BluefoxToday blog : Esko Kiuru

It looks like the Federal Housing Finance Agency - or FHFA - is getting ready to introduce new regulations later this year that would prevent Fannie Mae, Freddie Mac and the Federal Home Loan Banks - FHLBanks - from investing in mortgage loans tagged with these now notorious private transfer fees. This would then effectively bring major government-controlled home loan players in agreement about them, because FHA already is, according to HUD's regulations, banned from insuring mortgages on homes with private transfer fees. They are considered "legal restrictions on conveyance" in FHA talk.

These private transfer fees are brought to life by covenants attached to a deed that result in a payment to a third party every time a home is sold. The fee generally is 1% of the sales price and paid by the buyer, who may or may not know about it until he's sitting all excited at the closing table. Finding out about it typically elevates his blood pressure even further. Home builders are the ones who usually - but not always - would do this type of thing, giving them an additional, effortless revenue source for 99 years, the standard duration of the arrangement.

FHFA finds several problems with them. They hike home ownership costs up front, make property transfers more complicated and sometimes legally uncertain because regular title searches may not reveal their existence, particularly after multiple ownership changes. They can cause trouble elsewhere, too. Secondary mortgage market investors, lenders and title firms are vulnerable to possible hidden liens and title flaws.

The increased cost factor to home buyers and legal issues for mortgage industry participants are by themselves enough to cause concern. The other big issue is that the home builder who sets up the private fee structure does not provide any service or product to enable him to honestly earn the continuous stream of income. When it's finished with a subdivision, it's gone but would still collect for a long time money for free. Frankly, this seems to take us back to the creative instruments Wall Street not so long ago came up with that ultimately led to the current mortgage and real estate meltdown.

FHFA is on the right track to decisively curtail this from spreading any further. At the moment government entities control over 90% of the mortgage market, so its upcoming regulation will effectively put a stop to private transfer fees, for the good of consumers and the home loan and housing industries.

When major upheaval pummels a real estate market, it as a rule leads to home value depreciation. That's the easy part. The hard part is to try to put an actual number on the price reversal. A team led by the Massachusetts Institute of Technology, or more commonly MIT, recently conducted some deep research to determine how much a home's value deteriorates because of a foreclosure. The current housing and mortgage meltdown obviously got them thinking and they decided to dig up some realistic answers.

The group looked at 1.8 million real estate sales in Massachusetts spanning from 1987 all the way to 2009, which then includes data from the present housing collapse. After spending considerable time shifting through the massive amount of information in front of them they at last were comfortable in concluding that - on average - a foreclosure slices 27% off a home's value. That is a high number, and subject to some serious debate.

The same MIT team also studied other forced sales and their effect on real estate values. When the homeowner goes into bankruptcy, the property's value drops 3%. And when a homeowner death brings about a sale, the price sinks on average 5-7%. Clearly, a mortgage foreclosure has a much more profound impact on the underlying value than the other two.

The main reason to the wide separation between the different forced sales is the condition of the home. Homeowners sliding inevitably toward foreclosure will spend the money they still have on everyday necessities and not on property upkeep. That's stage one. Stage two is when mortgage lenders foreclose and then generally neglect their REOs - real estate owned - allowing properties to fall into further disrepair. There clearly are two forces here steadily gnawing on the property's value. In the other two instances neither one is prominently present.

As the MIT research proves, it would be to the mortgage providers' benefit to maintain their REOs to attract top dollar when selling. 27% shortfall should make them think again about proper maintenance. But that often is not the case in this current real estate downturn.

The recent oil spill has had a harsh impact on everything associated with the Gulf of Mexico and its alluring waters. One of the less-discussed issues, so far at least, has been residential real estate and how severely is it going to be affected. CoreLogic - a California analytics, business services and information boutique - has bravely ventured into the topic and has compiled some sobering numbers for everyone involved in housing to debate about.

Residential real estate values are supposed to wane in the coastal areas by $648 million for the first year and possibly rise to as high as $3 billion over five years, CoreLogic estimates. This is based on what has happened there to date, which is already quite a monster. Popular beach destinations string along from Mississippi and around the curve down Florida's west coast and hold something like 600,000 homes within 1,000 meters from the water.

CoreLogic's research is based on much-used techniques for forecasting environmental amenity values on coastal property on one side and then measuring adverse impacts on those values when a calamity like the Deepwater Horizon oil spill strikes, on the other. Like in this case, recreational use of the beaches is either limited or possibly completely restricted for a period. Buyers have paid nice premiums for homes on the water and now that extra expenditure is largely lost.

Moreover, should the already spilled oil somehow work its way around Florida and up its legendary east coast the cost would leap up to $28 billion through five years, CoreLogic reports. Florida's housing market is already on a super strong drip treatment and this would set it back even further.

Many who were planning to take advantage of today's low mortgage rates and purchase something around the Gulf of Mexico are predictably having second thoughts about that. Either they are going to wait and see or then look elsewhere, like further up the east coast, all across the Pacific shoreline and also give lakefront real estate a chance. These alternatives may experience a moderate upswing in activity in the coming months.

If the oil in the Gulf is cleaned up rather quickly and unhindered beach access is restored throughout it could lessen the expected amenity value erosion. Even so, the memories surrounding the events from the rig's explosion and demise to the inaccurate oil flow reports and the economic loss to the seafood industry and to the struggles of wildlife will long linger in everyone's mind. There are hundreds of oil rigs operating in the Gulf and their presence could harm potential buyers' trust that their coastal property investment is safe from another calamity.

Photo by divemasterking2000

Fannie Mae recently took an assertive step, in its own mind at least, to stem the growing tendency of mortgage borrowers pulling off strategic defaults. In that homeowners who could afford their payments choose to walk away from the obligation anyway. The GSE went ahead and added another category to the new policy. Home loan recipients who fail to do a workout in good faith also fall under the spell of its new guidelines. What this all means is that property owners fitting these parameters would be ineligible for mortgages backed by Fannie Mae for seven long years from the recorded foreclosure date.

Strategic default entered the already crowded mortgage and real estate vocabulary just recently when the ever thinner-skinned housing bubble couldn't hold on any more worthless air and popped. The event sent property values on a long skid toward the beckoning abyss and in the process wiped out equity in numbers not seen in modern times. Eventually home prices sank below the underlying mortgage balances and to the utter horror of observant homeowners just kept on going down, spawning the unpleasant designation for the phenomenon; underwater. And those underwater on their mortgages are prime candidates for a strategic default.

Right now Fannie Mae controls a decent chunk of the mortgage market and that gives its policy adjustment some teeth. Yet, as government-affiliated home loan providers today just about completely dominate the housing finance arena, no one else has thus far followed suit. Freddie Mac and FHA are the other major performers and predictably will then attract with their less restrictive rules much of the business Fannie Mae will be turning away.  

The private home loan sector is still struggling to rise from the ashes, but when they do so Fannie Mae's policy is bound to lose even more of its bite. Mortgage applicants - with strategic default/ foreclosure on their record - with down payment funds and solid income will be shopping for the best deal and private mortgage lenders with their innovative minds are certainly going to find a way to accommodate this specialty slice of the real estate market pie.

As things stand, Fannie Mae's policy change seems to hold minimal deterrence power for homeowners contemplating to go for the now notorious strategic default. People simply have too many options besides Fannie Mae to look at.

Home Affordable Modification Program, or more commonly HAMP, was rolled out to allow mortgage lenders and servicers to make available trial modifications to an estimated 3 to 4 million homeowners.When Treasury announced its birth it raised hopes among not only mortgage borrowers in trouble but also government officials who frantically tried to bring the collapsing housing market back to its feet and with that give the badly-mauled banking sector something more concrete to lean on. But things haven't turned out all that well with HAMP.

At least that's what SIGTARP says. SIGTARP is another wonderful acronym - among so many - that has risen to fame on the heels of the memorable finance and real estate crash and stands for Special Inspector General for Troubled Asset Relief Program. That's a long one. In short, he is - could be a she too - tasked to monitor the government's massive struggle to bring reasonable order to the shaky national banking system and the besieged housing realm.

SIGTARP refers to the 389,198 permanent mortgage modifications HAMP has thus far managed to generate, as was recently reported by Treasury.This of course is far less than what the original plan of at least doing 3 million of them called for. One thing is that HAMP is an ongoing process and perhaps when it's all said and done that plateau can be reached. But, frankly, it probably won't happen.

For one, due to high mortgage redefault rates under HAMP underwriting guidelines have been tightened leading to scores of cancelled trial and permanent modifications.It is greatly lowering the potential candidate pool. Short sales are making serious inroads as a viable option for many struggling home loan recipients. Doing a HAMP requires a lot of paperwork and patience and many are willing to take their chances with short sales.

The underwater menace seems to come into play with HAMP, too.Its malicious impact is somehow going to touch all corners of the housing enterprise. When a homeowner is sufficiently underwater he can be essentially convinced that making those lower HAMP payments for years on end still won't pull him out of the negative equity hole anytime soon, so he clearly has little incentive to apply for HAMP. Lower payments are great, but where is the equity? After careful consideration many choose to just simply walk away from their mortgages.

Besides, mortgage lenders generally haven't been all that enthused, for one reason or another, about putting their arms around the program either.HAMP appears to have suffered from clearly-defined goals, as SIGTARP claims, but also from rapidly shifting real estate market conditions. With more assertive administration Treasury could have streamlined its direction and possibly been more efficient in the use of taxpayers' money.  

Real estate market observers have mixed feelings about RealtyTrac's Midyear 2010 Foreclosure Report. It says that 1,654,634 homeowners were sent at least one mortgage foreclosure filing from January through June. That translates to over 3,000,000 by the end of the year and RealtyTrac forecasts that over 1 million of them will eventually become repossessions, or REOs - real estate owned. The number by itself is of course alarming, but the current six month number actually is a drop of 5% from the second half of last year. Ordinarily in any housing enterprise that would be something to feel upbeat about.

On closer look the home loan picture isn't all sweet grapes and chocolate treats after all. Mortgage lenders and servicers have lately changed course to give a short sale a chance to work before filing foreclosure notices. The government has aggressively promoted its mortgage loan modification programs that have had a preventive impact despite the private sector's reluctance to get fully engaged. Yet, these initiatives have been a disappointment when measured by their originally announced goals. Moreover, mortgage lenders often are disorganized and undermanned to handle the torrent of foreclosures and their workforces seem to lack the necessary training to be effective, therefore foreclosure action can be delayed for months.

These factors have shifted the emphasis away from mortgage foreclosure statistics and are obviously responsible for the 5% decrease. In the meantime distressed properties continue to saturate unabated the landscape from Las Vegas to the shores of Florida. A great many are underwater and are hard-pressed to find any meaningful relief in the near future. The job situation is slowly improving at least in some regions but still isn't strong enough to decisively begin lifting struggling homeowners to their feet.

Nevada maintains the dubious top spot on the list of most foreclosure filings with almost 6% of all households receiving one at the midyear mark. In pure numbers that is 64,429 homes, a bunch really. Arizona came in second with 3.36%, followed by Florida at 3.15%. California registered a score of 2.54%, rounding out the four states that have been dominating this difficult statistic from the beginning of this historic real estate collapse.

The underwater problem will likely be a drag on the housing market for longer than anyone can imagine. But, there appears to be one relatively fast cure for it should the decision makers in Washington - like the Fed and Treasury - have the backbone and political support to give it a try. It's called inflation. With a steady dose of that often-ridiculed medicine home prices ought to begin tip-toeing upward, preferably at a controlled pace. In time it would pull homeowners out of the abyss and give them real equity again that would make them feel better about a lot of things. In addition, banks and investors now smelling the offensive odor wafting from their mortgage portfolios would see a gradual change to that downright embarrassment. Just an idea.

Photo of the Fed by stantoncady

Las Vegas homeowners and real estate observers have been looking for clear direction the local housing market could be happy about but it's refusing to cooperate. It seems to have settled on a typically erratic path that markets display when they reach the bottom on a downward cycle - or are very near it -  and just can't decide how to shake the gloominess off and embark on a climb out for better days. Last month's real estate statistics reflect that rather well.

GLVAR, or Greater Las Vegas Association of Realtors, recounts for its rapt audience that 3,360 resale homes were closed in June, a nice 16.5% uptick from May. That reverses two consecutive months of modest declines. However, it's about an 11% drop from June of 2009, a cause for some concern.

Las Vegas homeowners are carefully monitoring price movement that has been so negatively aggressive in the valley, dragging scores of them underwater, an occasion where property value dips below the underlying mortgage balance. The median price in June parked at $140,000, a $2,000 retreat from May, and the same as it was in May of 2009. For now it appears that prices have stabilized, giving the disappointed Sin City homeowners some hope of sunnier days ahead.

The worrisome trend now is the single-family house inventory. It has been on a constant, although gradual, ascent for several months, topping off at 21,361 in June. It could well be that this will go on another few months as mortgage lenders release more foreclosed homes on the market, or agree to do short sales.

Talking about mortgage foreclosures, their share of total sales in Southern Nevada has steadily declined in recent months to 38%. Gone down, but still a scary figure. On the other hand, short sales have grabbed an ever larger chunk of closings, reaching 34% in June, reports GLVAR, indicating that mortgage lender preference is shifting over to the short sale. So, 72% of all existing home sales are labeled distressed, an unheard of situation that obviously will take some time to untangle. It simply points out how out of balance the once-booming residential real estate arena in Vegas nowadays is.  

The real estate market meltdown has exposed many painful and game-changing weaknesses in how business was conducted in the years past. In the quest to make as much money as possible scores of mortgage files were pushed through with incomplete or doctored information. Now, with foreclosures the topic of the day, mortgage lenders are receiving growing demands from investors like Fannie Mae and Freddie Mac to buy back loans they originated haphazardly. That can be devastating to the bottom line.

To deal with the costly buyback menace many mortgage shops have commenced tinkering with appraisals, of all things. As an appraisal comes in some home loan providers will run an electronic valuation model based on public records - it involves no actual physical inspection - to see how close the two numbers are. They are double checking on the appraiser's work, is what they are doing. If the appraiser's report is higher the underwriter can randomly cut back on the value, so that the lender can't be blamed for using inflated figures should the loan go bad. Of course, many a deal has blown up into many little pieces as a result. This likely happens more in the hard-hit areas - Las Vegas comes to mind, as does Arizona, California and Florida - where values have eroded the most and where all the mortgage foreclosures and short sales can seriously trample with the price structure.

Mortgage brokers, real estate agents and builders are howling injustice at such a practice. Home buyers and sellers whose transactions disintegrate don't know whether to cry or laugh. Part of the housing market has indeed turned into an unpredictable mystery.

But things are about to change for the better. Fannie Mae is tackling the electrifying issue head on. The GSE will not accept mortgages where the appraisal numbers have been altered, the policy going into effect September 1, 2010. It requires home loan providers to get in touch with appraisers to work out any disputes over values. If plan B is needed, a second appraisal should be ordered.

The housing industry is raving about Fannie Mae's decision. Despite having withstood some genuinely tough times during this real estate chaos the GSE can still manufacture sensible policies. It can only strengthen its position as a key element in the mortgage marketplace. It wouldn't be a big surprise if Freddie Mac followed suit in the near future.

The housing collapse has been particularly brutal to home builders. It's hard to market new houses regardless of the latest features when similar resale property is selling for 20-40% less. The usual incentives, like kitchen or flooring upgrades, have very little impact when the price difference reaches, say, to $50,000, and often much higher than that. The gaps are especially wide in badly-mauled cities like Las Vegas and many areas in Arizona, California and Florida. Inviting mortgage rates are available to all buyers, so no help there either.

In order to generate more interest in their products residential real estate developers have been frantically searching for ideas that would give them a chance against the low-priced mortgage foreclosure and short sale properties littering neighborhoods across the land. Several have put their arms around the green home, a concept that was making some progress over the past decade but then was largely tripped by the housing meltdown.

KB Home is heavily using Energy Star features in its homes, including energy-efficient cooling, heating and ventilation equipment as well as appliances. Beazer has the eSmart Green program that also builds homes to Energy Star standards. As an option it offers the SolarLease^TM program in Phoenix that comes with an integrated solar power system, bypassing the pricey upfront installation costs. 

Meritage Homes takes all this to another level. The builder offers as standard an array of green magnets at its new subdivision in Gilbert, AZ. In addition to the regular ones like high-performance windows and spray foam insulation each home comes with a solar system and weather sensing irrigation. All this can save the homeowner up to 80% in utility bills, according to the builder. Meritage snapped up last year land for the project at a deflated price that allows it to throw in these features and still stay competitive with the existing real estate market.

It's too early to tell how in this trying real estate market of record-low mortgage interest rates and ample supply the resurrected eco product will fare. The home buyer remains largely in a holding pattern with great concern about the overall economy and therefore might be hard to convince to apply for a home loan to make a purchase. If anything, this nascent trend should give the green housing advocates something to cheer about.

The housing industry is relying heavily on government-backed mortgage organizations like Fannie Mae, Freddie Mac and FHA for supplying financing to home buyers, filling a gaping void left by the private home loan sector still applying remedial salve to its festering wounds. Without them the real estate arena would be uniquely anemic. And the government is slowly gaining even more control over housing in a different but quite influential capacity, whether it likes it or not.

As mortgage foreclosures keep steadily spilling onto the ravaged real estate market, GSEs - Fannie Mae's and Freddie Mac's official designation - and its federal cousins like FHA and VA pick up repossessed homes by the thousands. Radar Logic - a real estate research boutique - reports that the government now holds about 46% of all U.S. REO inventory, a large share that has been continually growing over the past several years.

What's alarming is that it's going to increase from there for the foreseeable future. 2.3 million homeowners are currently 30-90 days behind on their mortgages, as Zillow and Lender Processing Services have figured out. Radar Logic calculates that 69% of these home loans are guaranteed or owned by the various government agencies. The situation is worse than that, though. About 5 million mortgage borrowers are either 90 days past due or are already in the foreclosure pipeline. The Treasury reports that 56% of these are in some shape or form under the government's umbrella. Radar Logic estimates that roughly 35% of mortgages in these two categories will avoid foreclosure via modification efforts or short sales.

Nevertheless, when everything is tallied up nearly 3 million homes will soon be in the government's REO inventory, Radar Logic says, pushing up its percentage share quite a bit.

If Washington puts the entire inventory as it becomes available for sale, real estate prices that have lately shown some stability will certainly weaken again. That will predictably swing the nascent housing turnaround in reverse. Also, selling in this soft real estate market will bring more losses that will ultimately turn into the taxpayer's responsibility. These choices are so unappealing. What other options are there? Renting them out until the housing market recovers and then later on sell them to at least break even, might be one answer. That is exactly what many investors are doing today, especially in worst-hit areas like Las Vegas and Phoenix. The operative word for them is hold. Be patient.

The government is not in the house leasing business but in this dire and unusual situation it might be wise to seek solutions outside the box.