BluefoxToday blog : December 2008

The federal government has been quite aggressive in the past few months in infusing money into the financial system in order to turn the tide on the still deteriorating housing industry. One of the key goals of this was to assist homeowners facing foreclosure find a way out of their mortgage payment problems. The capital, however, was given to the banks in good faith, without enforceable regulations to make sure they would comply.

Sure enough, it appears that many lenders have found better uses for the funds than help struggling borrowers. For one, it's nice to get the taxpayer to take care of a balance sheet that sags under the weight of under-performing mortgages, acquired without careful analysis of their soundness. Hoarding cash also gives them the opportunity to grab a failing bank or two when nobody is looking. There are other ways to make money work.

To deflect light from these objectionable actions the bankers are now saying that federal regulators are demanding they must meet certain capital requirements. Supposedly that prevents them from fulfilling their mission to help turn around the messy real estate market. Maybe so.

The weak housing industry got the entire economy in the pickle to begin with and it can lead it out of the gloom, too. With the right moves the financial sector and its regulators together should be able to come up with policies that would make a lasting difference. But what has happened so far is much less than what could've been done. The banks obviously are shirking their responsibility and missing now on setting up a path to long-term prosperity. The government with its regulatory power clearly has difficulties finding the right mix of answers to get any type of a meaningful recovery started.  

The bottom line, a fresh approach is needed in the decision-making process where it matters, government or private.

At last there is a list where Nevada occupies one of the higher spots and this time it actually is good news. The year has otherwise been very dramatic for the state, especially for the Las Vegas metropolitan area that holds a large chunk of its population. Real estate values are under constant attack, many homeowners have difficulties making mortgage payments, Strip developments are put on hold and so on. The picture isn't pretty. Anyhow, let's get back to the good news.

The U.S. Census Bureau has prepared a report that covers the time from July 1, 2007 to July 1, 2008 and it estimates that almost 46,000 people moved into the state between those dates. Again, most of them predictably found their way to the Las Vegas valley. The increase amounts to 1.8% and puts the state on spot eight in national rankings. Nevada used to crowd the highest perch on the list for years and now has seen a few other states slide right by. Nevertheless, the population growth is still substantial and will help pull the stagnant housing market in Las Vegas and elsewhere from its present misery.

In a mild upset Utah rushed to the front of the pack this time with a growth rate of 2.5%, picking up over 67,000 new residents. Arizona, a perennial Nevada challenger in the past, came in second with an 2.3% advance. The next three were Colorado, North Carolina and Texas, each cruising along at 2.0%. California is still a big draw as it attracted 379,000 people that lifts its total population to over 36 million.

Nevada sits atop another mortgage- and real estate-related list, a placement that no one really wants. The Silver State, together with Arizona, California and Florida, enjoyed unprecedented real estate price appreciation during the recent boom cycle and now the same states are topping the national list of most homes with negative equity, in other words underwater. Those who grow too fast usually have to pay the price sooner or later.

First American CoreLogic took a look at county real estate records across the land and then analyzed property prices with its own automated valuation models and finally issued a report on its findings. Nevada landed on the top spot of its ranking with 48% of mortgaged homes in the state being underwater. Not too long ago another study found that Nevada also had the most foreclosures, so the two appear to mirror one another. And it's fair to add that a bulk of this 48% is right here in Las Vegas. The report doesn't separate how many are underwater, say, from $1 to $25,000, which is not so alarming, or from $50,000 to $75,000, which can be devastating. Still, the high percentage is troublesome for the entire Southern Nevada housing scene.

It likely will mean that foreclosures will continue to play a pivotal role in the region's battle to turn things around. The more negative equity the more probable it is that the home will end up being foreclosed. That will push banks piling up these REOs to sell them at even steeper discounts than before, thus putting further pressure on values. This, of course, has been going on for months already over here and lower prices have recently drawn buyers, homeowner-candidates and investors alike, to go after the inexpensive inventory. Demand is beginning to build up especially in the lower half of the market, an encouraging development.

Evidently the correction is plowing ahead full-steam although it still has a way to go. It brings with it affordable pricing that better matches the area's median average income and that, the discrepancy of the two, was what really threw the market out of sync to begin with. Topping the list doesn't look good but if that's the only way to mend the housing market, then be it.

The other states on the ranking behind Nevada were Michigan with 39% of homes underwater, or upside down, Arizona and Florida each at 29% and California at 27%. The national average, by the way, is 18% and altogether 7.5 million homes fall under the unpleasant label.  

The outlook for home builders in Southern Nevada remains rather bleak. It has been a tough real estate market throughout the year for the entire industry and especially so for new homes. This year, 2008, will be a year to remember in the business. Mortgage money has become outright inexpensive lately, though, so perhaps the coming months will bring more traffic for the struggling segment.

As for the pure numbers, there were only 643 new home closings in November, a noteworthy decline from 1,521 recorded at the same time last year. That comes to about a 58% change for the worse. These figures were tallied by Home Builders Research, a reliable Las Vegas analyst.

Moreover, only 180 new home building permits were granted in November in the entire valley, signifying the lowest level ever after the research shop began compiling these numbers in 1988. Twenty years ago Vegas was far from being a true boom town but even the figures from those days were better than what the market can post today. That alone tells how difficult the situation currently is.

On the price front, it dropped 1% in November from the month before to $247,990. This is an 8.2% decline from the same month last year, or $22,288. New home values have held better than those on the resale side that has been hammered by a flood of foreclosures. And that's where the problem is for new homes. They can't come even close to competing with bank-owned resales that are often priced as low as necessary to move them.

Is next year going to be any better? Tough to say. The early going is likely to be much of the same but hopefully the second half will show some improvement.

The letters IRS usually make the neck hair of people to stand up, often followed by a bad word or two. Now, however, at least a few citizens can find something positive to say about the much-reviled agency. The ones who might do that have a federal tax lien currently clouding their homes.

Normally it takes around 30 days to clear out a tax lien when a property is either sold or refinanced. Now IRS is promising to speed up the process although it won't say how long exactly it'll last under their new policy. Regardless, anything that will cut transaction time will be warmly welcomed by the mortgage and real estate industries.

There are a couple of things to keep in mind when a lien is glued on a house. The homeowner, or his representative, can petition IRS to place the lien in a secondary position in the pecking order during a refinance, sale or loan modification process. This is actually called subordination and will then allow the transaction to proceed normally.

The other issue that is relevant in today's marketplace that has seen housing values plummet in most areas is the fact when the homeowner is upside down. In other words, the mortgage balance is higher that what the home is worth. In case of a sale, or even refinance, the IRS can be asked to "discharge" the lien so that the transaction can go on. This will not wipe out the tax lien, though, as many would like to happen. The IRS isn't that nice. It just lifts the lien to permit the sale.

It's hard to say how many homeowners will benefit from this ruling but every little bit that will help the stagnant housing market crawl back on its feet is good news.   

Whatever Washington has thrown at the ailing housing market so far hasn't had much of an impact. The latest plan was called TARP, the Troubled Asset Recovery Program, that has done very little to stabilize the messy situation. It has cost untold billions to no avail. The key still appears to be to halt foreclosure growth that would then help stabilize prices that in turn would lay down a firm foundation where the housing market can stand on.

One avenue to arrest foreclosures is to work with the investor community that owns mortgage-backed securities. About two-thirds of home loans out there were securitized into bonds and are now in the portfolios of large-scale investors. Earlier work-out plans by Fannie Mae, Freddie Mac, Citigroup and others haven't made much of dent at all because the contract terms of these bonds prevent any adjustments without the bond holder's permission. They would lose money if they accepted new terms and therefore have refused to play along.

Instead of pouring truckloads of money into banks why not offer the mortgage-backed security owners a subsidy so that they would then have incentive to go along with modifications with a bite. All it would require is to shift some of the already allocated funds into this sector. This idea would bring under the same umbrella a large chunk of outstanding mortgages that could be massaged accordingly to keep distressed borrowers in their homes.  

Arresting the spread of foreclosures would go a long way in keeping home values from sinking further and that's what this market seems to need more than anything else. The investors might be the solution to it.

Homeowners across Southern Nevada know that their properties have lost quite a bit of value during this incredible mortgage and housing meltdown. It's a somber feeling to first watch the equity in a home shrink down to nothing and then to make matters worse in many cases the spiral has continued on down to create an upside down situation. That surely isn't what home ownership usually means. So, in the big scheme of things, how low have the prices dropped in town?

An intriguing report was just published by IHS Global Insight, a forecasting shop, and National City Corp., titled House Prices in America. The researchers wanted to arrive at historically normal values and to get there they studied median prices from 2000, interest rates, household incomes and population density.

According to their findings Las Vegas was undervalued by 18.8% in the third quarter. In the first quarter the same index came in at negative 3.1% but that wasn't quite enough to trigger the dreaded undervalued label. A value decrease of over 14% will do it, though. The report looked at 330 areas nationwide and Las Vegas was shoved way down to spot 287. Still, it actually means that there are a host of markets that are doing worse than Sin City once considered the flag bearer of the crash.

From a buyer's perspective this is welcome news. Great news, really. Median resale prices, currently at $184,000, are now somewhere around pre-boom levels that makes them affordable again to the average buyer and that's what is needed to shake the market off its agonizing coma. This could be the bottom as far as value decline is concerned, the famous correction having obviously done what it's supposed to do. Overall, there remains volatility in the mix, especially in the mortgage sector, that can delay anything resembling a cautious recovery.    

The holiday season is upon us although this year it might be more subdued than in a long while due to the overall weakness in the national economy. The mortgage and housing markets have taken unprecedented punishment in most parts of the country that requires extraordinary efforts and just plain old time to turn around. Las Vegas real estate, for its share, has paid dearly for past excesses but has lately shown some flickers of hope that perhaps a tentative recovery may be forming.

November stats from Greater Las Vegas Association of Realtors, or GLVAR, back up the cautiously upbeat sentiment. There were 2,183 single-family house closings last month that is well over double the number for the same month in 2007. True, it's a small drop from October that really is a normal development as the slower-paced winter season sets in. For several months now resales in Southern Nevada have been significantly better than comparable figures a year ago, an entirely positive sign.

The inventory is down slightly in November from a year ago, to 22,700. It appears to be a major hurdle to bring it down below 22,000 listings, a level that once breached might signify better times ahead. The improved sales are mostly fueled by bargain-priced bank-owned homes but the temporary void is quickly filled with more foreclosures that continue to dog the Las Vegas housing market.

The median home price is still slowly drifting lower, this time settling at $186,000 that is a somber decline of 32% from 2007. Opportunistic foreclosure pricing by lenders puts a lot of downward pressure on it to the detriment of valley homeowners. What obviously is needed to arrest it is to slow down the foreclosures that may be a few months away.

Up to now Washington has come up with quite a few different remedies to lift the reeling real estate market out of the jaws of defeat. Most of them have focused on helping the battered mortgage industry and it surely looks like the right road to take. Yet, the results have been less than satisfactory. The carnage goes on as foreclosure filings keep piling up and empty houses dot the landscape.

With that in mind, still another idea has been tossed out there for public discourse. What if the government, more specifically the U.S. Treasury, would subsidize mortgage interest rates so that they would go down to 4.5%? As of now the initiative would apply only to homebuyers and would exclude refinance candidates.  

It would provide some relief to the situation, mainly on the demand side. The action would likely spur first-time buyers and fence-sitters into action but that might be about it. Those who would like to move up find it difficult to sell the existing home first in this depressed environment and they make up a large chunk of the marketplace. The overall effect would appear be minimal, again.  

Another thing is that despite the home loan rate going down today's tough underwriting standards will still keep many borrowers from qualifying. How many of them can put down 20%? Or even 10%? Inadequate FICO score is another potential impediment for loan approval. Lack of verifiable income causes many applications to be turned down, especially in a place like Las Vegas. And the weak economy predictably curbs many from spending any money on a major purchase like a home.

One solution would be to provide lenders financial and regulatory support so that they can ease up on strict loan standards. Fannie Mae and Freddie Mac are already established in the business that makes them natural choices to be the conduits between the Treasury and the finance community. Lenders have to be assured that they can take a bit more risk with borrowers and once that is accomplished demand in housing would accelerate. This track has more upside potential than cutting mortgage rates.    

The financial system has taken it to the chin repeatedly over the last few years thanks to multiple factors, one of which was the subprime home loan product. Many eager borrowers were able to secure funding for a home purchase using its flexible underwriting criteria although many really didn't have the means to keep making payments in the long term. The loans were structured with the idea that the real estate market would continue to expand and if it somehow tanked, well, that probability wasn't considered much at all. And so the bubble burst and the subsequent damage is severe.

As a result the subprime programs were swept into the trash bin and that was that. For a while anyway.

A host of the subprime lenders and brokers who prospered during the boom years and then for one reason or another exited the scene are now coming back. The niche they are presently involved in is in many ways similar to the subprime one. It's the FHA, or Federal Housing Administration, product that is primarily designed to cater to first-time homebuyers, although all applicants are welcome, has reasonable income standards and requires a down payment as low as 3%. Borrowers pay FHA a fee that insures loans against default but ultimately it is the taxpayer who guarantees these mortgages.

The problem here is that these former subprime mortgage lenders, some of whose background includes bankruptcy filings, civil lawsuits, state disciplinary measures and a few criminal convictions, are using the same high-pressure sales tactics they did before to make loans. And they are supposedly sometimes involved in outright fraud just to get to the closing table. The bottom line is that the paper they write goes bad at a rate much higher than national average. In the big picture, only about 4% of all loans were FHA in the fall of 2007 and a year later, today, it has soared to 26%. And that number is likely to grow even more in the coming months and as it does more of these poorly-underwritten loans will start falling behind and ultimately face foreclose. Sounds familiar? 

To qualify to do these loans a company has to be approved by FHA. Why, then, isn't FHA weeding out the unworthy applicants? For one the agency is way understaffed to handle the surge of applications it's getting nowadays. The systems in place probably are ill-prepared to catch everything they are supposed to catch. Staff training might also need an upgrade. Perhaps pressure from who knows where unduly influences their decision making. It's possibly a little bit of all of this.

Anyway, FHA is one of the main players in the government's far-reaching plan to rescue the housing industry and to allow it to operate with minimal supervision is irresponsible, to put it mildly. It's clear that there is a power vacuum in Washington right now and from the way things are going at this point it will unnecessarily prolong the real estate market's recovery. Sadly, the word responsibility has a hollow ring to it.