Kick The Can: FHA Needs Bailout Now Too

Just when you thought the worst of the government bailouts were over, now comes the next iteration of taxpayer funded market management.  From Newsday we read:

The cash-strapped Federal Housing Administration may need a $943 million taxpayer bailout to cover expected losses from loans it insured as the U.S. housing bubble was deflating, the Obama administration said April 10.

-snip- 

 The agency provides liquidity to the housing market by insuring lenders against losses on loans. Currently, it backs $1.1 trillion of loans and is a primary source of funding for first-time home buyers and those with modest incomes.

In November, an independent audit found that the FHA faces projected losses of $16.3 billion and was at risk of depleting its cash reserves.

-snip- 

Since then, the FHA has a taken a number of steps to shore up its books, including charging borrowers higher premiums. In addition, housing prices have continued to recovery, further helping to strengthen the agency’s balance sheet.    

This is our big government system at work.  FHA acted as a white knight in the housing market as it insured loans to guarantee against losses during very troubling times back in 2008-2010.  FHA is still the preferred lending method (via Fannie and Freddie) and makes up over 90% of the market.

Recently, we hear that since times are good again at Fannie and Freddie they are reconsidering their exit from the mortgage market.  This hesitancy to exit also creates a problem for private mortgage lenders who want to enter the market on competitive terms.

The bottom line is when you have taxpayer subsidized lending and all risk of losses are insured by the ability of the government to tax the people to pay for the losses, we have a system that defies natural market forces.    It's time for Uncle Sam to get out of the market.

EXIT: Uncle Sam Makes Escape Route From Mortgage Monopoly?

One of main supporters of the real estate market over the past several years has been Uncle Sam.  Through the Fannie Mae and Freddie Mac government enterprises, FHA loans have become the savior of mortgage lending.  The mortgage meltdown of 2008 left the finance market for homes in a ruinous state.  Government stepped in to pick up the slack and taxpayers have been shouldering the risk ever since.

This week one of my loan officers emailed me that FHA is increasing mortgage insurance fee.  The MI, as it is called, is a monthly fee paid in addition to the principal and interest for at least five years and can be terminated once the borrower gets to 20% equity on their home.The new change states that the fee will now be for the life of the loan.  That is a big change!

Some of these changes reflect the fact that FHA has not been as stringent in underwriting loans as it should have been and default rates are higher than they should be.  The longer payment of MI will help cover some of those losses.  But, this move does not happen in a vacuum.  As FHA loans become more expensive, it makes private lending more competitive.

Indeed, a news report from Housingwire seems to indicate movement on the private lending front:

  Mortgage real estate investment trust Cerberus Mortgage Capital filed for its IPO Friday, unveiling wide ranging plans to purchase residential mortgage-backed securites and mortgage servicing rights, according to the document at the Securities & Exchange Commission.
"We intend to pursue a broad range of investments in residential mortgage whole loans and other real estate-related assets, including securitized financial assets, mortgage servicing rights, excess mortgage servicing rights and residential housing for lease, which, together with RMBS, we refer to as our target assets," the filing states. 

New York-based Cerberus plans to raise $150 million in its IPO. 

"We expect to use borrowings as part of our strategy," the filing states. "We intend to purchase RMBS throughout the capital structure, including not only the highest rated AAA/Aaa securities but also securities rated below investment grade or unrated securities."

This is good news.  When private parties are willing to enter the market, it means that fundamentals make sense.  Although it will take a lot more than one company to put a big dent in the market, this is a move in the right direction and an indication that the mortgage market can and will right itself.
 

Uncle Sam To Play Landlord?

The vicious cycle of federal encroachment into the housing market is coming full circle in the near future.  Housingwire reports that the Federal Reserve is endorsing a program to allow Federally owned homes to be made into rental properties:

 "Preliminary estimates suggest that about two-fifths of Fannie Mae’s REO inventory would have a cap rate above 8% — sufficiently high to indicate renting the property might deliver a better loss recovery than selling the property," Bernanke's staff writes in a supporting white paper.

"..support for such a program will cost mortgage servicers, bond investors and even taxpayers. But it may be a sacrifice for the greater good.

"Some actions that cause greater losses to be sustained by the GSE in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery," the white paper states.

This would complete the pernicious circle of government intrusion into the free housing market.  Right now Uncle Sam issues about 95% of all home loans.  Presently, many of those loans are being issued on REO homes that are owned by Uncle Sam as well.  Finally, we find out that Uncle Sam will now be wanting to rent all the homes that it owns due to making bad loans in the first place.

This proposition of an REO-to-Rental program is inappropriate.  The article sites tight underwriting guidelines as the reason for the program.  The Federal government created this scenario by keeping unhealthy banks alive and not letting them fail.  Banks have no incentive to lend while they get cheap money to buy Treasuries that yield them a guaranteed (but low) return on investment.  Why would they lend to the man on the street when they can get a risk free ride from Uncle Sam?  Pure folly.

Let's get government out of the housing market.  

High Density Smart Growth: The Utah Pioneer Solution

A colleague of mine forwarded a brilliant and insightful .pdf from the APA Conference last year.  I thought I would share it with you.


APA Oct 2010 Strong Roots Sustainable Communities
It makes for a quick read, but it emphasizes the importance of smart planning and harkens back to the "Plat of Zion" of the early days of the Church of Jesus Christ of Latter Day Saints. A fun read for sure.

Real Estate Bloodlines: Scenes from the Secret Recorder's Vault

I went to do some historical research today at the Weber County building.  I wanted to find out who has owned my home since it was built in 1908.

My quest led me to the Weber County Recorder's Vault.  Located in an inconspicuous hallway on the 2nd floor of the Weber Center, the first thing I noticed was the security coded doorknob and a handwritten note "knock to enter".

Upon knocking, a pleasant elderly woman answers and wisks me into the room.  The room smells of old books.  As I cast my eye around the room, I see rows and rows of disproportionately large books carefully organized.  Their scale is awkward and almost cartoonish.

The clerk asks what I am looking for.  When I respond,  I am handed a note with a handful of letters in the alphabet.  She pulls out a book stamped with a letter on the cover and shows me how to read the cryptic cursive handwriting from the 1800's.  Then I am on my own.

My abstract search reveals some interesting facts about the creation of our home (look for that in a later post).  When I am done, I look at the clock. What I thought was just a few minutes was actually an hour and a half.  I am late for my next appointment...  

Nanny State Real Estate: The Rise of the Ridiculous

It seems that with the increase in bank owned inventory there has been a proportionate increase in ridiculous Federally mandated safety fixes to properties.  Here is today's example:

My, doesn't that look pretty.  I am so grateful that Uncle Sam, in his well-intended way, has mandated these to protect us from ourselves.  Had these shabby railings not been there, I would have flung myself off the terrace and onto the driveway below. 

Upon reflection, it's remarkable that mankind has survived the ages without handrails....

Notice that there is only one person in all of these pictures.  I am sure the rest of them died of neck and back injuries sustained when their governments failed to mandate handrails.

Safer Neighborhoods: Ogden's Proposed Gated Community

Recently I have been made aware of efforts to make Ogden's neighborhoods feel safer.  One of these efforts includes a proposal to create a unique gated community in Downtown.  Here is a map of that neighborhood:

Basically, the proposal includes gating Eccles, Van Buren, and Brinker Avenues at 20th Street and also at 19th Street and Jackson Ave.  The four gates would  enclose a community of approximately 150 homes, most of which were built in the 1940's. 

The idea is to create an environment that would allow home owners to feel safer but also create an environment that makes it more difficult and less opportunistic for criminals. 

Interestingly, crime is not necessarily higher in this neighborhood than the surrounding area but rather the geography and street layout provide a unique opportunity to create a gated community with the least amount of infrastructure expenditures.  It will also be interesting to see how this kind of project will affect crime statistics once it is completed.

The project is still in the research stage so it will be interested to report on this again as community buy-in gets underway and plans are presented for approval. 

Watch for a report on this again in the future.

Appraiser Atrocity: Bureaucracy in Real Estate Hell

I just closed with some buyers after spending 75 days working on a small file that would normally take just 35 days.  You can read details about the negotiation and price points in JUST SOLD! Bargain Cottage Starter Home. 

Once we locked the home up at the $59,000 price point the first thing we did was order an inspection.  We found some ticky tacky problems but nothing serious.  We then ordered the appraisal.  The appraiser came to the home and several days later we received her findings.  To our surprise, the appraisal came in low with the appraiser indicating the home's worth at $57,000...the original list price.  This was disconcerting because the home was in very good condition for its age and we estimated that the home was actually listed several thousand dollars below its comparable market value.

An examination of the appraisal was shocking (click to enlarge):

A couple things popped out at me on this page.  First, the comparables the appraiser used were cash transactions rather than financed transactions as you would normally expect to see with retail owner-occupied homes (homes that are actually comparable to the home my buyers were trying to purchase).  A review of the MLS confirmed my suspicions.  These comparables are scratch-and-dent BANK OWNED homes!  Our appraiser was comparing apples to oranges in her work.  Tisk. Tisk.

Five minutes on the MLS revealed traditional non-distressed homes that sold just a block away. After I put our evidence together, my lender and I threw a Hail Mary pass and disputed the appraisal.  We were pleasantly surprised when the appraisal management company called us a week later to say that our dispute was successful and the value was adjusted to $60,000.  Whew!

Little did we know what kind of waves we had made by succeeding in our dispute.  As you can see on the appraisal form, the home called for "Exterior cracked and peeling paint needs to be scraped and painted."  When we notified the sellers they immediately scraped and painted the appropriate places.  We ordered our Own In Ogden inspection and the inspector passed us off except for a couple interior repairs.  Own In Ogden is picky about paint and they could find nothing wrong in their inspection.

Shortly after that, the original appraiser returned to review the paint work.  She was unsatisfied and identified several places that were not noted in the original appraisal that needed to be "fixed" according to her.  Flustered, the sellers scraped and painted those areas.  We called the appraiser back to the property and she refused to sign off on the repairs yet again, this time indicating she could see transition lines where the old paint had been scraped off even though it was all covered in new paint.  The appraiser said "I am the eyes and ears of FHA and this needs to be sanded, scrapped and painted to our satisfaction."  Wonderful.  It cost $150 each time the appraiser had to revisit the property.  Someone's ego had been bruised so they were running up the meter.

Finally, the appraiser signed off on the repairs.  When the Appraisal Management Companies are done away with and we go back to a free market again, this appraiser will be on my short list.

However, our problems did not stop there.  Just a few days before closing, our loan officer received a full page of conditions he needed to fulfill from the underwriter, one of which was a 2nd appraisal!  Our closing was delayed a month while we jumped though numerous other hoops.  When the underwriter discovered that I was the landlord of the buyers, they tossed out my Verification of Rents as unreliable and instead demanded proof of deposits.  It took my bank a full week to pull deposit images of my buyer's rent payments.  Finally, the underwriter was satisfied, miraculously waived our 2nd appraisal, and we were able to wrap up our transaction.

In my opinion, the HVCC has been a disaster in the market and has created an appraisal industry rife with bureaucracy and paranoia. I know some very competent appraisers.  Unfortunately, our freedom to employ them has been restricted and regulated by Federal law.  The sooner this regulation is done away with, the healthier our market will be.

Mortgage Lending: Signs of Life In The Wasteland

The mortgage lending market has gone through some trauma since 2007.  For illustrative purposes let's liken the damage done to the mortgage lending business to the effects of a volcanic eruption...in this case Mt. St. Helens specifically.

Here is a picture of the as a lush forest pre-eruption.  Look at all those pretty trees living happily basking in the sun.  Think of each tree as a mortgage lender and the abundance and health of the trees in this photo as a representation of the Mortgage Industry in 2007.

Then, trouble brews and a cataclysm befalls the forest as Mt. St. Helens blasts the life out existence.

Uh oh!  Think of this as a visual representation of what happened to the mortgage industry after the housing crash of 2008.

Yet, with every disaster, there is renewal.  Here is a photo shortly after Mt. St. Helens erupted:

This looks like a lifeless moonscape.  How could anything live in this environment?

Well, lo and behold, there is life!

Please forgive the labored analogy.  The point I wanted to make today was that, as in all natural disasters, life goes on and nature has a tenacious way of springing up and clawing its way back from obliteration.  The same goes for the mortgage lending market for housing.  Just this week we get two very interesting headlines from Housingwire:

Redwood Lines Up Another Jumbo RMBS
Redwood Trust, the only company to launch private-label residential mortgage securitizations since the financial crisis began in 2008, is issuing the RMBS.  Redwood will bond 473 loans with a total balance of approximately $375 million.

This is good news!  Morgtage backed securities have been dead for nearly three years with Redwood being the recent innovator and initiating the creation of more of these products.  They anticipate doing another $1 Billions in RMBS this year.  Good for them.  Good for us.

Also we read today:

Banks May Skirt GSE Uncertainty With Covered Bonds
More banks based in the United States will establish covered bond programs to fund future mortgages on the perception of less risk and still lingering uncertainty over private and agency securitization markets, according to Moody's Investors Service.

New covered bond frameworks could take the place of mortgage-backed securities issued by either the government-sponsored enterprises or the private market.

-snip-

"New covered bonds in the U.S. will also not have the low quality assets that were common in pre-crisis residential mortgage-backed securities." Moody's said in a research note released Tuesday. "We expect future U.S. covered-bond deals will have much less market risk following a bank default than pre-crisis U.S. covered bonds because we assume future covered bond legislation will establish mechanisms permitting liquidation of a portion of the pool over a period of time."

What this is saying is that banks are seeing the writing on the wall that Fannie Mae and Freddie Mac's days of market dominance are numbered.  If the demand for home loans is going to be satisfied, banks will need to find other ways of meeting that demand than originating loans and sending them to Fannie or Freddie.  Thus, traditional banks have started to use tools called covered bonds to provide incentives for the creation of new home loans.   

Both of these reports show that the market is innovating and adapting to survive in the inevitable post-government-dominated mortgage market. 

Wild West: Farr West City Tamed By The Law

Last month I reported about a project that an associate of mine was working on in Farr West to build an assisted living center for the elderly.  You can read the story in Wild West: Farr West City Denies Developer and Dooms Taxpayers.

Well, it appears that the reality of the situation has finally caught up to the city council.  The Standard Examiner reports the following:

After a scolding from its own attorney, the city council this week granted Anthony Marler permission to build an assisted living facility.

The action reversed the council's ruling earlier this year that the center could not be built because it was on land the council designated as wetlands.

Had the city not reversed course, the penalty the city would pay would likely not me a small sum.  The city attorney cites other examples:

And such a ruling would have severe consequences for the city, he said. He pointed out a case in Boise, Idaho, in which a county lost a similar suit and is now filing for bankruptcy because of the $4 million awarded.

The taxpayers of Farr West can breath a little easier tonight. 

Rules from MARS: NAR Blasts FTC With Ray Gun

It was announced today that the Federal Trade Commission will exclude Realtors from the MARS disclosure rules that it adopted earlier this year.

Basically the MARS disclosure documents were a series of four papers that were cumbersome, confusing, and in my opinion totally unnecessary.

Today's ruling is a common sensed step back.