BluefoxToday blog : April 2007

Now that the subprime woes are generating fat headlines across the land, a debate is roiling around what to do about it. One idea that has received a fair deal of attention is the loan suitability requirement. Which means that lenders can only put borrowers in loans that are suitable for them. That they are able to repay. Some consumer advocates also propose that the borrower should have the right to sue if there is any breach of this fiduciary duty. Hmmm.

Frankly, I do have deep reservations about a loan originator being called to make subjective judgments about which mortgage program best suits an applicant. That would translate into him taking the responsibility of making a financial decision for someone else. Just doesn't sound right. Would that potentially open the door to allegations of discrimination? Yes, indeed.

Let's go into it a little deeper. A professional loan officer normally strives to become a trusted adviser for the prospect. So, by looking at the credit report and the application he can form a decent picture where the customer is financially. This is pretty standard. Now the discussion is steered into the borrower's future plans regarding the house purchase or refinance and then, armed with a full package of information now in front him, he can suggest a couple of mortgage programs for consideration. He'd also take a moment to explain the various loan features and answer any questions. Isn't that his role?

If the loan officer follows the suitability doctrine, he would make that decision for the borrower based on what he knows and has been told. What if the borrower falls ill three years later, can't make the payments and defaults on the home loan? He could sue the lender for the breach of his fiduciary duty. What if there is a divorce and the same thing happens? Or the consumer just simply changes his future plans for the worse? The payments were made on time up until that point, the mortgage was deemed suitable, but all of sudden the loan is in dire peril and now the lender could be liable.

I can see the investors who are buying mortgage-backed securities reacting to any legislation like this with alarm. Liability could come knocking on their door, too. What would it do to the cost of mortgage funding? Increase it.

It very well may be. The most urgent reason to do so is if the homeowner has an adjustable rate mortgage, or an ARM, and it's about to reset upward. That way the payments can be kept from changing too much or not at all. To cash out some of the built-up equity for a home improvement project or something else could be another good reason to do it. And there still are older loans with high interest rates that could benefit from today's low levels.

There are a few things that need to be taken into account, though. Is there a prepayment penalty on the existing home loan? That's vital to find out. These penalties usually equal 6 months of interest payments and are set off in case of a refinance, or even a sale of the house. They often are in effect during the first two or three years. All these time frames and dollar amounts can vary from one mortgage loan to another, so it's important to carefully check what the terms actually are.

Secondly, the mortgage marketplace has changed quite a bit in the last several months. The so-called subprime sector is currently suffering from a high default rate that has prompted the industry to become more vigilant about credit scores, appraisals and income verification. Many are now requiring a healthy equity cushion, often 10%, before underwriting a loan. It can be said that the days of easy money are over.

Then there are the costs of a refinance. The no-cost type only means that the fees are included either in the interest rate or are added on top of the loan amount. It really stands for no out-of-pocket cost. That's a more accurate way to put it. Here's a money saving tip. Title insurance companies do offer a re-issue rate on their policies, which will cost less, but it has to be requested upfront.

Best practice is to contact a couple of reputable lenders to get a picture of their costs and what kind of service they provide. Lowest cost doesn't necessarily translate into expert service, I might add.

Mortgage lenders today are setting higher loan qualification standards for borrowers with weak credit files. Since they're facing mounting defaults in the subprime segment, they have to. Now there's another issue to contend with. When they study a credit report, the one compiled by FICO, are they really looking at the applicant's true financial background, or has it been artificially boosted by someone else's excellent credit file?

This is what's happening. Companies are turning up on the Internet that offer to marry a stellar credit file with a file that is so-so, or worse. In essence, the high-quality information is shared and that'll help the poor file. These online stores argue that this maneuver will enhance a FICO score from 50 to 250 points. That is a lot. Now, is this legal? It appears to be.

Namely, Federal law allows someone to add an authorized user to his credit card account. Usually it's done within the family, parents for children happens a lot, but the law actually does not limit in any way who can be included in an account. It can be anybody. And that's where the loophole is.

So these Internet shops are purchasing trade lines from people with stellar credit backgrounds and renting them for a nice fee to those who need an upgrade. And the seller gets a cut, too. How about that? Does this mean that home loan lenders have to be even more vigilant now? Absolutely. Loan officers and underwriters have more questions to ask an applicant if something looks suspicious. And make the process take even longer to everybody's frustration.

Good news at last. It took a while. The last several weeks have been tough. The real estate headlines just about everywhere have oozed with subprime troubles this and foreclosure that and home values are dropping and so on. Followed by long and dark narratives about new regulations and who is to be blamed for what. Now the beam of light is shining on a new home loan program from Washington Mutual. At least for the time being.

It's called Mortgage Plus. People who are looking for more flexibility and control are going to be dancing in the streets. It actually combines a first mortgage and home equity line of credit into a single loan. The borrower can reset the interest rate twice a year, for free for the first time and then it's $250. He can also pick between fixed and variable rates, fully-amortized payments or interest-only. Additionally, there's no need to refinance to benefit from the accumulated equity in the home. He can just write a check to tap into it, or do a cash advance or even use a credit card, if approved. These are merely some of the components of the program.

It appears very tempting. As always, it's my advice to fully understand what it all means before signing up. It'll definitely work for some consumers, but not for others. And keep in mind, our competitive marketplace already offers similar programs, so it's not like the invention of the decade. The product is not available to subprime borrowers, though. And lastly, how are they going to price it? So long as that's reasonable, it should be able to find its niche.

UNEP, United Nations Environment Program, sponsors the Sustainable Building and Construction Initiative, or SBCI, that recently issued an eye-opening report about global warming and what role the building industry plays in it. The sector alone accounts for 30-40% of global energy use, a significant amount. It should also be mentioned that the U.S. Green Building Council is a strong supporter of SBCI, so we're closely working with the international community to address the deteriorating situation.

Most energy is consumed during the use of the structures, that is houses, condominium towers, townhouses, office buildings, plants, for cooling, heating, ventilation, lighting and some other applications, and not during the construction phase. That's an important distinction. It's about 80% during use vs. 20% while under construction. 

Now that the origins to the carbon dioxide (CO2) emissions have been identified, we can begin to look for solutions. Many of them are very simple, everyday stuff. Thermal insulation is relatively easy to install, solar shading can make a considerable difference, particularly here in Las Vegas, and energy efficient appliances are readily available at your local department store. This is only to start the conversation.

Another solution is the demise of the wasteful incandescent light bulb that has received a lot of press lately. A compact fluorescent bulb is elbowing in to take its place. And the sooner, the better. Here's why. In a global switch to the fluorescent bulb now, by 2010 that would amount in CO2 savings of about 470 million tons. I know it's just a huge number. Probably impresses these environmental experts more than us here in the real estate business, but I'll take their word for it.

Everybody has to get on board to make any forthcoming changes bear real fruit. Homeowners, developers, builders, property owners, architects, governments on all levels, tenants, energy suppliers. Everybody.

The annual Las Vegas Perspective took place yesterday. It's actually a report that discusses in detail economic, government, demographic, business and lifestyle issues in the valley. A thorough undertaking. It's put together by the Metropolitan Research Association, a nonprofit organization.

One of the main topics of the event was housing affordability. According to the report, only 15% of the residents living here can now afford to buy a house. On the other hand, home ownership is nearly 70%, a level that was reached largely on the subprime market's flexible mortgage underwriting guidelines. So, when we look at these numbers, the affordability has really taken a severe beating in the last few years. And the gap might be widening further as home prices seem to hold fairly well, yet mortgage lenders are steadily raising loan qualification standards. Many of the first-time buyers and the borrowers with weak credit files may have to stand for a while on the outside looking in.

What's the good news? The population growth gauge for 2006 recorded a healthy 5.3% increase, to 1.91 million. The five states that contributed the most are California, who else, Arizona, Florida, Texas and New York. There is more good news. We are now the top player in the whole nation in the green housing trend. We should all be very pleased about that.

We do have challenges, of course, but with a report like this we get to know what they are and can then go to work on them. The full report is available in public libraries or can be obtained directly from the Perspective.

Contrary to popular belief, mortgage lenders are totally opposed to foreclosing. If they have to do it, it'll usually cost them money. And who wants to lose money? Nobody. EMC Mortgage reports that on average it loses 40% of the value of a home loan gone into foreclosure, plus typically has to pay property taxes and other expenses related to the house. That's bad business.

The question is, how are lenders dealing today with the alarmingly climbing foreclosure numbers? EMC and some others have come up with feasible solutions. Read more by clicking here.

AREP, controlled by Carl Icahn, agrees to sell their gaming operations in Nevada, most of which are in the Las Vegas valley. These are casinos it owned here, so that in itself is normal. The action in that arena is steady. Companies are being bought out all the time, Harrahs - Caesars, other properties get purchased, Aladdin -Planet Hollywood, others get imploded to make room for something new and possibly larger than anything previously built. Another transaction among the many is just the flavor of the day.

What caught my eye on this deal was the Stratosphere property and where it's located. Besides the casino itself, the buyer, Whitehall Street Real Estate Funds, gets 17 acres of undeveloped land around the resort. That's potentially significant. As has been the trend recently, the north end of the Strip is getting ever more attention from developers. They eye resort projects, and increasingly high-rise condominium possibilities. And why not?

Turnberry Place in the neighborhood is already well-established in the luxury segment. Nearby Allure is heading for completion, expected in September. MGM Mirage bought some acreage in the area the other day. Whitehall seems to have limited experience in the gaming business, so they might be drafting plans only for the 17 acres. Perhaps a high-rise condo tower, or towers? Or just hold onto the Stratosphere until they can find separate buyers for the land and the resort.

What are they going to do?

Despite the recent softness in the real estate market, buying a home can be a stretch for many first-time buyers and young move-uppers. Prices are relatively high in most areas and lenders are getting fussy. Shared equity mortgage could be worth a look. Let's go over some of the basics.

Normally it involves well-off parents helping out their children. But it can be anyone besides the parents. Anyway, let's say a father contributes $60,000 toward a down payment on a $300,000 house his married daughter wants purchase. His investment is 20% of the home's value. He would get that back at a future sale, plus 20% of any appreciation to that date. Just a short example. 

Benefits to the daughter are that her family is able to buy the house they need in the neighborhood they desire to live in and the home loan is easier to qualify for because of the 20% down payment that they otherwise wouldn't have. And the father is now a real estate investor and proud to be able to help a young family out.

Everything in an arrangement like this should be put in writing. Normally the homeowners would be responsible for the mortgage payments and during tax time get the interest deduction. Property taxes and insurance are open for negotiation, although often they are split. Many experts recommend that an end date is set, ranging typically from 3 to 10 years, when the investor, the father in this example, will be paid back either by means of a refinance or a sale.  

Should the father's name be on the loan? It could be, but deals between family are frequently very flexible. If I were the father, I'd have an attorney write up the contract. And keep my emotions in check since we're talking about a financial judgment here. For many young families, shared equity mortgage could be the path to take.

Let's start with the good news. The numbers are in for March and what we see is that the prices in Southern Nevada are holding up rather well. The median new home price is down 3.5% from March of last year, but for the first quarter it's up 4%, to $324,035. That's for a new house. In the resale sector the median home price is 1.8% lower from a year ago, while the first quarter slide is only 0.3%, to 280,667. This is what the latest stats tell us. Some magazines have been predicting all sorts of bubble burstings here and looks like that's not in the cards. So far only a tad of air is coming out.

Now to the bad news. New home closings took a deep dive, to the tune of 43%, in the first quarter, amounting only in 5,264 transactions. Existing housing fared a little better, however, dropping about 20%. The weakness clearly is in the sales side. In the inventory side. A couple of reasons come to mind. Prices are still too high to attract the needed attention that would burn the inventory down. And lenders are adjusting their underwriting guidelines up, especially in the subprime sector, that is obviously putting a chilling effect on the market.

Back to the good news. It's a buyer's market. They only come every so often. Those who can qualify for a mortgage loan and those who plan on buying investment property, this is a market custom-made for them.