Election Year Promises Coming Soon With presidential electioneering in full swing, politicians have not lost sight of flagging sales and falling values. Without promising anything they seemingly promise to assist those in trouble of losing homes, while commenting that those with “Bad Credit” may be on their own. Wow! What a break! But the problem for those in trouble of losing their homes is that they typically have falling credit scores. So the politicians real message is “Vote for Me” because I care… or because I haven’t a clue? America continues to vote its pocketbook, and our politicians play to this, which is nothing new in itself. What is becoming problematic is a concerted effort by some to develop a voting base, which some fear are becoming a voting majority, that votes to spend someone else’s tax dollar to underwrite their basic lifestyle. We all have needs and wants, but we are seeing a trend of politicians promising to secure these as birth rights for those who have failed for whatever reason to earn such on their own. What was once a simple “safety net” providing food, shelter and health care is somehow hinted at now trying to save the American Dream of Home Ownership for many that have basically over spent. It is a cold hard fact that life’s luxuries, cars, homes and lifestyles cost money. Lots of money in California! Just because the economy shifts, markets go flat or interest rates go up does not mean everyone was victimized by lenders and banks. “It Takes a Village” Since the introduction of Hillary Clinton’s book, “It Takes a Village,” this has come to be referred to as the “Village Mentality.” The basic premise being that if a single mother, or working family can’t afford something… than “the village” should provide it?
Please do not tune me out if you are a Clinton fan, because this is more an observation than a political attack. We are not trying to tell anyone what to think, or how to vote. We are trying to explain some of the influences affecting real estate markets, and discuss where it is heading. More importantly to explain why it is heading there.
The Lunacy Spills Across Political Lines Politics aside, politicians are taking advantage of those hurt by market changes and proposing legislation and government bailouts to ease foreclosure woes. In reality they are doing nothing more than talking about making changes… but what’s to change? It is an easy sell; “Saving the American Dream” ranks right up there with free health care, clean water, Mom and Apple-Pie. Personally I would like to see the IRS abolished, with all taxes refunded; but awaiting that a free designer home for everyone makes a popular campaign slogan! God forbid anyone should actually have to be able to afford such home! It is amazing just how screwed up and twisted the role of politicians has become even suggesting such. Hear me out please; It isn’t just those politicians that have become muti-millionaires “serving” the public, the lunacy spills evenly across political lines.
Short-Sale Tax Implications (IRS Form 1099-C)
George Bush proposed that changes be made in the tax laws to halt short-sale tax implications (IRS Form 1099-C) for those bailing out on home loans. No regards for the luxuries bought with equity lines attached to such bailouts… but it sounds like he cares! This after George Bush lobbied hard for changes to personal bankruptcy laws that gutted much of the protections allowed individuals seeking bankruptcy protection. Somehow it seems like the average working person was sold out to big banking lobbyists with that legislation, so now we are supposed to believe George has had a change of heart? It is not just the “Short Sale” IRS guidelines that need to be re-written… but those promised changes have not happened yet. Many Banks Do Not Accept Short Sale Offers Interesting to note that banks do not have to accept short sale offers, and some don’t by policy. Other lenders entertain short sale offers only after borrowers are in full-blown foreclosure, so who are they really helping? Not the borrower trying to save their credit, because this little game of “Helping” assures the borrowers’ credit is trashed before the bank does anything to legitimately help. But like George Bush’s promise of help, it all sounds good when the promise is made. Seemingly every presidential candidate has proposed some sort of legislation to protect against predatory lenders without providing any real details or commitments. What predatory lending program are, or whom and how such legislation might benefit the market is anyone’s guess. In line with Hillary Clinton’s, “It Takes a Village” the presidential hopeful has even proposed giving every child born a $5,000 bond upon birth. The bonds would mature into college funds or be used as a down payment for a home… or perhaps medical insurance at some date. One has to wonder if the bonds will be retroactive, or given only to those trending to vote for democrats? We can be assured they would apply to children of illegal immigrants, but would they be provided for children of parents who actually pay the taxes? Would there somehow become income limitations, or would such bond represent a transfer of wealth from those who pay taxes to the children of parents who don’t?
How screwed up can campaign promises become before becoming a complete joke? Who except for the Village Idiot would consider voting for any stooge offering such unsupportable electioneering bribery? Yet seemingly every politician does it!
Who Warned the Big Banks Ahead of the “Melt Down?” So now we have stirred the pot, let’s start a rumor of our own. Has anyone noticed just how long the Fed has been able to keep interest rates artificially low? What should be done if it is discovered market manipulation maintained abnormally low interest rates? Would it matter that many benefited and the spending helped assure a stronger economy? Personally I think whatever behind the scenes political pressures applied to the Fed to maintain cheap credit is a good thing unless you are the one getting paid the interest… at which time you want it higher. Is keeping the economy strong not why we have a Federal Reserve?
Personally I question the sudden “Mortgage Market” crash and how so few federally insured banks were affected by the collapse they helped create! Who warned them ahead of the “melt down?” I am not sure if many noticed, but it was pretty much overnight that several big banks changed their Jumbo Rates and started cancelling Alt-A loan programs. Somewhere a decision was made. How was it possible that so many mortgage bankers missed the information; could it be their businesses were expendable for the sake of keeping the economy humming along as long as possible? No Savings and Loan Crisis for the government to bailout this time; One has to wonder how that little miracle occurred?
House and Senate Propose Legislation Conspiracy theories aside, the House and Senate have both suggested legislation that will allow Fannie Mae and Freddie Mac to increase mortgage holdings by $74 billion each. This would increase their funding limits by 10 percent above their current limits of $735 billion; but only for six months! What is going to happen after six months?
The problem with this legislation is that the Office of Federal Housing Enterprise Oversight, which independently regulates Fannie Mae and Freddie Mac, and the Bush Administration both reject the proposal. Not good for those in trouble today.
The "First Available" Bill Headed for a Senate Vote Democrats have not given up however, and want to require 85 percent of the proposed $147 billion increase, or $125 billion, in loan portfolios be directed towards borrowers with weak, or subprime, credit. This to refinance loans due to reset at higher rates in the next 6 months. Democrats claim if Fannie and Freddie increase their purchases of mortgages from banks, those banks will in turn make additional credit available to financially strapped homeowners. Senator Charles Schumer, D-N.Y. said that he plans to attach just such a proposal to the "first available" bill headed for a Senate vote.
This all sounds good, but fails to address the “New,” more rigorous lending guidelines which is the basis for many of these prospective borrowers being “financially strapped” in the first place. Nothing in this proposed legislation does anything to address the upside down value issues home buyers find themselves in that also causes many to be “financially strapped.” Many of these will simply walk away from their debts when faced with declining values and the credit dries up; does Senator Schumer propose lending to these borrowers? The root of their problem is as much the more strict lending guidelines as it is cash available for borrowers with good credit. How Long Will This Downturn Last? Realtors are once again addressing market cycles with sellers as buyers seek increasingly lower purchase prices and greater seller concessions. Completely gone is the allusion that home prices will always increase, and many wondering if renting is not more affordable. It has gotten much harder to buy a home and sellers are panicking as housing inventories pile up. The question now is how long this downturn might last? This current property cycle saw property values amplified by historically low interest rates, multiplied by expectations of assured profits. The cycle was additionally bolstered with 100% financing programs and easy qualification loan programs that are for the most part, gone. This hinders a rapid recovery of values by removing many buyers from the market. Good luck if somehow you are one of those borrowers who no longer qualify for a loan; you are quite figuratively trapped!
The Housing “Woes” Redouble The bigger problem is the number of borrowers affected. In 2004 “Alt-A” loan programs accounted for about 65% of all loan funded; mostly loans set to cycle into more costly adjustable rate payments in 2007 and 2008. It is this potential wave of financial disaster that triggered the “Mortgage Market Meltdown” as lenders restricted most “Alt-A” programs while curtailing subprime loans.
The current cycle of housing “woes” will redouble as adjustable loans written in 2005 become due amid a sea of already “upside down” borrowers from 2004 and 2003 purchases. This affects those needing to refinance home loans just as much as those wanting to sell.
Unfortunately we are only just beginning to see the value problems this market could present when one considers there is already a 1-year inventory of unsold homes currently for sale in many communities. Factor a possible tsunami of defaults and foreclosures that are likely to follow in 2008 and the terms “Melt Down” only begin to describe the problem.
A growing number of borrowers are finding themselves locked out of the mortgage market at the same time property values are flattening out. With over 75% of the mortgage lenders providing “Alt-A” and “Sub-Prime” loans now out of business increasing numbers of homeowners are unhappily discovering no way out of loans they were assured could be refinanced. Thus the cry from borrowers for government intervention with many claiming to have been “Victimized” by loan programs no longer available, or out of business. Rewriting Basic Lending Ratios and Guidelines
Lending is searching for some balance between acceptable risks and down payment ratios. Mortgage Insurance companies are examining credit scoring models to more accurately forecast risk factors associated with insuring against foreclosures. Increasingly the focus is on the increasing levels of consumer responsibility for debt, and debt ratios in general. Indeed, many blame lenders for providing too much credit, too easily while victimizing borrowers with predatory rates. Consumer groups and politicians agree, so now we are witnessing a rewriting of basic lending ratios and guidelines which has proven painful for those with less than perfect credit.
“No Win” Situation Few borrowers admit responsibility for life choices, success or failure amid a culture that excuses everything creating subclasses of victims. Lenders are accused of taking advantage of borrowers based on everything from socio-economic status to nationality and marital status. Many in banking feel they are in a “no win” situation, stuck between being labeled “Predatory Lenders” if they extend credit, and “prejudiced” if they don’t. Market pressures are always for the easing credit guidelines while creditors strive to maximize profits. It is an endless balancing act. With the real estate market leveling off, buyers caught by the value shift claim they were taken advantage of… Victimized by Realtors and predatory lenders! Trapped in loans pressured onto them by greedy realtors and lenders who took advantage of their situation, completely forgetting how positive they were real estate values would continue to escalate. Many were sure buying a house was a lottery ticket to everything they wanted… and for some it was seemingly so.
Lending Reforms Pending
Bankers point to borrowers living in McMansions, slow to make payments, driving expensive cars evolving into an entirely new class of “Victim” as credit guidelines tighten. Easily obtained equity lines of credit fueled the confusion of actual wealth with the accumulation of debt. Borrowers are becoming increasingly upset when additional credit is denied at even lower interest rates at the same time lenders are going out of business as never before. Responsible borrowers point out that this day was easy to see coming, but are equally frustrated by falling property values with everyone calling for lending reform. CAR Predicts Falling Home Values
Compounding the pain of lending reforms, experts forecast falling housing values for the first time since 1996, as unsold homes keep piling up and buyers hold out for lower prices. The 2008 forecast released by the California Association of Realtors (CAR) calls for the median price of a home in the state to decline 4 percent to $553,000. What CAR is failing to address is the impact the more restrictive “Income Qualifying” guidelines could have on the median priced market. Drive Until You Can Afford To Buy In all fairness to Realtors and Lenders, with the Real Estate Markets appreciating so rapidly buyers lined up to be “taken advantage of” buying homes in record numbers at record high prices. Wealth grew rapidly on paper as equity levels increased and borrowers clambered to find homes they could afford in fear of missing out. This unbridled rush to buy anything and everything saw developers and builders selling homes faster than they could build them. Entire communities developed for no better reason than buyers could afford to buy their… and camped out to do so! Builders marketed planned communities built miles from anywhere based on affordability. The sales pitch was “to drive until you can afford to buy.” It was your ticket to the American Dream!
Sleepless Nights
Those caught up in the dream are finding sleepless nights as these homes tend to be in areas less desirable for any reason other than affordability. Sleepless nights turned to long commutes with gas prices and driving costs offsetting any mortgage savings. Buyers tired rapidly of long and costly drive times. Lacking desirable locations, these homes are already experiencing high foreclosure rates with values plunging as banks struggle to find buyers at give-away prices. For all of these same reasons, Desert Communities represent some amazing purchase opportunities with values unfound anywhere else in Southern California. The major factor becomes qualifying for a loan as reportable income and borrowers tax returns come more into focus by lenders.
Real Estate prices in high cost states (i/e California) will probably be more impacted than lower cost states as the markets wait for guidelines on stated income loans to once again become established. The rapid reinstatement of these “Alt-A” loans will play a vital role in market recoveries across the Nation, but especially here in California.
Of Concern To Any Recovery Of concern to any recovery would be any legislation passed limiting lenders to accepting only actual income to debt ratios when qualifying borrowers for loans. No matter how well intended, nothing would do more to slow sales and hurt property values more than such legislation. This could have disastrous implications for foreclosure rates, and property values as borrowers are forced by lending guidelines to buy homes they can prove they can actually afford. It would also impact how rapidly values for any given area could potentially increase changing the wealth building characteristics of real estate itself. Income for many is difficult to prove with reported median income levels leaving one to wonder how anyone affords to buy a home in California. Down Payment Required to Qualify
Presently lending guidelines have restricted many to loans requiring massive down payments, or to the income they show on their income tax returns. When borrowers combine other consumer debt (i/e: auto loans & credit cards) with their anticipated housing costs the majority find it impossible to qualify. It was these changing guidelines that witnessed so many lenders closing their doors convinced their lending niches would be unprofitable for the foreseeable future. For those who might not understand the impact these ratios have, consider the following loan qualification scenario.
How Median Income Levels Would Impact Median Home Prices: As an example, lets factor the lending formulas backwards as a loan officer would in order to qualify a borrower. The 2006 median income for the State of California is $54,385; as reported on the governments census information website: http://www.census.gov/hhes/www/income/income06/statemhi2.html
Applying typical “Fannie Mae” / “Freddie Mac” income qualifying guidelines lenders we can use a maximum 41% ratio of the $54,385 for total bills. Total bills assume all car payments, student loans, credit card debts and other bills that report on the borrowers’ credit report. For example, we first divide the annual income by 12 (it is a little more complicated than this) to calculate a monthly income amount of $4,532.
Assuming this example; our above average “Median Buyer(s)” do not have any other monthly “Credit” debts, very rare! We calculate a maximum of $1,858 that can be invested towards the total monthly housing cost. This cost includes all taxes, insurance and association dues attached to the purchase. These are the same factors applied to Stated Income programs, but in this case we are using income actually reported on tax returns… not stated income amounts which somehow became adjusted accordingly.
Not Much of a Home in most of Southern California
Using normal factors of 1.25% for taxes and .35% for insurance we can calculate out monies for these expenses. This leaves a monthly amount for Principal and interest payments of about $1,517 each month. Assuming an interest rate of 6.5%, and factoring no creative loan combinations (80/15/5 – 80% first, 15% second and 5% down payment). Using $12,000 as a down payment; the median income buyer in California qualifies to purchase a $250,000 home. Not much of a home in most areas of Southern California.
Consider a median house price of $350,000 in (San BernardinoCounty), and everyone can start to understand that from an income based economic approach that home is at least 30% overpriced! Factor in CAR’s 2008 forecast for the median price of a home in California to decline 4 percent to $553,000; compared to the group's projection for this year's median sale price of $576,000. Qualification guidelines rapidly become more problematic as prices rise and required incomes increase dramatically. California Real Estate is basically unaffordable for most of those living in California! This helps explain why in 2005 over 76% of home loans recorded were of the “Stated Income” or “Non-Income” qualifying loan types; they could not qualify any other way!
The Key to Stabilizing Market Values Somewhere falling values will begin to level off as housing inventories increase and banks slow down dumping foreclosure properties back onto stagnant markets. This in turn will directly impact the market prices of homes listed by Realtors by private sellers as home inventories return to manageable levels. Easy access to mortgage funds will be key to stabilizing market values.
“Stated Income” loan programs have become essential to stimulating home sales; the same programs blamed for the Market Meltdown. Conversely, these are the same loan programs that fueled so much of the past years market gains, and the same programs politicians seek to protect borrowers from. Nobody is addressing how the market is going to replace this huge block of homeowners and potential buyers. Politicians claim the Real Estate Markets will expand to absorb the losses and values will stabilize… but at what costs? This is the first time an entire block of home owners that once qualified for home loans, now suddenly does not! It is going impact the market negatively… but to what degree and for how long?
Avoiding the “Perfect Storm”
These changing guidelines are exactly what is compounding stagnating housing values. Borrowers seeking to purchase or refinance more frequently are finding they are trapped by the “Perfect Storm” lending scenario. Everyone blames “Predatory Lenders” without admitting “predatory loans” account for only a tiny fraction of the borrowers crying fowl. Politicians offer no solutions but are pointing fingers at one another claiming “mean-spiritedness” and “heartlessness” in attempts to take advantage of the situation. The problem being just how buyers who do not make enough money are going to qualify to buy homes they honestly cannot afford? “Perfect Storm” analogies aside, Nobody wants to admit it “Takes A Village” to buy a home!
Investors Are Salivating!
If you are a homeowner stuck in this situation, there is nothing perfect about it; but investors are beginning to salivate! The implications should be obvious, and Southern California radio waves are already abuzz with seminars proclaiming the best market for investors in years. This at the same time realtors and lenders bail out of the business in record numbers!
The press only assures what some are saying is unavoidable; a complete collapse of market values on an almost Nationwide basis. As a lender, we would point out that this is already begun with the only question being; for how long? Educated guesses put a gradual market rebound from this downturn somewhere around mid 2009. That means a whole lot of pain for the housing market; but also a market full of values for qualified buyers.
Fortunately the Markets Are Starting to Rebound The larger question to a full recovery has to be how long it will take the devastated wholesale mortgage market to rebuild and stabilize. Of major concern is real estate markets have never suffered a collapse of their funding networks like we see now. The closure of over 75% of the market’s biggest named lenders is unprecedented and possibly just the beginning. New lending programs and wholesale channels will grow out of the failure of the old, but will take time for investors to become comfortable purchasing mortgage backed securities again. Fortunately these markets are already starting to rebound. The values Are Incredible! This growth is absolutely key to stabilizing the Housing Market and pivotal to ancillary economies also beginning to suffer. Housing starts for new construction have dropped with banks declining to fund new tracts. Tracts that were scheduled to be built, along with many already started, are being put on hold. Standing inventory is being liquidated as builders fear even larger losses should they wait. Discounts and Builder Incentives have become the rule of the day with developers clearly desperate to sell. This has placed additional downward pressure on home values but opened numerous doors into upscale homes for qualified buyers. The values are incredible!
The Deals Are Real
The result is that those who have recently bought homes in these tracts find their values unexpectedly discounted by builders dumping inventories. Qualified buyers are increasingly hard to find, and those buying are demanding price concessions. The deals are real. The National economy, inflated with consumer purchases these past couple years is now seeing consumer spending drying up. The impact to the overall economy only now starting to become obvious as Car, Boat, and RV sales slump. Equity lines of credit are beginning to dry up also as banks scrutinize borrowers’ ability to repay such loan more carefully and they become difficult to secure. Even borrowers with good credit are finding guidelines more restrictive. Some Will Write Books One only needs to turn to the newspaper financial section to read about some politician proposing one form of relief or another to problems they don’t seem to understand; and in the end appear to be nothing more than transparent grandstanding. All the speeches aside, those expecting some sort of “Potomac Two-Step” or “Arkansas Lightning” to miraculously solve mortgage problems are going to be disappointed. Just look how little the government has accomplished in New Orleans after years of promises. The politicians promising help went home just as soon as the cameras did! Funds were spent and political favors granted, but other than for the press’s Hang Over, New Orleans “Recovery” is on hold. In the end it all boils down to personal responsibility… those who were prepared will profit, most others will lose as the markets readjust. Some will write books.
The same old “Potomac Two-Step”
All the “It Takes a Village” rhetoric is simply that… cheap political rhetoric. For those keeping record, George Bush has been an even bigger embarrassment! The more we see coming out of Washington, the more I become convinced politicians on all sides will say anything to get elected and deny making such promises later. The same old “Potomac Two-Step.” From a Loan Officer’s standpoint we are yet to see legislation that will help save a single home now in foreclosure. The Feds have helped bail out their Big Banking buddies, but little else. In closing what we need avoid is more legislation requiring nothing more than a few more disclosures… the problems beyond simple disclosures. Once again banking lobbyists are trying to blame market problems on “Predatory Lending,” code words implied to mean mortgage brokers. Left untold, these were all loans these same banks marketed, promoted and funded themselves. Most have closed their doors already, but will reappear under new names as soon as the markets improve… so some legislation is probably needed. Consumers deserve to be protected from predatory lenders.
The Banks Hide Behind DOC Disclosures
In truth it has been Banks hiding behind DOC (Department of Corporations) disclosures that have created most of the problems while they pretend to provide the same services as mortgage brokers. This leaves the mortgage brokers once again to unwind the mess these others creative lending programs created. Those looking to get rich quick have once again closed their doors and fled the business.
Interesting to note: Those looking for a bargain, and those about to become rich are working with Realtors and Lenders today because Real Estate is once again a bargain!
This article was posted by: Ed Wright and Central City Mortgage’s “Wright Team,” specializing in Residential and Commercial Mortgage Lending… Purchase and Refinance. Serving all of California from offices in the Inland Empire. For all your mortgage lending questions please call Ed Wright, “Your Personal Mortgage Consultant For Life” at (909) 938-3777 or E-Mail “The Wright Team:” Ed@ForHomeLoan.info | 
