of owning real estate
  • appreciation of housing as an asset

Also, are we looking at the cost of renting the home we want to buy? Or are we looking at the cost of renting the home we would likely rent, if we chose not to buy? They may not be the same, for when we are not required to sink 100k or 200k into a down payment, we may be inclined to spend an extra $200, $300 even $500 a month more in rent. If you want to see how a true rent vs. own analysis works, please email me.

Some other interesting observations: San Jose, CA has the highest ratio. New York City is surprisingly low, suggesting that it’s not only expensive to own, but also to rent in that city.