The More I Learn, The Less I know…..

As if things weren’t strange enough, the subscription service that brought you Monday Morning Coffee for the last few years ceased operations in June. Since then I have been musing as to what to do for the many subscribers that have enjoyed those weekly snippets of wisdom. A dear long time friend and client jarred me back to responsibility last week asking, “what happened to Monday Morning Coffee? Did you drop us from your list?” No. I’ve just been thinking about what to say, if anything, as a replacement.
In keeping with the turmoil surrounding us in today’s real estate market, and just about everything else in our lives:

But Noooooo…..

Last week HUD announced to it’s thousands of mortgage brokers across the country that a full 3% fee would apply to all loans, all borrowers. Well, that’s about the end of that. Thanks, Uncle Sam. Instead of the carrot we were anticipating, we get beaten with the stick. Bear in mind that the same thousands of mortgage brokers paid up to $7,000 each to become FHA certified lenders, all in anticipation of FHA loans providing the needed path out of a deep hole. Now it would appear that they flushed that $7k down the toilet. No one is going to want these loans. They are now absurdly expensive.

The More I Learn, The Less I Know.

Although I’ve been at this real estate game for over 25 years, including the down markets surrounding Desert Storm, the Dot Com Bust, and 9/11, this has to be one of the weirdest periods I’ve seen yet. Suffice it to say that I learned a lot from those down markets in terms of strategy, tenacity, and faith. What I did not learn is how badly our financial systems have been in need of repair. With each of the aforementioned downturns, band-aids were applied. Small fixes that were just enough to restore confidence in what were dilapidated systems. Have you ever used “stop leak” in a failed radiator? It might get you to the repair shop, but no further. When the band-aides have been applied to our financial systems, we thought all was well, and drove right on by the repair shop.

Folks, we’re facing a bit of a perfect storm. People want to buy houses, and people want to sell houses. The only impediment to transacting business is obtaining decent loan terms.
The one entity over which the Federal Government asserts complete control is Housing and Urban Development ["HUD"], which in turn is the administrator for Federally insure home loans ["FHA"]. Since raising the FHA loan limits to a level almost relevant to to day’s prices, in the past 6 weeks HUD has vascillated wildly as to how to charge borrowers. For weeks it was stated that the insurance premium cost would be based on risk assessment of individual borrowers. Makes sense. The driver that has 3 DUI’s pays more for auto insurance than the driver that’s never had a ticket. The borrower that has never paid their bills on time should pay more for their loan than someone that has never been late.
Next on the hotsheet of not-so-good news: FNMA and FHLC, because of their own problems, just announced that they are now going to charge lenders 0.5% for loans that they buy. It has been 0.25% since, well, forever. Of course this cost will be passed on to borrowers in the form of 1.25% origination fees instead of 1%. Or the APR will simply be higher in order to preserve the 1 point fee and still pass on the added cost. That should be a big help……..to no one. Fewer loans, less volume, slower recovery.

Why is it that lenders, when the easy money stops rolling in, assert draconian fees and costs on those that are still doing business? IndyMac Bank, the California based lender that failed last month, is a case in point. Inexplicably, IndyMac announced early this year that it is their policy, on all of the second mortgages they had made, that they would NOT allow subordination of their loans for the sake of homeowners attempting to refinance their FIRST mortgages. For those with toxic first mortgages, this left them no way out. They either had to sell, or walk away. In either case, when told by their lender that their refi was dead because IndyMac had effectively blocked the process, how long do you think it took for these borrowers to decide whether or not they would continue to send payments to IndyMac? As soon as I heard this I said, “dead bank walking”. Sure enough, it’s dead.

I keep visualizing these really bads decisions being made by a very few sweaty little men in windowless rooms. All they look at is printouts ananlyzing cash flow, and then they hit the panic button. They have no faith, and they have no vision. They’re hanging on so tight the blood doesn’t get to their brains. Who put them in charge? When busines is slow at a Seven-Eleven do they turn off the lights and beer cooler to save money. No. They cut prices to entice MORE buyers, get the volume up to compensate for lower margins, and keep prices low until things improve. If they turn off the lights and the beer cooler, they may as well lock the doors. Why don’t lenders, especially that which is run by the Feds, get it?

I suggest that we all start writing to our Federal representatives. Does yours have a clue as to what is at stake?

Not to get too political:

6 years ago, before the congrssional vote was taken on whether to attack Iraq, I wrote to Patti Murray and Maria Cantwell. While it was admittedly self serving at the time, I asserted that war [unabated ego], combined with tax cuts [shameless vote buying], could bring ruin to our financial markets. When the government starts borrowing money, it depletes the pool of cash available for everything else, and drives up interest rates. Well, here we are. Money is tight, and getting tighter. Banks are failing. People are losing their homes. All for lack of liquidity because the goverment is spending more than it takes in. And people are worried that a Democrat will raise taxes, spend more? If traditional politics are to be believed, then Bill Clinton was the best Republican President we’ve ever had.

The current goverment cash burn rate is unsustainable. It won’t matter who is in charge when the bill comes due. Tax cuts were a great idea to stimulate growth, as long as the thin ice held out. How about those recent tax rebates? Not even a blip on the radar. We can’t buy our way out of this mess. We are going to have to work harder/smarter, spend less, and pay taxes commensurate with the expenses incurred. Honestly, would the Iraq war have lasted 6 years if taxes had been increased each year to pay for it?

The More I learn, The Less I know. So teach me something.

This Is As Bad As It Gets

As reported at CNN.com,  Youngstown, OH is demolishing scores of buildings that have remained abandoned in order to convert the costs of infrastructure and maintenance into open space.

“Under the initiative, dubbed Plan 2010, city officials are also monitoring thinly-populated blocks. When only one or two occupied homes remain, the city offers incentives – up to $50,000 in grants – for those home owners to move, so that the entire area can be razed. The city will save by cutting back on services like garbage pick-ups and street lighting in deserted areas.”

I wonder how close Renton has come to this over the years. [See the entire article]

Hallelujah!

After 3+ years of refuting, critiquing and criticising the writings of The Seattle Time’s Elizabeth Rhodes on real estate matters, the Times has finally heard our pleas and replaced her with a new, actual Real Estate Editor. Meet Cindy Zetts. In her first article for the Times in yesterday’s Real Estate section, Cindy quickly demonstrates that “SHE GETS IT!” She has experienced multiple real estate transactions and has taken the time to study, and thus understand, how real estate works.

I am both thrilled, and relieved, that Ms. Rhodes has been demoted in what appears to be a lateral move with the new title of “Business Reporter”. Great! Let her torture the business sector for a few years with her uninformed, poorly researched, and otherwise confusing and misleading articles.

Unless you are in the business, my zeal for this improvement may seem over-emphasized. Allow me to explain: The time that we have spent explaining Ms. Rhodes inaccuracies and wrong-headed view of real estate over the last 3+ years to confused clients and prospects has been frustrating, to say the least. Now we can fully focus on the tasks that matter, helping people navigate the real estate buying and selling processes without fighting the rip tides caused by Ms. Rhodes.

Although it is early in the game, if the first article by Ms. Zetts is any indication, Western Washington may finally have a columnist that will help them in their quest to understand real estate.

Mortgage Mess: Light at the End of The Tunnel?

Jack Guttentag, aka “The Mortgage Professor”, provides some interesting insights into the mortgage market meltdown in his Sunday Seattle Times article “It’s Time To Expand Role of Mortgage Insurance”. Parts of his article are characteristically dry and difficult to read, but the essence of the message is there. If there is a bright spot in this deluge of not-so-good-news, it is that the mortgage insurance companies, those that impose an insurance policy on mortgage amounts in excess of 80% of property values, are doing OK. Why? Because they are insurance companies. As insurance companies, they have been required to “hold in reserve” i.e., save, a portion of the premiums that they collect in order to weather, without going broke, a housing downturn event. This means that they actually have the money to absorb the losses they are suffering through foreclosures and deflated property values. At least, so far.

Have you wondered how so many managed to get that zero down 100% no doc, no equity, no job loan with having to pay mortgage insurance premiums ["MIP"]? As an alternative, the mortgage bundling geniuses of Wall Street cooked up a risk assessment system that charged loan fees, interest rates and loan types based on risk factors.

“Oh, you don’t want to pay MIP with your loan every month? No problem. We have this little thing called an ARM with an artificially low start rate that is guaranteed to completely blow up your financial life in 2 or 3 years. But don’t worry, we’ll refinance you out of that in a year or so into a 30 year fixed rate loan you can live with. How do we do that? Simple! Your property simply has to appreciate to where it will appraise for 20% more than the inflated value that we are using today. Oh, did I say inflated? I meant enhanced. That’s what we say when we pack all of the exorbitant loan fees onto your loan amount. That way, you’re not just getting 100% financing, but about 103% financing. But don’t worry. The important thing is that you are in the market, and surely your property will continue to appreciate at 10-15% per year.”

The Mortgage Professor thinks that MIP is the way out of this mess. Once considered a nuisance to borrowers, it may now be a blessing as a means to refinance loans that exceed 80% of appraised property values and allow owners to keep their homes.

What $1 Million Buys In Homes Across The U.S. by Forbes.com

Honestly, most of the news surrounding housing has me a little depressed lately. Actually, it’s not so much the housing, but the credit debacle that has caused banks across the country to lose their collective minds as evidenced by arcane C.Y.A. policies implemented in the last week: cancelled “HELOC’s” [home equity line of credit], and second position lenders refusing to subordinate for the sake of refinancing a first [see Ken Harney's article from the Sunday Seattle Times]. So I thought it be nice to look on the lighter side of real estate this week. If you would like to see what $1,000,000 buys in other parts of the country, you will enjoy this article by Matt Woolsey at Forbes.com

More Waiting For True Jumbo Relief Required…..

Further exasperating the jumbo loan picture is the idea that Wall Street is going to segregate the new Fannie Mae and Freddie Mac loans that exceed the former conforming limits. This is going to limit the interest rate relief originally sought by the increased conforming loan limit initiative. Read this article from the Associated Press.

Lending Supply and Demand

If you were among the multitudes calling your lender last week when mortgage rates dropped, you may also have been disappointed when you finally got through. On the heels of the FED’s historic 3/4 point rate reduction mortage rates temporarily dropped to as low as 5.125%. [See the LA Times Article "Interest-rate drop spurs frenzy of refinancing calls".]

But something happened while you were on hold listening to elevator music. The calls were coming in unprecedented volume. In the past, mortgage lenders would rejoice, taking down names and requests and go about hiring new personnel to handle the volume. This time, the lenders view the volume with great caution. They will do the deals they are equipped to handle, but are unlikely to start hiring back all the people they just layed off over the last 6 months. Why? There is no long term solution/replacement to the loss of the sub-prime and/or non-conforming securties market. What this meant to the callers that didn’t get through first was the steady climb in fees and rates throughout the week. This is the lenders’ way of slowing down the flow to that which they can handle AND raising the profit margin for the deals they put together.

Right now, after 6 months of attrition and downsizing, lenders are not about to start looking for additional office space and employees. They will try to earn more per transaction. As such, shopping around is now more important than ever. The differences in rates and fees may be dizzying, but worth sorting through.

Diana’s Opinion Published in the Seattle Times

The “Letters To The Editor” section of the January 19 edition of the Seattle Times featured Diana MacDonald’s opinion regarding Elizabeth Rhode’s prior article “RealEstate Anxiety: What’s Next in ‘08?” from Dec 30, ‘07, which I also panned here under the title “Not The Sharpest Tool” (see Selling Concerns under categories, about 3 articles down from the top). Read Diana’s published opinion, the 4th one down titled “Indulge in moderation”. Rhode’s insinuation that ALL sellers are “out to get” unsuspecting buyers is an unfair characterization of the majority of sellers that just want a fair price, nothing more. 

Bank of America Acquisition of Countrywide

Bank of America agreed to purchase the remaining 84% it didn’t own for $4.1 Billion Dollars last week. Aside from a few regulatory hurdles it appears to be a done deal. The acquisition follows B of A’s August, 2007 investment of $2 Billion for stock in the company in an effort to stabilize Countrywide amidst looming foreclosures and credit woes. Hindsight points to B of A’s savvy decision in August to position itself for either (1) a significant stake in an important and very well run company for a bargain and (2) pre-position itself for the eventual buyout as occurred last week.

People that have experienced the mortgage process with both Countrywide and B of A may be few, but we have, on many occasions, witnessed first hand the ineptitude’s of B of A’s mortgage underwriting processes vs. Countrywide’s streamlined processing of loans on behalf of our clients. It seems that B of A rarely grasped the importance of transparency when it came to mortgages.

Borrowers, and their respective real estate agents, do not appreciate being put upon to provide pay stubs twice because the first copies were lost, or to produce the last 3 years income tax returns 5 days prior to closing on their new home. These are the types of hiccups we have commonly encountered when folks go to B of A for a residential mortgage. When we have warned clients about such pitfalls we have commonly heard the lamenting after the fact: “we wish we had listened to you. It was a mess……”

Countrywide “gets it”. They have long understood that it is not their place to add stress to what is already a stressful process, that of buying or refinancing a home. They are quite proficient at achieving the transparency that real estate agents need to effectively manage the many other issues faced by their clients in form of negotiations, contracts, contingencies, inspections, repairs, packing, school registrations, moving, job changes, etc. When a loan rep is calling every few days for another piece of paper because they didn’t know to ask for it when the client applied, it jacks up stress level, and as Countrywide has prov-en over the years, it is unnecessary in a well organized and well run entity.

In my opinion this is a good thing. Partnering the muscle of the nation’s largest bank with one of the pre-eminent mortgage processing and servicing companies should be a benefit to consumers, while at the same time bring a sense of relief to the mortgage and credit industries. But we must hope that B of A won’t mismanage Countrywide into the dysfunctional bureaucracy that is it’s own mortgage department.

Related Stories: Associated Press   Wall Street Journal Blog  Bloomberg News

Not The Sharpest Tool….

Did you see the Sunday Seattle Times front page article by Elizabeth Rhodes? This condo owner, Paul Kelly, that is crying the blues over his inability to unload his $639,900 condo is NOT typical, as Ms. Rhodes would lead Times readers to believe. His situation is an anomaly, due almost entirely to his own folly, not the current real estate market trends. Follow along as I provide the facts that Ms. Rhodes conveniently omitted:

1. The Worst Part: Contrary to the article’s implication that Paul Kelly purchased his condo in 2004, he actually purchased it 0n April 20……..2007! for the extraordinarily inflated price of $604,000, from a private party. Apparently, no agents were involved in the sale, as I am unable to find a listing relative to his purchase, just the King County Tax Record.

2. Overpaid: Check out this Competitive Market Analysis for city view 1 bed/1 bath condos in the South Lake Union Area dating back to March 1, 2007. The average sold price per square foot is $644. Paul Kelly paid $799/foot.

3. Dumb, then Dumber: First he pays too much, then he asks too much. Oh, WHAT A TERRIBLE MARKET!! His problems have nothing to do with the market. If he paid 24% above the going rate to start with, what makes him think that he can tack on another $55,000 4 months later, taking the value to $871/foot, a 35% boost above what he paid? Yea, I feel terrible for the guy. There just has to be a bigger sucker than him around……isn’t there? Not likely.

4. Accountability: It is unfortunate, but Paul Kelly is the source of his own misery. How Elizabeth Rhodes manages to turn his situation into something that even remotely reflects  current regional real estate market conditions can be attributed to one simple fact: by Ms. Rhodes own admission to me via personal email, “I am a reporter, not a real estate agent.” Nuff said.

5. The Damage: There are many sellers in our market that would like to sell their homes for a fair price. It is the minority that may still be out to gouge someone (call Paul Kelly). It is true that sellers are still adjusting to the changes in the market i.e., learning to price more competitively, improve conditions, stage properly, etc. It is a shame that such brazenly careless reporting likely adds to the hesitancy many buyers are feeling today.