Monday Morning Coffee

Delaying Foreclosures to Get Re-Elected

February 28, 2010

Good morning,

I hope you had a nice weekend.  We had the open house for our Rancho Bernardo office on Friday afternoon and had a nice turnout.  Thank you to everyone who stopped by.  After being cooped up in the house Saturday, it was nice getting out for a walk with Zach before going to the office on Sunday.  Most of Sunday was spent getting data ported over to our new web site which should be up and running by the end of the week.  Things are getting really busy and with the typical spring increase in activity coupled with ramping up the new office and switching over all our web sites, sleep seems to be  a luxury right now.  Very glad the team is running smoothly right now – speaking of team, Cori is doing well enough in her recovery from the multiple back surgeries that she is back handling our property management again.  It is nice to have her involved again.

A couple of quick notes on the market.  Things seem a little slower now than they were a couple of months ago.  Not so much that homes aren’t selling, but instead of 7-8 offers, we are getting 1 or 2.  It could just be that everyone bought when they thought the tax credit was expiring, but it could also be the start of a trend.

I saw an article last week that didn’t make sense.  The headline was: Obama May Prohibit Home-Loan Forelcosures Without HAMP Review.  I know some of you out there are going to make that silly argument about that Constitution thingy we studied in school, but I think there is a clause they didn’t tell us about where the President can ignore certain parts of it if he really needs to.  The effect of a HAMP review would be to delay the foreclosures for about three months (plus another three while they get the systems in place to process everything), so another 6 months of artificially tight supply.

Then, another piece fell into place on Friday.  A colleague of mine who does a lot of work with the foreclosure departments at many large banks and loan servicers was told that the banks are being pressured to keep their foreclosures off the market until after the mid-term elections.  That made me wonder if maybe the HAMP review proposal was designed to keep the foreclosures from hitting the market until after the election in November.  

Ok, so I went back and did a quick re-read of that same Constitution we slept through in high school.  And guess what?  The whole ”ignore sections of this document if they are inconvenient to your current crises or desire to be re-elected” clause never made it in there. 

I know I am making light of a bad situation, but I think that we ought to consult the original rule book every once and awhile to make sure we are still playing the right game.

Ok, enough on the whole Government hijacking the country theme.  Let’s talk about a positive!

We’ve got a great new listing in 4S Ranch.  This home has 4 bedroom suites (1 downstairs), a loft, and a great layout for the growing family.  Due to allergies of one of the children, almost every room has engineered wood flooring and the house is spotless.  If you know anyone wanting to move into the Poway School District, please shoot them over to the site.

We have a couple more new ones, but the virtual tours are not ready yet, so I will have them next week – along with the new web site!

Enjoy the Coffee!!!

Bad Temper

There once was a little boy who had a bad temper. His father gave him a bag of nails and told him that every time he lost his temper, he must hammer a nail into the back of the fence.

The first day, the boy had driven 37 nails into the fence. Over the next few weeks, as he learned to control his anger, the number of nails hammered daily gradually dwindled down. He discovered it was easier to hold his temper than to drive those nails into the fence.

Finally the day came when the boy didn’t lose his temper at all. He told his father about it and the father suggested that the boy now pull out one nail for each day that he was able to hold his temper. The days passed and the boy was finally able to tell his father that all the nails were gone.

The father took his son by the hand and led him to the fence. He said, “You have done well, my son, but look at the holes in the fence. The fence will never be the same. When you say things in anger, they leave a scar just like this one. You can put a knife in a man and draw it out. It won’t matter how many times you say I’m sorry the wound is still there. A verbal wound is as bad as a physical one.”

 Have a Great Week!

Scott Voak

Sounds good doesn’t it? The government (in an election year) is going to come to our rescue by convincing the banks and investors who hold the adjustable mortgages to freeze the interest rate on these loans so that the borrowers are not hit with a huge payment increase that forces them into foreclosure. The question is, will it help or is it just election year politicking?
After reading almost everything I can get my hands on on this in the last couple of days (thank you to everyone who keeps sending articles to me, I get a little something out of all of them), I have to say it is a lot of politicking that will be a little helpful. The reason is: The freeze will not be available to everybody. You will not qualify if:

• You are already late on payment or in foreclosure
• You have re-financed your home since you purchased it.

That is the simple version and there are other reasons you might not qualify, but those two wipe out about 90% of the people I know who could benefit from the program. That doesn’t mean the program doesn’t have merits. Anything that helps slow foreclosures is a very welcome approach, but I think the problem is much larger than this program will help.

How big is the problem ultimately going to be? Good question. First of all, we have to realize that the blame for the problem runs through everybody involved in the process. There was enough fraud committed (sometimes by people who didn’t understand that what they were doing was illegal) by everyone. That includes buyers who lied about their income, mortgage brokers who advised them to do so, real estate agents who sold the homes these people had to lie to afford, and banks who loaned the money. Interestingly enough, the people with the least responsibility are going to be the ones asked to shoulder the losses and I believe that is the weakness of this solution. A friend of mine sent me an article from Sunday’s San Francisco Examiner that outlines this situation.

The article points out that the people who are really going to get hurt by this rate freeze are the investors who bought the loans. Here is a quick primer to explain how the investors are involved, skip it if you already know this:

When you take out a loan with your mortgage broker, it is issued by a bank or
other lending institution. This bank takes all the loans it issues and
packages them into one large group of loans and sells that package to
investors. The investors buy the loans at a discount and make money by
taking your payments. They understand that some of the loans will go bad,
but they buy the whole package at enough of a discount that the bad loans are
covered.

Now, these investors purchased these adjustable loans knowing that the payments they would receive would go up significantly when the loans adjusted or the loan would be paid off as the home owner re-financed. Either way, it is good for the investor who purchased the loan package as a legitimate investment. Now, the plan is for these investors to waive their right to receiving these higher payments in exchange for the homes not going into foreclosure. Sounds like a good compromise – although probably not if you are one of those investors.

Fortunately for them (and unfortunately for US Banks and the real estate market), the investors have another option. All of these loan packages have clauses that state the investor may return the loans to the banks and be paid the full face value of the loans if it is ever determined that there was fraud involved in the issuing of the loans.

Oops.

Remember when we talked about the borrower lying about his or her income and the mortgage broker knowing about it? Well, the banks knew about it too (they aren’t that dumb or they wouldn’t have all the money). So, you basically have fraud on all levels, giving the investors the right to ask for their money back. So they’re left with the quandry, “do I accept a much lower return on the investment I was told was safe, or do I return it and get all my money back?” I know what 99.9% of the people I know would do. Problem is, there isn’t any money to give them. Values have fallen so you can’t sell the house to get the money and the individual banks and lenders have been going out of business like crazy. So, where does this leave us? With the government trying to lean on foreign investors (many if not most of these loans were purchased by foreign governments and investors) to accept a lower interest rate in exchange for a stable US economy.

I sure hope it works, but not sure I want to count on it.

Everybody from mortgage brokers, to real estate agents, to mortgage investors and homeowners are asking how this meltdown happened. To help explain, I’d like to use a fictional (sort of) story to show how easy it was for everyone to get into this position.
There was a lady I met, let’s call her Mona, who was already in trouble when I met her. Her story is not unusual, but it goes something like this:
Mona purchased a home in 2001 in a new development in San Diego. She bought it from a builder and put 5% down on her $400k home. As an elementary school teacher close to retirement, this was a stretch, but property values had been going up and her friends told her it was the right thing to do (she was convinced to do this because “everybody else was doing it”). By the time Mona closed on the house, it was worth $450k. She couldn’t believe it. In six months she made almost as much as she did teaching class for a year! Two years later, with her home worth $650k, she was looking for another investment so, she bought another home from a developer in North San Diego County. This one was 10 miles from the freeway, miles from shopping on a new golf course. The plan was for her nephew to live in it and pay the mortgage. They would split the profits when they sold it in two years. She qualified for the home ($600k) by “stating” an income that was higher than she really made. She thought this was no problem because everyone else was doing it. Her nephew decided he didn’t like the house, so he moved out, leaving Mona with a payment on an empty house. No problem. The house was now worth $700k so she re-financed and used the money to make the payments.
In the meantime, there were some new homes in her old neighborhood and she jumped in line to buy one, refinancing her residence (now worth $850k) to make the downpayment (like everyone else, she was now stating an income much higher than her actual income).
How was she able to do this? Foreign investors were so hungry for loans made on US property that they bought all the standard 30 year fixed loans and wanted more, so the banks gave them adjustable loans and they bought those too. Then the banks created interest only loans so they had more loans to sell these investors. Everyone was happy. More people could buy houses which pushed the value of the houses up creating the feeling that everyone was wealthy. People ran up their credit cards buying expensive cars and living like they were millionaires when in fact they were just using their homes to treat themselves like spoiled kids. Still, the investors wanted more loans. What to do? The banks figured it out. How about creating a loan where we don’t check how much money people make. We will let them tell us whatever number they want and we will make them a loan based on that income level (never mind that in overstating their income, people were committing fraud – everyone was doing it). Still the demand from investors in the secondary market was huge, so they relaxed the standards even more so that people with marginal credit could state their income and buy a home.
So, where does this leave Mona? This was the point at which I met her. She owned three homes. One was rented by the room to 4 individuals (the rent did not cover her mortage payments), she was living by herself in the newest home – a 3,500 sf home in a gated community, and she had a vacant home with a loan of $700k on it. Oh yea, she made about $60k as a 62 year old elementary teacher working in Los Angeles (she drove up every Sunday night and home on Friday because the pay was more). When we met, she wanted me to sell her vacant home that had no upgrades (vinyl floors, etc.). She wanted to get $750k for it despite the fact that the home accross the street that was the same floorplan had been on the market for six months for $750k and had hardwood floors, crown molding and a built in spa in the backyard. It was impossible. But, that was ok because Mona found a very helpful mortgage broker who was willing to put her deeper into the hole. (Due to the incredible money being made in real estate sales and lending, it seems like everyone with a high school diploma who couldn’t get a legitimate job found themselves in real estate trying to counsel people who had legitimate jobs on how to manage and purchase million dollar properties) This lender found an appraiser who appraised the home for $800k based on a 9 month old sale of a home in a better neighborhood. He re-financed the house for the $800k (no doubt making about $16k in the process – but hey, everyone was doing it) and Mona was able to make the payments for another few months. However, at the end of that time, she lost the house to foreclosure which destroyed her credit, making it impossible to re-finance her other homes. Plus, she was due to receive a 1099 for the amount of money the bank eventually lost (probably close to $150k, the tax hit of which would wipe out one year of her income).
On top of that, after she lost the first house, she still had a lot of equity in her original home (the one rented out), but she did not want to sell it because her friends were telling her not to (she also faced significant tax consequences in terms of eventual capital gains by holding the property). So today, Mona is close to 65 with terrible credit, loans that are adjusting upward with no way to re-finance them and a depleted savings account. Mortgage payments (plus taxes) on her two homes run over $11k a month and her income sits at $5k a month. Add in the $3,500 a month rent she takes in and Mona is losing $2,500 a month at a time she should be looking to retire.
Somehow, “everybody’s doing it” doesn’t sound so comforting anymore.