Tuesday, July 28, 2015

New Change Coming to Real Estate Settlement Process:

Effective October 3, 2015, the Consumer Finance Protection Bureau (CFPB) will be implementing new lender and escrow disclosure procedures that will have a profound impact on real estate transactions nationwide.

The intent of the new regulation is to provide coherent consumer disclosures in real estate transactions, enabling consumers to better comprehend costs and conditions of their transactions. The new regulation integrates disclosures required under the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA).

In fact, the new Loan Estimate (LE) and Closing Disclosure (CD) forms are indeed easier to read than the multiple forms they are replacing.

However, the mandated extended time lines for multiple disclosure notifications and enormous penalties [$5,000 per day and up to $1,000,000] for non-compliance by service providers are going to unfortunately add consumer costs to transactions and slow them down considerably.  Lenders and escrow servicers have noted that the cost of compliance with the new regulations will be significant.

Except for cash sales, very likely gone will be the days of 30 day escrow closes.  Escrows may now take 45 to 75 days to close with the norm likely being 60 days according to escrow sources.  This will place a cost burden on Sellers who would have wished to sell timely, and Buyers who will be confronted with more costly loan rate lock periods and delayed closings.

Friday, October 10, 2008

Shock and Opportunity

What appears to have been a tsunami shock wave in the real estate and stock markets has actually created remarkable long-term investment opportunities in both areas.

As market values of homes have dropped 40% and more in some San Diego communities, affordability has increased markedly. Now 48% of San Diego households can afford to buy a home – up from less than ten percent. Improved FHA and VA programs are now becoming big factors in financing owner-occupied real estate as banks have tightened guidelines on conventional loans.

In spite of the negative economic news, there are many buyers now entering the marketplace as evidenced by the recent upturn in sales volume and velocity. Foreclosures are being absorbed (many with multiple offers) and resale inventories (which are now oftentimes highly competitive with foreclosure pricing) are contracting. New construction is also being rapidly absorbed as developers sell off remaining homes with attractive buyer incentives.

Hundreds of billions of dollars from the stock market sell off have found themselves into individual’s bank accounts especially since the FDIC insurance level was raised from $100,000 to $250,000.

The Federal government’s decision late Friday, October 10, 2008 to buy preferred stock in U.S. banks should have a further positive effect on liquidity in the mortgage markets.

Traditionally, sharp declines in stock prices are accompanied by renewed interest in the indestructible asset of real estate.

Thursday, October 2, 2008

A Time for Reform

What caused the current financial crisis, who is to blame and who is capable of rectifying the damage and restoring stability and confidence in our nation’s economic future?

Kevin Hassett in a September 23, 2008 release on Bloomberg.com relates in straightforward detail how the current financial crisis evolved. “The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally.

“Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize sub prime loans by becoming the primary customer of all AAA-rated sub prime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves.”

Finding someone anywhere capable of spelling out with clarity a “solution” to this seemingly never-ending economic crisis appears as elusive as getting a clear response from some members of the U.S. Congress to explain why they accepted lavish campaign donations from quasi-government financial institutions that have been under fire for mismanagement and accounting anomalies.

A lot of frantic action is under way nationally and around the world to stem the financial panic – a panic brought about by over-leveraging inherently unsound investments in overvalued home mortgages.

Both presidential candidates have come out swinging with plenty of blame to go around. Bush-bashing, being something of a national pastime for all liberals and many conservatives, is in full flourish. But, is President George Bush the one most responsible? And, should we give the power to resolve this crisis to the same people who gave it to us? Connecting the dots leading to the current crisis central core of corruption is actually not all that difficult.

In past decades, the United States had been a leader in sound financing of residential real estate. The primary vehicle had been the fully amortized 30-year loan given to homebuyers with good credit ratings and documented ability to repay their loans.

In quest to make homeownership available to all Americans, Congress enabled unaffordable mortgage financing. Creative home-loan financing came about with low introductory interest rates, negative amortization loans (i.e., the principal balances of which increased as the borrower paid less in payments than the pegged interest rate would have otherwise required), and no-document and stated-income loans (i.e., loans in which evidence of income was not required). Added to this were syndicated loan-fraud scams where collusion between buyers, sellers, real estate and mortgage agents overstated home values by hundreds of thousands of dollars with never any intention to repay the loans.

The foregoing led to unrealistic rises in home prices as illusionary affordability led buyers to purchase properties they would not be able to afford once interest rates increased and as fraudulent home-loan schemes proliferated. In the quest to expand business, mortgage companies gave little attention to auditing the inherently weak mortgage paper they were accepting. They, in turn resold this weak paper on the secondary market.

Some of the major players in this unfolding drama are:

Countrywide Financial Corporation, now a subsidiary of Bank of America, is a diversified financial marketing and service holding company that has dealt primarily in residential mortgage banking and related businesses. Under its co-founder Angelo Mozilo, Countrywide spearheaded the creative “affordable loans” that led to the sub-prime mortgage collapse. Sub-prime loans with their built-in pre-payment penalties, interest-rate accelerations and padded unearned “junk fees” were the most profitable loans for companies such as Countrywide, which packaged the loans and sold them on the secondary market.

Perhaps no one profited more from ripping off sub-prime loan borrowers – those least able to afford their loans – than Angelo Mozilo.

As reported by USA Today (April 10, 2008), “Mozilo, who founded Countrywide 40 years ago and built it into the nation's leading provider of mortgages, saw his compensation soar during the real estate bubble of 2001-06. During that period, his total compensation — including salary, bonuses, options and restricted stock — approached $200 million.” According to the New York Times (August 26, 2007): “Since the company listed its shares on the New York Stock Exchange in 1984, he has reaped $406 million selling Countrywide stock.”

Mozilo also co-founded Indymac Bank which was seized by federal regulators on July 11, 2008.

As detailed by the New York Times (August 26, 2007): Countrywide’s entire operation was intended to wring maximum profits out of the mortgage lending boom no matter what it costs borrowers. Many of these loans had interest rates that reset from low teaser levels to double digits; others carried exorbitant prepayment penalties that made refinancing prohibitively expensive.

New York Times conceded that Countrywide was not the only lender that sold questionable loans with enormous fees during the housing bubble. As real estate prices soared, borrowers were all too eager to participate, even if it meant paying high costs or signing up for a loan with an interest rate that would jump in coming years.

Lehmann Brothers Holdings Inc. was a global financial services firm, dealing primarily in the U.S. Treasury securities market. On September 15, 2008, the firm filed for Chapter 11 bankruptcy protection, making it the largest bankruptcy filing in U.S. history.
American International Group, Inc. (AIG) is a major American insurance corporation. On September 16, 2008, as AIG suffered a liquidity crisis following the downgrade of its credit rating, the United States Federal Reserve moved in with an $85 billion credit facility to prevent the company's collapse.
In the early 2000s, AIG had become embroiled in a series of fraud investigations conducted by the Securities and Exchange Commission, the U.S. Department of Justice and the New York State Attorney General’s Office. The New York Attorney General's investigation led to a $1.6 billion fine for AIG and criminal charges for some of its executives.

With the bankruptcy of Lehman Brothers, investors began comparing the types of securities held by AIG and Lehman, and found that AIG had valued its mortgage-backed securities 1.7 to 2 times the rates used by Lehman.

The Federal National Mortgage Association (FNMA), commonly referred to as Fannie Mae, was founded as a government agency in 1938 as part of President Franklin Roosevelt’s New Deal to provide liquidity for the residential mortgage market. In 1968, to help balance the federal budget, Fannie Mae was converted to a private corporation.
The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, was created in 1970 by the Emergency Home Finance Act to create competition for Fannie Mae and expand the secondary market for mortgages. Along with other government-sponsored enterprises (GSEs), Freddie Mac bought mortgages on the secondary market, pooled them, and sold them as mortgage-backed securities to investors on the open market. This secondary mortgage market increases the supply of money available for mortgages lending and increases the money available for new home purchases.
On September 7, 2008, Federal Housing Finance Agency (FHFA) director James B. Lockhart III announced he had put Fannie Mae and Freddie Mac under the conservatorship of the FHFA
Democratic Congressman Barney Frank (D-MA) is the chairman of the House Financial Services Committee. According a New York Times report: “In 2003, Congressman Barney Frank (D-MA) opposed Bush administration and Congressional Republican efforts for the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis. Under the plan a new agency would have been created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry. ‘These two entities, Fannie Mae and Freddie Mac, are not facing any kind of financial crisis,’ Frank said. He added, ‘The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.’”
Democratic Senator Christopher Dodd (D-CN), in his role as chairman of the Senate Banking Committee, proposed a housing bailout to the Senate floor in June 2008 that would assist troubled subprime mortgage lenders such as Countrywide Bank in the wake of the housing market collapse.

Conde Nest Portfolio reported that in 2003 Senator Dodd had refinanced the mortgages on his homes in Washington D.C. and Connecticut through Countrywide Financial and had received favorable terms due to being placed in a “Friends of Angelo” program (referring to the co-founder of Countrywide – Angelo Mozilo).

As reported by the New York Sun (June 9, 2008), James Johnson [former director of the Federal National Mortgage Association (Fannie Mae) and a close political and economic advisor to Democratic Presidential nominee Barack Obama] “ took at least five real estate loans totaling more than $7 million” under remarkably favorable low-interest-rate terms “from Countrywide Financial Corp. through an informal program for friends of the company's CEO, Angelo Mozilo…” The Sun further noted that the president of the American Federation of State, County and Municipal Employees, Gerald McEntee, had said that records of campaign donations showed Mr. Obama had ‘taken $1.8 million from the folks who have pushed these loans on unsuspecting working families’…”

Another close confident and key political and economic advisor of Barack Obama is Franklin Raines, former head of the U.S. Office of Management and Budget from 1996 to 1998 under President Bill Clinton. Franklin Raines also served as Chief Executive Officer of Fannie Mae after James Johnson. He had also previously been a managing director of Lehman Brothers and is a director of Goldman Sachs, among several other major corporations.

An Office of Federal Housing Enterprise Oversight (OFHEO) report dated September 17, 2004 found that, during Johnson's tenure as CEO, Fannie Mae had improperly deferred $200 million in expenses. This enabled top executives, including Johnson and his successor, Franklin Raines, to receive substantial bonuses in 1998. A 2006 OFHEO report found that Fannie Mae had substantially under-reported Johnson's $21 million compensation.

From an AP Report in the Seattle Times (April 18, 2008): “Former Fannie Mae chief Franklin Raines and two other top executives have agreed to a $31.4 million settlement with the government announced today over their roles in a 2004 accounting scandal.

“Raines, former Fannie chief financial officer Timothy Howard and former controller Leanne Spencer were accused in a civil lawsuit in December 2006 with manipulating earnings over a six-year period at the company, the largest U.S. financer and guarantor of home mortgages.

The three largest receipients of campaign donations from Freddie Mac and Fannie Mae are Senator Christopher Dodd (D-CN) ($165,400], Senator Barack Obama (D-IN) [$126,349] and Senator John Kerry (D-MA) [$111,000].

On September 24, 2008, the International Herald Tribune (IHT) revealed that Rick Davis, campaign manager for Senator John McCain, was paid $15,000 a month from 2005 until the end of August 2008 as consultant to Freddie Mac.

The Herald Tribune also reported, “It was not unusual for Freddie Mac and Fannie Mae to have well-connected people from both parties on their payrolls, but doing little work, in the high-flying days. The purpose, people who worked at the companies said, was bipartisan insurance against new regulations or loss of the implicit government guarantee, which seemed at risk during both the Clinton and current Bush administrations.

“McCain and his advisers have argued that whatever connections Davis and other McCain campaign officials have had to the mortgage giants, McCain in the Senate has been an advocate for reforming them.”

In early 2005, Federal Reserve Chairman Alan Greenspan prophetically warned Congress that if Fannie Mae and Freddie Mac were to ``continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. ``We are placing the total financial system of the future at a substantial risk.''

In January, 2005, heeding Chairman Greenspan’s warning and foreseeing the current crisis, four Republican Senators, including Senator John McCain (R-AZ), introduced the Federal Housing Enterprise Regulatory Reform Act of 2005 (S. 190). This bill would have established an independent Federal Housing Enterprise Regulatory Agency.

This bill would have set forth vital operating, administrative, and regulatory provisions of the Agency. It would have also amended the Federal Home Loan Bank Act to establish the Federal Home Loan Bank Finance Corporation and transferred the functions of the Office of Finance of the Federal Home Loan Banks to that corporation.

With remarkable foresight, Senator John McCain said at the time, "If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole. I urge my colleagues to support swift action on this GSE reform legislation."

Unfortunately, the bill was blocked by Democrats on a party-line vote in the Senate Banking Committee. If that law had passed, this current financial crisis would not have occurred.

Serious reform is needed in the U.S. mortgage and financial markets – reform that will assure that congressional representatives are not influenced by donations from campaign lobbyists operating counter to the interest of American citizens and that sound banking principles are applied to mortgage financing.

It’s not just a time for “change.” It’s a time for “reform.”

Tuesday, January 1, 2008

San Diego 2008 real estate assessment

“It began with low-income Americans being encouraged to borrow mortgages they couldn't afford.” So wrote David Teather in his British Guardian on-line insightful essay, From the sub-prime to the ridiculous: how $100 billion vanished: Mighty institutions and powerful figures undermined by pitiful little property deals, dated December 31, 2007.

Starter teaser rates with adjustable-rate, negative-amortization financing for fixed-low-income families and low- and no-document, stated-income loans for seminar-fresh eager “get-rich-fast” investors and real-estate “flippers” initially fanned the mortgage embers. Enter outright loan-fraud schemes – 103 percent loan-to-value mortgages on homes appraised at 20 to 25% percent above market value for straw buyers – and the flames burst forth setting the stage for the mortgage conflagration that has now begun burning overseas financial markets.

Teather pointed out that bad mortgage debt “had been packaged up and sold on around the world’s financial system. Nobody, not even the banks themselves, knew who owned the toxic debt.” Teather concludes, “Confidence appears to be ebbing.”

Indeed, fear, emanating from uncertainty, seems to have been the emotion that dominated the U.S. real estate and mortgage markets during 2007. Yet, we sense a meeting of pent-up buyer demand and sellers coming to recognizing current market realities.

We believe the U.S. Federal Reserve will continue to lower interest rates, although that may have only a nominal effect on residential conforming rates, currently in the low six-percent range. Recent government measures to improve mortgage lending practices are not addressing the corruption that led to and continue to contaminate the mortgage industry. In fact, the new regulations are simply going to make borrowing more difficult for many investors and further diminish demand.

While many believe that interest rates are going to have to drop significantly in order to salvage the damaged housing market, financial guru Jerry Klein of Klein, Pavlis & Peasley, Financial, Inc. (www.investtalk.com) observed, “Lower loan rates would not solve the mortgage crisis.”

Klein believes that the U.S. government will have to step in aggressively and soon to support the housing financial markets. As do other informed sources, he sees a prolonged recovery period of at least several years with further value erosion before an upturn.

James DeFrancia, Trustee and former Vice-Chairman of the Urban Land Institute and former national director of the National Association of Home Builders, commented, “There really is no such thing as a national real estate market…all real estate is local.” DeFrancia, who is also a principal and co-owner of Lowe Enterprises, a national real estate development company engaged in a urban residential, mixed use and hotel and resort development, predicts 2008 as “… a flat year as we see bottoming out of the housing market in combination with a general economic slowdown.” He added, “…however, there remain several geographical areas of market strength while others will be weak well beyond this year.”

With that in mind, what’s in store for San Diego real estate in the year 2008? Well, first off, people do need to live in homes.

Secondly, real estate – at least the land part – is an indestructible asset. Not much more land is being made available for development in southern California; this is particularly true in San Diego County. Yet, more people want to live here each year – in no small part due to the favorable climate. This bodes very well for the long-term.

Thirdly, many developers are now dumping inventory at below cost (a major developer on a recent purchase of ours took away a bit less than $20 at close of escrow – and that was before computing in the company’s administrative and marketing costs). The result of this third factor is that developers are cutting way back on future projects.

The stage is being set for an acute housing shortage in San Diego County within the next four to five years.

Downtown San Diego is an interesting micro-market to observe. In the past rather sluggish 18 months, remarkably, downtown resale inventory has managed to diminish from over 750 units to around 560 units while developers have been moving their remaining new-construction inventories and abandoning plans for new projects. We see a dramatic reduction in resale condo inventory by early 2009 and an acute shortage of downtown San Diego condominiums by 2010.

We forecast a continued softening of prices in San Diego for the first two quarters of 2008 with a leveling by late 2008. We see conforming 30-year interest rates between 5.75% and 6.25% for the coming year.

The combination of value erosion of U.S. real estate and the plummeting U.S. dollar have resulted in considerable off-shore interest in U.S. real estate. Appreciable infusion of off-shore investment capital may well play a role in stabilizing the deterioration of U.S. real-estate values.

Even though most predict continued value decline, developer incentives to buyers are only going to last until current inventories are reduced to manageable levels – these incentives may begin to disappear by mid-2008.

Due to these significant incentives now being offered to buyers by developers, this is an excellent opportunity time to consider buying a brand new home. As in 2007, buyers should focus on quality and prime location.

On the other hand, those with homes for immediate resale have to take a hard realistic look at current market conditions. They need to prepare their properties in a manner competitive with new homes and at prices that will attract prospective buyers to make offers.

Monday, August 6, 2007

San Diego Real Estate Market Recovery

MSN Forbes.com reports that Moody's Economy.com has forecast San Diego as nationally the number four ranked metro market with prospects for a near-term real-estate recovery. According to the report, the San Diego market is expected to turn-around in second-quarter 2008. In contrast, third-ranked Las Vegas is not expected to bottom until second-quarter 2009 and second-ranked Phoenix's rebound is likely to occur in the fourth-quarter 2008. San Diego real estate is predicted to appreciate 5.3% during the first year of recovery.

Saturday, July 28, 2007

Real estate loan fraud

The weakened residential real estate market has created a favorable environment for scammers and real estate loan fraud. Taking advantage of the desperation of some home sellers, "buyers," sometimes even represented by real estate licensees, offer to overprice the sale price of a home. With a co-operative mortgage agent and appraiser, 100% (or more) financing is arranged for the bloated sale price. The owner is happy because he is able to sell his home. The "buyer" and his accomplices walk off with tens and even hundreds of thousands of "easy money" and let the bank take the hit when the mortgage isn't paid. Another variant is for the "buyer" to convince the home seller to carry back a second or third trust deed (i.e., mortgage) with no cash out from the buyer. Sellers take heed: co-operating with loan fraud involving a federally chartered bank carries a potential ten-year prison sentence and the FBI is quite serious in pursuing these cases.