Your Property Path Real Estate News Brief: July 2008

July 30, 2008

Bush Signs the Housing Bill

The Small Print: Will it Help You

Much analysis that will take place, but this is a quick first look. The size of the program is 300 billion, helping as many as 400,000 homes. The program will last five years and then phase out. Given that we expect 3 million homes to foreclose this year its only a partial.

No bail Out

Lenders: This is not a bail out for lenders or investors. Investors and/or lenders will have to take significant losses in order to benefit from the proceeds of the loans refinanced with government insurance. However, these losses would be less than the losses associated with foreclosure.

Borrowers will share their new equity and future appreciation equally with FHA. Borrowers will pay for the FHA insurance. If you sell during the next five years, you must agree to share 50 percent of any profits from the resale with the government. What's more, homeowners can only retain equity gains based on a sliding scale.

Voluntary Participation

No lenders or investors will be compelled to participate. The only way to find out if your lender will join the program is to call.

Fannie and Freddie Raise the Limits

Areas with median house prices that are higher than the regular conforming limit will now be able to borrow at 150% of the conforming loan limit, or $625,000.

Eligible Borrowers.

Only owner-occupants who are unable to afford their mortgage payments are eligible for the program.
No investors or investor properties will qualify.
Mortgage debt to income ratio: Must greater than 31 percent as of March 1, 2008
Loans must be 30-year, fixed rate loans.

New Loan Amount.
The size of the new FHA-insured loan will be lesser of the amount the borrower can afford to repay, as determined by the current affordability requirements of FHA; or, 90% of the current value of the home.

Equity & Appreciation Sharing:
The borrower must share the newly-created equity and future appreciation equally with FHA. The homeowner would have zero equity from a sale in the first year, with the amount rising 10 percent in each succeeding year and capping at 50 percent from a sale in year five and thereafter.

Thanks for Reading

Howard Bell
www.yourpropertypath.com
A web site of over 450 articles related to real estate focused primarily on property management.

Your Property PathSF
http://yourpropertypath.blogspot.com/
Trade talk for the San Francisco real estate industry. Your source for property management tips, policies and market trends.

You can add this page to your favorite Social Bookmark site:

July 29, 2008

Some of the big hedge funds are beginning to look at these battered mortgages. Merrill Lynch has just sold off a huge amount of mortgage backed debt. The most important take away is that at least, there are some people who want to buy these CDO's.

A short list of some of the big hedge funds that are setting up subsidiaries

Lone Star Funds: bought 30.6 billion of CDO's from Merrli at 22 cents on the dollar putting aside money to buy of bad debt.

The Blackstone Group: Puts aside 1.25 billion
PennyMac: Has a $2 billion war chest as is shopping

BlackRock: bought $15 billion in mortgages from Swiss bank UBS AG

This is going to be a bumpy , but I do believe we are putting in a bottom. Real estate cannot recover until these institutions finish purging...there will be little money or interest in funding new housing

July 27, 2008

Freddie Mac: Is there a Pulse

Yes....so far. Reuters reports that Freddies ability to support the housing market as of June was intact, buying billions of dollars worth of mortgages. Concern exists as to whether they can continue to keep up this pace as many more foreclosures and poorly structured mortgages out there. Almost 3 million homes are expected to foreclose this year alone and that number continues to rise.

As everyone knows by now, Congress has just passed a bill basically giving Fannie and Freddie an unlimited line of credit.

But Freddie Mac has decided that the best approach to capital infusion is the stock market. This week they formally registered with the SEC. This is the beginning of a process to issue 5.5 billion in new shares. If investors are willing to take a long view, its possible that we may not have to deficit spend our way out of this crises. Perhaps Freddie realizes that the government doesn’t really have the money anyway. Perhaps they have faith in the long term viability of the system and think many others do too.

Freddie Freddie Mac Update: Spike in Mortgage Rates This Week.

30-year fixed-rate mortgage: Averaged 6.63 percent with an average 0.6 point for the week ending July 24, 2008, up from last week when it averaged 6.26 percent. Last year at this time, the 30-year FRM averaged 6.69 percent.
15-year fixed-rate mortgage: Averaged 6.18 percent with an average 0.6 point, up from last week when it averaged 5.78 percent. A year ago at this time, the 15-year FRM averaged 6.37 percent.
Five-year Treasury-indexed hybrid ARMs: Averaged 6.16 percent this week, with an average 0.7 point, up from last week when it averaged 5.80 percent. A year ago, the 5-year ARM averaged 6.30 percent.
One-year Treasury-indexed ARMs: Averaged 5.49 percent this week with an average 0.5 point, up from last week when it averaged 5.10 percent. At this time last year, the 1-year ARM averaged 5.69 percent.

The spike in rates is attributed to rising inflation. Consumer prices increased year over year 5%. The Fed's priority conclusion is that inflation is far more dangerous than the housing crises. It would love to manage both, but given the choice they will live with foreclosure rather than the long term across the board wealth destruction of high inflation.

July 26, 2008

Origins of Fannie & Freddie

The early Origins of the Mortgage Mess

It is interesting how a government agency evolved into some curious form of hybrid, unlike any other. In 1938, to help restart the housing market after the great depression Fannie Mae was created and funded to help provide liquidity to home buyers.

In 1968, Fannie was privatized and Freddie came into existence. The financial page of the New Yorker makes some interesting observations.

The claim is that the hybrid nature of these two agencies of the government came into being as an accounting trick. By recreating Fannie as semi private and Freddie as a private corp., they were able to take the mortgage debt off the books. Considering that they now have a combined mortgage ownership equal to the national debt, this helped the US look much more solvent as it was deficit spending to finance its Vietnam war effort.

The special relationship of these two companies to the government enabled them to borrow at better rates. This allowed them to buy or guarantee more mortgages, providing the liquidity to fund the idea that everyone could be a homeowner.

The real problem is when companies become so big that they can tip the boat when they mismanage. No doubt better oversight is on the way. Hopefully, they will be broken up into manageable pieces, so that if this ever happens again, they will not be so large as to tip the whole boat.

July 24, 2008

The New Housing Bill Highlights

Although many Republicans were against Bush signing off on a tax payer bail out, Bush did sign. This is one of those things that has critics on both sides. Those who are for it feel it doesnt go far enough in helping the tsunami of foreclosures we will see through 2010. Those against it feel the tax payer gets to pay for the excesses of the industry and thats not the American way. We pay to play and when we lose we lose....

The Housing Bill Highlights:

Relaxed lending standards will allow many owners to refi with lower cost Government owned mortgages. or renegotiate mortgages
FHA gets 300 billion in new money
Fannie Mae and Freddie Mac will get the financial supprot they need through a line of credit and maybe the US Govt will become an investor and by stock.
Stricter controls over Freddie and Fannie. They own or guarantee more than 50% of all mortgages and when you get that big, mismanagement can sink the boat.
Housing Tax Breaks: 15 billion for low income housing and mor
Tax Credit: Up to $7500 for first time buyers who purchase between April 19, 2008 and July 1, 2009
Foreclosure Counseling: $150 million to help owners headed for forcloesure. This money will provide for leagl services and for counseling.

The U.S. Senate is due to vote finally on Saturday to approve a major housing market rescue bill, including federal financial assistance for Fannie Mae and Freddie Mac. As of this writing, it has passed in committee paving the way for the final bill to become law. Well folks, its clear now that we will all own the problem. The Government is now the lender of last resort.

July 20, 2008

The Credit Crunch Could Continue Through 2010

Banks Will Lead the Recovery

The lenders will have to regain their footing before the housing markets can really recover. If the lender wont or cant lend money to a willing buyer, then regardless of demand or favorable price there will be fewer deals. I think the big banks and Fannie Mae/Freddie Mac must be recapitalize before we can see a meaningful housing recovery.

Using Citigroup as a Leading Indicator for the Housing Markets

Citigroup was one of the hardest hit of the large banks because they held so much subprime debt. Chairman Win Bischoff warns that house prices in Britain and the United States are likely to keep falling for another two years in an interview with the BBC.

For the quarter Citigroup lost 54 cents a share or 2.5 billion dollars. The stock jumped on the news and is prompting people to say that this is the early beginnings of a recovery, considering Citigroup lost 5.1 billion dollar last quarter. Confirming Citigroups indication that we will see losses through 2010, JP Morgan reports that their holdings report 30 day delinquencies have risen from about .75% to just under 4% today year over year.

The second wave

The ARMs that funded this boom will be re-setting and monthly payments will increase between 3 to 8 times. This will cause another wave of defaults unless banks are willing to renegotiate or Federal programs help people stay in their homes in a massive way, we will continue to see prices drop for two more years. The bill currently in the house, if passed as is, would likely help only about 400,000 of the estimated 3 million homeowners who may lose their homes in the next year. Add to this mix the fact that Federal Reserve can't wait for the end of the crisis to raise rates and you can see that the housing markets will be at risk for quite a while.

Freddie Mac: Mortgage Rate Update

Long and Short term Rates Take a Breather

30-year fixed-rate mortgage: Averaged 6.26 percent with an average 0.6 point for the week ending July 17, 2008, down from last week when it averaged 6.37 percent. Last year at this time, the 30-year FRM averaged 6.73 percent.

The 15-year fixed-rate mortgage: Averaged 5.78 percent with an average 0.6 point, down from last week when it averaged 5.91 percent. A year ago at this time, the 15-year FRM averaged 6.38 percent.
Five-year Treasury-indexed ARMs: Averaged 5.80 percent this week, with an average 0.6 point, down from last week when it averaged 5.82 percent. A year ago, the 5-year ARM averaged 6.35 percent.

One-year Treasury-indexed ARMs: Averaged 5.10 percent this week with an average 0.6 point, down from last week when it averaged 5.17 percent. At this time last year, the 1-year ARM averaged 5.72 percent.

In spite of these short term moves I think that the cost of oil and how it ripples through the economy reflected in food and transportation will cause a rise in interest rates. The Fed does feel the pain of another 3 million homes about to face foreclosure, but it sees inflation as the greater long term harm. Besides, bailing out consumers who make greedy or bad deals is against our economic culture…..unless you are a big bank

July 17, 2008

Freddie Mac: Rates are Higher

30-year fixed-rate mortgage: Averaged 6.37 percent with an average 0.6 point for the week ending July 10, 2008, up from last week when it averaged 6.35 percent. Last year at this time, the 30-year FRM averaged 6.73 percent.

The 15-year fixed-rate mortgage: Averaged 5.91 percent with an average 0.6 point, down from last week when it averaged 5.92 percent. A year ago at this time, the 15-year FRM averaged 6.39 percent.

Five-year Treasury-indexed ARMs: Averaged 5.82 percent this week, with an average 0.6 point, up from last week when it averaged 5.78 percent. A year ago, the 5-year ARM averaged 6.35 percent.

One-year Treasury-indexed ARMs: Averaged 5.17 percent this week with an average 0.5 point, unchanged from last week. At this time last year, the 1-year ARM averaged 5.71 percent

Clearly, the Fed is more concerned with inflation now and is really between a rock and a hard place. We all know that the twins are on the ropes, if not bankrupt. They have 5 trillion dollars of mortgages they own or insure. To hammer home how much trouble we have gotten ourselves int, the International Monetary Fund has requested a complete review of the American financial system - first time in US history.

Big time problems. I took a look at high income funds, one of the major institutional buyers of sub primes. The top high yield funds recommended by Morningstar lost on average 9.33% vs the S&P 500 which lost 15.19% this quarter. None of these high income funds owned mortgage passthroughs. I also looked at Federated Total Return Bond Fund. The portfolio is 53% mortgage backed securities, about 18% of which are BBB or lower. This fund is up 0.57% for the year.

What are the markets telling us? If you look at the financial sectors you see real losses, yet the holders of ][e`high yield product surprised me....I didnt see the sky falling.

Either the banks were playing so fast and loose with investors money that they tanked the American financial system (which I think is criminal and people should be held accountable) or its a stock market over reaction to a very bad situation. There comes a time when good companies become a buy. If we are coming close to this for the big banks, then we may be putting in a bottom. Tricky, to predict and no telling how long a bottoming process can take. Still, its seems like a disconnect between funds losses bank losses. My Citigroup is down to $16.41 form a high of $54.

July 12, 2008

Freddie Mac and Fannie Mae: An Update.

Freddie Mac and Fannie Mae have lost most of their stock value in the past year. Investors are looking at the commitments they have been made and are uncertain that the twin companies actually have the financial health to keep those commitments.
As the primary source of funds for home buyers they hold a staggering $5 trillion in mortgages and mortgage-backed paper, an amount equal to the national debt.

Chartered by the federal government is to keep funds flowing back to mortgage lenders, both companies buy mortgages from lenders and bundle them into securities for sale to investors. They act as financial insurers and pledge to cover the payments if borrowers default. Both companies have the implicit backing of the full faith and credit of the US and offer a lot of muscle behind the promise to cover payments of their securitized mortgage pools.

Ironically, Fannie and Freddie were created by FDR as part of the new deal to help jump start the mortgage industry after the great depression causing one of three homes into foreclosure. This arrangement whereby, Freddie and Fannie buy mortgages from lenders and repackage for sale to investors recapitalizes lenders and spreads the risk of default by selling to investors world wide. The problem arises when even deep pockets arent big enough to assure payments.
They bought about two-thirds of the single-family-home mortgages that originated from January to March of this year and now they may not be able to meet their obligations.

If Fannie and Freddie have to pull back substantially in their lending to mortgage originators then housing and the stock markets will certainly take another hit. There are no other lenders right now in the U.S. mortgage market.

What Can Be done

Treasury Department and Federal Reserve officials have been considering some of the following options:

1. Allowing the companies to swap some of their holdings in troubled securities for public money.

2. Allowing access to government loans

3. Allowing them to tap an expanded line of credit from the Treasury.

Thanks for Reading

Howard Bell
www.yourpropertypath.com
A web site of over 450 articles related to real estate focused primarily on property management.

Your Property PathSF
http://yourpropertypath.blogspot.com/
Trade talk for the San Francisco real estate industry. Your source for property management tips, policies and market trends.

You can add this page to your favorite Social Bookmark site:

July 10, 2008

Fannie Mae & Freddie Mac: Twin Disasters

First its important to understand their role in how the markets work. They are the very center of the American housing system.

They are independent companies with an implicit government backing. That means that everyone expects the government to come to their rescue (and likely they will have to), but they are not government agencies.

Its hard to believe that the government wouldnt step in and recapitalize them or extend a line of credit to keep them solvent. The US wouldn't let the companies go under due to their central role in the mortgage market. Between them they own or guarantee about $5 trillion of mortgages, nearly half of all U.S. home-mortgage debt outstanding.

Without these guarantees, practically backed by the full faith and credit of the United States, mortgages would be much more risky and therefore expensive. The importance of creating liquidity so that property is saleable is key to the entire economy. Consider how large housing is as a sector of the entire economy, from financial services to builders and managers, to the property taxes that keep our communities afloat.

According to marketwatch "In the last week alone, Freddie has lost 47 percent of its value, and Fannie is off 28 percent. Expectations of default at the companies have also risen; it costs three times as much today to guarantee a two-year Fannie bond as it did three years ago."

Some of this is fear based on some peoples opinion that the companies are on the ropes. According to the ex St Louis Fed President the firms are already "insolvent".

Secretary of the Treasury Paulson disagrees and testifies that they are not insolvent and will not need cash infusion.

What amazes me is that we need these major dislocations to clean house. Where are the regulators? The analysts, the overseers such as Moodys or S&P? Are they asleep or in collusion. Do we suffer from a big case of CYA? I think so.....

Thanks for Reading

Howard Bell
www.yourpropertypath.com
A web site of over 450 articles related to real estate focused primarily on property management.

Your Property PathSF
http://yourpropertypath.blogspot.com/
Trade talk for the San Francisco real estate industry. Your source for property management tips, policies and market trends.

You can add this page to your favorite Social Bookmark site:

July 6, 2008

Apt Housing Market Update

A bright Light in a Dismal Market

Not all housing markets are in bad shape. In fact, many would be buyers are now renting as they try and catch the bottom of the housing market.

Nationwide, the number of renters is projected to increase by 4.3 million households over the next decade, according to the National Multi Housing Council. Apartment demand is forecast to increase by 430,000 units annually, the report says. The increase in foreclosures has put another 2.2 million people into the renters markets. There are reports of another 3 million owners now 60 days behind in mortgage payments, not very far from default and this will only increase the demand for rental units. Add to this positive mix, an apartment segment that did not experience the building boom that homes and condo’s did and you have a pretty good story.

According to the National Real Estate Investor, "overall apartments performed well as an investment, with returns to privately held apartments in the first nine months achieving an annualized rate of 12.6%”. Thats a drop from the 2006 level of 14.6%, and down significantly from 21.2% returns in 2005."

These declining returns from 21.2% to todays 12.6% reflect the heady boom days that are now behind us. And should be a reminder that although the sector looks to be on track for another good year, its important not to over pay. Still, owning this sector or looking to invest in income properties is still favorable. In this economy, 12.6% return represents a strong return. As long as the economy remains strong in your sector, the demographics will keep good returns coming in.

Thanks for Reading

Howard Bell
www.yourpropertypath.com
A web site of over 450 articles related to real estate focused primarily on property management.

Your Property PathSF
http://yourpropertypath.blogspot.com/
Trade talk for the San Francisco real estate industry. Your source for property management tips, policies and market trends.

You can add this page to your favorite Social Bookmark site:

The Housing Stimulus Bill

Congress is about to pass a stimulus bill that will help get us back on the road to recovery. By itself its only a small piece, but we'll take it.

Here Are Some of the Major Provisions

Temporary Home Buyer Tax Credit.

For first-time home buyers, a tax credit will reduce taxable income the first year after buying a home. The House proposed creating a temporary tax credit with a ceiling of $7,500 that could be used by first-time home buyers or those who have not owned for three years. But that money would have to be repaid over 15 years. There is a similar proposal in the Senate that would allow for a credit of $7,000 for buyers who are purchasing a foreclosed property. The hope is that this will help stimulate home sales and begin to stabilize market prices. The most recent Shiller/Case index shows that homes nation wide have dropped more than 15%, just this year and no bottom in sight. ARMs will continue to re set through 2010, no doubt putting more supply on the market as home owners find the payments to high or just to illogical to make.

FHA Modernization Act

Would reduce down payments and raise maximum mortgage amounts for Federal Housing Administration-insured loans. A version passed the Senate by an overwhelming 93-1 vote. Senators also approved the Mortgage Forgiveness Debt Relief Act, which would remove the controversial tax on “phantom income” when lenders forgive portions of the balances on mortgages of financially stressed homeowners for a three year period.

The Senate bill raises the FHA’s loan limits to $417,000, now equal to Fannie Mae and Freddie Mac limits. The House version ties the limits to median home prices. This approach could help higher priced markets like San Francisco by boosting loan limits to $700,000. It also includes a new FHA foreclosure prevention program to help as many as 400,000 at-risk borrowers stay in their homes.

Freddie Mac and Fannie Mae Reforms

They buy mortgages from lenders giving lenders the cash back to make new loans to home buyers. Changing the way they are regulated will enable them to offer more loan programs or to refinance troubled loans on a greater scale

Bills pending in both houses would change oversight to Fannie Mae and Freddie Mac and allow them to increase liquidity in the nation’s mortgage markets. One bill, H.R. 1427 includes a provision calling for a permanent adjustment for high-cost loan areas based on the area median home sales price up to 150 percent of the national limit. Others call for a two year limit to help the housing markets through a trough, until the jumbo loan market comes back.

Low Income Housing Tax Credits.

This program provides incentives to builders to construct affordable rental housing. But many builders can’t afford to build these types of units. The cost of labor and commodities forces builders to focus on high end properties to justify the risks of fronting development. The house is considering provisions to temporarily increase the cap for federal low-income housing tax credits (LIHTCs).

Thanks for Reading

Howard Bell
www.yourpropertypath.com
A web site of over 450 articles related to real estate focused primarily on property management.

Your Property PathSF
http://yourpropertypath.blogspot.com/
Trade talk for the San Francisco real estate industry. Your source for property management tips, policies and market trends.

You can add this page to your favorite Social Bookmark site:

July 4, 2008

Freddie Mac: Mortgage Rates Reverse Trend and Fall

Momentary Relief

30-year fixed-rate mortgage: Averaged 6.45 percent with an average 0.6 point for the week ending June 26, 2008. Last year at this time, the 30-year FRM averaged 6.67 percent. The last time the 30-year FRM was higher was the week ending September 6, 2007, when it averaged 6.46 percent.

The 15-year fixed-rate mortgage: Averaged 5.92 percent with an average 0.6 point. A year ago at this time, the 15-year FRM averaged 6.30 percent.

Five-year Treasury-indexed ARMs: Averaged 5.78 percent this week, with an average 0.7 point. A year ago, the 5-year ARM averaged 6.29 percent.

One-year Treasury-indexed ARMs: Averaged 5.17 percent this week with an average 0.6 point. At this time last year, the 1-year ARM averaged 5.71 percent.

A secular change in the direction of the Feds focus from housing and lower rates is going to be high cost of money likely offset by lower home prices . If you want to sell and you have a willing buyer, you may have to sell at a lower price to help that willing buyer into your property. The rate drop this week is due to the Feds statement that they expect to see inflation lower by years end. These weekly changes are tidbits of relief, but the general trend for prices is still down. Industry leaders keep pushing the recovery date further out and now many think it will be 2010 before we see falling prices start to entice willing buyers

Thanks for Reading

Howard Bell
www.yourpropertypath.com
A web site of over 450 articles related to real estate focused primarily on property management.

Your Property PathSF
http://yourpropertypath.blogspot.com/
Trade talk for the San Francisco real estate industry. Your source for property management tips, policies and market trends.

You can add this page to your favorite Social Bookmark site:

Your Property Path Real Estate News Brief