BluefoxToday blog : May 2009

A lot of time and money is spent annually in foreseeing the future in a variety of areas. From the familiar to the strange. As expected, the mortgage and real estate markets have seen their fair share of this. Some of these studies are more accurate than others, after they are later independently checked for accuracy. But overall, the results of these novel exercises appear to be off the mark, sometimes way off.

In any case, here is the latest for Las Vegas. According to a new housing market study completed by the Concord Group, Southern Nevada can expect its new single-family home sector to pick up in the first quarter of 2012. That comes to about three years from now. This national projection relies on analysis of unsold inventory, anticipated shifts in the employment picture and demand, rather decent criteria.

One key component, however, ought to be included, and that is the foreclosure category. Currently bank REOs, or real estate owned, clearly dominate sales at the Las Vegas housing market. Banks are now unloading property at fire-sale prices and first-time buyers and savvy investors are all over them. The average existing home value is today at $125,000 while for a new home it is at $226,000, says SalesTraq. That is a huge gap and leaves the builder product at a distinct disadvantage.

With that in mind, foreclosures seem to be the single most important factor determining the Las Vegas market's future performance for new homes. Once the REO segment is whittled down to somewhere near the historical norm, then the new home front will start recovering, when it'll be in a much better position to compete in price.

So, when will that happen? Good question. Could be that the Concord Group is right.

Tentative discussions are already underway on it, although not yet where it really counts. Which is Washington. The Democratic Leadership Council has brought up the idea and it seems to be getting some traction. But as of right now, it's still in its infancy. No legislation has been introduced.

The first-time buyer tax credit of $8,000 has been fairly successful, boosting demand for the sagging real estate market. This new idea would then make every potential buyer eligible, a move that would give the still sluggish demand side another jolt forward. That's where the big problem right now is, as strict mortgage requirements continue to stifle many would-be buyers. Prices are very affordable in many areas, like Las Vegas and across much of California, and home loan rates low, but when the approvals just don't materialize it's tough to move inventory.

As it is, the new plan recommended by the DLC would only be good for this year. If so, it would need to be pushed through congress pretty quick to have any effect. The way things stand right now this housing and mortgage mess will easily go on deep into next year and beyond, so if this kind of program is introduced it ought to run at least a year, if not longer.

The cost at the moment is figured to be $11.4 billion. That's small change compared to all the billions the taxpayer has thus far donated to Wall Street, with very limited results. This would likely give the real estate market a stronger benefit. 

The mortgage and real estate mess has drawn the keen attention of many regulators in Washington and elsewhere, as if the existing laws governing those industries were largely inadequate. It must be, is the thinking, that there were too many gray areas and too many gaping holes in them. By amending a few of them or legislating brand-new stuff will cure the present ills in no time.

That's how there now is the HVCC, or Home Valuation Code of Conduct. It is an appraisal system required by Fannie Mae and Freddie Mac on mortgages they purchase from lenders. The aim here is to keep loan originators from strong-arming appraisers into fudging the numbers for their own purposes. In other words, make them more accurate. The result of the code is that independent appraisers are now largely working for appraisal management firms from whom they get their assignments, meaning they are no longer in any direct contact with mortgage brokers and loan consultants.

Well, the first reports are in on this and they aren't all that appealing. First of all, the cost of an appraisal has gone up 15 to 30%, like from around $325 to $425. Usually the appraiser takes home about half of that, so his income is obviously whittled down. The borrower may also have to pay a no-show fee of $50 to $100 if he can't make it to the house on time. The end result is that the consumer is paying more and the appraiser is making less. And the only beneficiaries appear to be the appraisal management companies.

Was this change necessary? Perhaps not. The old system certainly had some weak areas but still functioned acceptably. It was at times abused by some mortgage brokers and also others in the business. All in all, though, it had a very small role to play in the collapse of the real estate market.

If the old regulations were enforced properly, many of the manipulations had been avoided. But they weren't. So now it seems those legislators and regulators who for the most part failed to provide oversight when it was needed are behind this change. Shifting nicely any blame from themselves to the defective laws and thus skirting responsibility. And living another day working on more regulations that aren't really necessary.  

The Obama administration came up with a new plan that is aimed at trying to breathe some more life into the morbid real estate market. It still needs quite a bit of help from wherever it can get it. This time the focus is on short sales, and why not. Anyone - real estate agents, mortgage consultants, buyers, sellers - who has been involved in one of them, has some real life horror stories to tell.

The initiative has two parts to it. One attempts to streamline the paperwork requirements for everyone, from mortgage lenders to servicers to investors to distressed homeowners. When it gets simplified, it ought to cost less to do a short sale and potentially also get it done faster. One of the major roadblocks so far has been the slow, snail-like progress of these things, to a point where well-qualified buyers with a mortgage approval in hand just give up and put an offer on some other property.

The other is financial. Washington, or the taxpayer, is paying up to $1,000 to mortgage servicers and up to $1,500 to borrowers for a closed short sale or a deed in lieu transaction. In a deed in lieu the homeowner voluntarily transfers ownership to the mortgage firm. The program will also pay up to $1,000 to a second mortgage holder if it releases the lien to allow a short sale to proceed.

This plan could be specifically beneficial to areas that have been literally mauled by dropping prices, like Las Vegas, many California and Florida counties and Phoenix. Still, it appears that the government's success projections for it are quite high. The incentives simply aren't that impressive. What it might do is give the nation a feeling that Washington is indeed on top of things and tries its best to solve problems. In short, offer a psychological boost.

The real difference will come when the banking establishment comes to realize that it just might be in their best interest to do short sales. And do them in a timely manner and based on realistic decision-making.

Washington has been super busy for months in trying to shore up the ailing financial sector, hoping to keep it from being swallowed into an abyss by the real estate market meltdown. It has used rented front loaders to distribute cash to banks weighed down by nearly-worthless mortgage paper. In addition, the Fed's key short-term lending rate has been butchered down to almost zero. All this frantic activity has given the country some sense of comfort that the dire problem is getting the attention it needs.

Perhaps that's not quite enough, though. The Federal Reserve, or Fed, just published a quarterly survey according to which 50% of banks toughened their lending criteria on prime mortgages. It's up from 45% reported in the same survey done in early February. The numbers are clearly heading in the wrong direction, despite the taxpayer's generosity and everything.

The upward mobile unemployment figure must be factoring in on the banks' decision making. Even more job losses may be coming as the year grinds on. A stellar borrower today can be off the payroll soon after closing on his brand new home loan and then what. Home price volatility is another thorn. Approving a mortgage on a property that will possibly lose another 10 to 15% of its value in, say, the next six months can get mighty risky.

It's also a good bet that many banks are actually in worse shape than they currently let everybody, including the regulators, believe. The recently-concluded stress tests seem to have been more PR than actual hard-hitting ledger analysis. Obviously, if they were getting more confident about underwriting mortgage and other loans they would screamingly do so. Preferably it's sooner rather than later when they can ease up on standards and begin lifting the important housing sector from the ashes.

There is some optimism in the dry desert air that the Las Vegas real estate market is hitting bottom. At long last. Perhaps. It's still too early, though, to go into any definitive announcements about that. The patient's vital signs do remain quite mixed, that's why.

In any case, 3,198 single-family homes were closed in April, as was reported by GLVAR, or Greater Las Vegas Association of Realtors. In the year-to-year comparison that adds up to a big leap of over 78% and on a month-to-month basis it translates into a solid 7% gain from March. These numbers warm a lot of hearts in the struggling desert valley. Downright affordable prices are drawing scores of buyers to the housing bazaar here, amply bolstered by still low-flying mortgage interest rates.

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Home values are still falling nationally. More in some areas and less in others, but they still seem to be in retreat. People who bought property in the last five years or so are in real danger of being underwater. Or upside down. That's when the balance on the underlying mortgage is higher than the home's value. Those who put nothing or very little down are most vulnerable.

Zillow.com, a prominent real estate website, just released a report on the first quarter of 2009 according to which 21.9% of all homeowners nationwide are now taking a bath. It was 17.6% in the fourth quarter, so the increase is noticeable.

In the same report Las Vegas has claimed the top spot with 67.2% of homes now underwater. That is an alarming number. Mortgage borrowers who put quite a bit of money down could still be okay, at worst perhaps 5 to 10% upside down. That should make them eligible for the latest housing rescue plan, the Making Home Affordable one, where refinance can be done up to 105% of the home's value. As long as other important criteria is also met.

But those in Southern Nevada who are severely on the negative are facing a difficult situation. The only way they can refinance is to bring a check with many zeroes at the end to close the deal. In this struggling economy and job market that might be too much of a challenge. They can keep making payments and wait until the real estate environment here improves, potentially some day erasing the underwater problem. In truth, that could be a long wait.

Many are likely tempted to walk away from their homes. That would be a drastic step, but an option nevertheless. Everyone has to weigh their current unique circumstances and future plans and go from there. The more upside down a particular borrower is, the higher the odds that he'll skip on the house.

The severe price erosion in Las Vegas has admittedly had a large impact on foreclosures and once it's arrested, one of these days, a lasting, gradual recovery can begin.

They have become one way out of an untenable jam for many homeowners who can't make their mortgage payments in this tough real estate market. In a short sale a lender will allow the homeowner to sell the property for less than what the loan balance is. It often means the matter is over and done with, once the sale is closed. At least that's what the borrower is aiming at.

Mortgage lenders can go after the now former homeowner later for the unpaid portion if they choose to, as long as the loan documents and state laws support that. Frequently they don't bother with it even if they legally could because it might turn into an expensive chase after something that possibly isn't even there.

Lately, though, mortgage firms have become more aggressive on this issue, perhaps because there are signs that the housing market is on the verge of turning around. Nowadays a short sale agreement often includes a promissory note, a written pledge to pay back a debt. It usually is buried among the paperwork, so anyone contemplating such an action ought to carefully scrutinize what they are asked to sign. 

Every mortgage lender essentially has its own policy on this. Aspects they consider is what type of assets the borrower has and his employment status. Lack of financial hardship is going to be a red flag. What if the house was an investment property? That's a factor. Another thing weighing in is the unpaid loan balance. To go after a homeowner who only owes, say, $15,000 probably isn't worth it. But if the number goes to $80,000, for instance, things quickly become much more focused.

Prices have retreated dramatically in the once high-flying areas like Las Vegas, Phoenix and several California and Florida counties and have left thousands of homeowners with vast gaps between their mortgage balance and current home value. They are severely upside down. It's predictable that short sales in these loactions are being quite closely analyzed.

Bottom line, know what you are signing when considering a short sale.

Who would have thought such a list even existed in this real estate market? Especially since the new home segment is having major trouble in moving inventory almost everywhere, including here in Southern Nevada. But it's true. Robert Charles Lesser & Co., a housing advisory firm, is behind the study that keeps track of home sales in master-planned communities nationwide and then ranks them.

Mountain's Edge claimed the high spot on the best-selling list with 879 houses sold in 2008, although overall sales there went down by 49%. It's somewhat surprising that even that many properties were closed there considering all the overbuilding Las Vegas has experienced and the turmoil in the mortgage and financial industries. Their incentives must've worked fairly well because new homes prices generally aren't competitive with the resale sector.

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