Housing Still Hasn’t Hit Bottom

Posted in American Economy, Buying a Home, Foreclosures and Loan Modifications, Real Estate Prices on May 19, 2011 by David Griffith

BREAKOUT By Jeff Macke May 19, 2011

Housing bulls have wanted to get bullish ever since the bubble popped in 2008. They better grab a chair because it’s going to be a while, according to Richard Suttmeier. The chief market strategist of ValuEngine.com says home prices simply aren’t going to bottom no matter what the government or banks may do to push them higher.

Suttmeier, whose firm uses a blend of technical and fundamental analysis to drive its investment recommendations, offers some discouraging data for contrarian housing bulls. Housing prices haven’t just been “correcting” in the context of a recovery, observes Suttmeier. Housing actually never recovered in the first place. The economic truth of supply and demand is in play; during the bubble years we simply built way too many houses, and the glut isn’t going to be worked off anytime soon.

None of which is particularly new information for those paying attention to Federal Housing Finance Agency data or watching the S&P/ Case-Shiller Home Price Index approach the 2009 lows. What is of note are the investment conclusions Suttmeier reaches based on this and other observations. He says the bad mortgage problem still exists for regional banks in particular and that foreclosure rates would be much higher were it not for the fact that it’s often less expensive to allow people to stay in a home than it is to evict. After the federal bailout the regional banks are, in many cases, left holding the housing bag, stuck with massive inventory of homes that need to be sold off to a market with no demand.

By extension Suttmeier says companies such as Caterpillar (CAT), which has been on a torrid run of late, are poised for a fall. When my partner Matt Nesto observes that an enormous percentage of CAT’s revenues come from foreign sources, Suttmeier says emerging markets are following close behind the U.S. in the creation of a capacity glut. This echoes the observations of Vitaliy Katsenelson, who last week asserted that the Chinese government has resorted to building massive and unoccupied “ghost towns” in order to keep up the appearance of growth.

Suttmeier is also in the Breakout camp in keeping an eye on the recent drop in copper. He says the leading economic indicating metal dropped below its 200-day moving average on May 11 for the first time since July 2010. This is a warning, according to Suttmeier, that the global recovery is sputtering.

Before dismissing Suttmeier as a perma-bear, please note that he’s a truly agnostic strategist, simply following the lead of his proprietary screening methodology, which follows 5,500 stocks. When the fundamentals flash a warning sign, he plugs in the technical and other observations to arrive at his conclusions. This system has proven prescient in the past for Suttmeier’s clients, who were warned about bank stocks in 2007. This was early enough to be actionable, which is distinct from the countless number of bears who “saw the housing market bubble coming” well before such an observation made, or saved, them money.

How to Achieve Corporate Success in China

Posted in Doing Business in California with tags , , , , , on May 13, 2011 by David Griffith

[tweetmeme]

Multinational corporations now look toward China with a mixture of trepidation and anticipation. The remarkable speed and scope of Chinese economic growth is changing the global distribution of power and resources, possibly to the detriment of the major industrial powers. But this same transformation presents tremendous opportunities for companies who understand China well enough to leverage both its accomplishments and its deep-seated problems for corporate benefit.

In straightforward language, with numerous examples to back up his argument, Lieberthal cogently presents not only how to benefit from doing business in China, but also how to avoid the serious risks that the endeavor entails. The implications that Lieberthal lays out for corporate strategy are wide-ranging and critically important.

“This is a book to read before one begins work in China and to come back to once there. With its comprehensive analysis of challenges and insightful recommended responses, it efficiently points executives in the right direction and helps them avoid the errors that others have made. It has the potential to give any executive a flying start to executing their China strategy.”

Purchase “Managing the China Challenge“.

The Next ‘Shoe to Fall’ for California Housing

Posted in Buying a Home, Doing Business in California, Mortgage Rates, Real Estate Prices on May 12, 2011 by David Griffith

Federal Retreat on Bigger Loans Rattles Housing

DAVID STREITFELD, On Wednesday May 11, 2011, 1:40 am EDT

MONTEREY, Calif. — By summer’s end, buyers and sellers in some of the country’s most upscale housing markets are slated to lose one their biggest benefactors: the deep pockets of the federal government. In this seaside community of pricey homes, the dread of yet another housing shock is already spreading.

“We’re looking at more price drops, more foreclosures,” said Rick Del Pozzo, a loan broker. “This snowball that’s been rolling downhill is going to pick up some speed.”

For the last three years, federal agencies have backed new mortgages as large as $729,750 in desirable neighborhoods in high-cost states like California, New York, New Jersey, Connecticut and Massachusetts. Without the government covering the risk of default, many lenders would have refused to make the loans. With the economy in free fall, Congress broadened its traditionally generous support of housing to a substantial degree.

But now Democrats and Republicans agree that the taxpayer should no longer be responsible for homes valued well above the national average, and are about to turn a top slice of the housing market into a testing ground for whether the private mortgage market can once again go it alone. The result, analysts say, will be higher-cost loans and fewer potential buyers for more expensive homes.

Michael S. Barr, a former assistant Treasury secretary, said the federal government’s retrenchment would be painful for many communities. “There’s always going to be a line, and for the person just over it it’s always going to be an arbitrary line,” said Mr. Barr, who teaches at the University of Michigan Law School. “But there is no entitlement to living in a home that costs $750,000.”

As the housing market braces for more trouble, homeowners everywhere have been reduced to hoping things will someday stop getting worse. In some areas, foreclosures are the only thing selling. New home construction is nearly nonexistent. And CoreLogic, a data company, said Tuesday that house prices fell 7.5 percent over the last year.

The federal government last year backed nine out of 10 new mortgages nationwide, and losses from soured loans are still mounting. Fannie Mae, which buys mortgages from lenders and packages them for investors, said last week it needed an additional $6.2 billion in aid, bringing the cost of its rescue to nearly $100 billion.

Getting the government out of the mortgage business, however, is proving much more difficult than doling out new benefits. As regulators prepare to drop the level at which they will guarantee loans — here in Monterey County, the level will drop by a third to $483,000 — buyers and sellers are wondering why they should be punished simply for living in an expensive region.

Sellers worry that the pool of potential buyers will shrink. “I’m glad to see they’re trying to rein in Fannie Mae, but I think I’m being disproportionately penalized,” said Rayn Random, who is trying to sell her house in the hills for $849,000 so she can move to Florida.

Buyers might face less competition in the fall but are likely to see more demands from lenders, including higher credit scores and larger down payments. Steve McNally, a hotel manager from Vancouver, said he had only about 20 percent to put down on a new home in Monterey County.

If a bigger deposit were required, Mr. McNally said, “I’d wait and rent.”

Even those who bought ahead of the changes, scheduled to take effect Sept. 30, worry about the effect on values. Greg Peterson recently purchased a house in Monterey for $700,000. “That doesn’t get you a palace,” said Mr. Peterson, a flight attendant.

He qualified for government insurance, which meant he needed only a small down payment. If that option is not available in the future, he said, “home prices all around me will plummet.”

The National Association of Realtors, 8,000 of whom have gathered in Washington this week for their midyear legislative meeting, is making an extension of the loan guarantees a top lobbying priority.

“Reducing the limits will put more downward pressure on prices,” said the N.A.R. president, Ron Phipps. “I just don’t think it makes a lot of sense.” But he said that in contrast to last year, when a one-year extension of the higher limits sailed through Congress, “there’s more resistance.”

Federal regulators acknowledge that mortgages will get more expensive in upscale neighborhoods but say the effect of the smaller guarantees on the overall housing market will be muted.

A Federal Housing Administration spokeswoman declined to comment but pointed to the Obama administration’s position paper on reforming the housing market. “Larger loans for more expensive homes will once again be funded only through the private market,” it declares.

Brokers and agents here in Monterey said terms were much tougher for nonguaranteed loans since lenders were so wary. Borrowers are required to come up with down payments of 30 percent or more while showing greater assets, higher credit ratings and lower debt-to-income ratios.

In the Federal Reserve’s quarterly survey of lenders, released last week, only two of the 53 banks said their credit standards for prime residential mortgages had eased. Another two said they had tightened. The other 49 said their standards were the same — tough.

The Mortgage Bankers Association has opposed letting the limits drop, although a spokesman said its members were studying the issue.

“I don’t want to sugarcoat this,” said Mr. Barr, the former Treasury official. “The housing finance system of the future will be one in which borrowers pay more.”

The loan limits were $417,000 everywhere in the country before the economy swooned in 2008. The new limits will be determined by various formulas, including the median price in the county, but will not fall back to their precrisis levels. In many affected counties, the loan limit will fall about 15 percent, to $625,500.

Monterey County, however, will see a much greater drop. The county is really two housing markets: the farming city of Salinas and the more affluent Monterey and Carmel.

Real estate records show that 462 loans were made in Monterey County between the current limit and the new ceiling since the beginning of 2009, according to the research firm DataQuick. That was only about 1 percent of the loans made in the county. But it was a much higher percentage for Monterey and Carmel — about a quarter of their sales.

Heidi Daunt, with Treehouse Mortgage, said loans too large for a government guarantee currently carried interest rates of at least 6 percent, more than a point higher than government-backed loans.

“That can definitely blow a lot of people out of the water,” Ms. Daunt said.

Can’t Get a Mortgage Loan – Part II

Posted in American Economy, Buying a Home with tags , , , , , , , on April 19, 2011 by David Griffith

Fed unveils proposal on mortgage standards

REUTERS/George Frey

On Tuesday April 19, 2011

By Dave Clarke

WASHINGTON (Reuters) – Lenders would be required to make sure prospective borrowers have the ability to repay their mortgages before giving them a loan, under a proposal released by the Federal Reserve on Tuesday.

The rule, which is required by the Dodd-Frank financial reform law, is intended to tighten lending standards and combat home lending abuses that contributed to the 2007-2009 financial crisis.

The rule would establish minimum underwriting standards for most mortgages and lenders could be sued by the borrower if they do not take the proper steps to check a borrowers ability to repay the loan.

The law does provide protections from this type of liability if a loan meets the specific standards that are part of a “qualified mortgage.”

In its proposal, the Fed is seeking comment on two possible ways of defining a qualified mortgage.

Under the first scenario the loan could not include interest-only payments, a balloon payment and regular payments could not result in the principle of the loan increasing.

Under the alternative, the loan would have to meet all the standards laid out under the first option and meet additional requirements such as having the lender verify a borrower’s employment status and debt obligations.

The proposal lays out a general standard for complying with the rule, including verifying a borrowers income, their employment and the amount of debt they have.

Mortgage originators who serve rural and underserved areas would be allowed to give out loans with balloon payments.

“This option is meant to preserve access to credit for consumers located in rural or underserved areas where creditors may originate balloon loans to hedge against interest rate risk for loans held in portfolio,” the Fed said in a statement.

The Fed is seeking comments on the proposal through July 22.

The final rule will be implemented by the Consumer Financial Protection Bureau, which opens its doors on July 21.

Can’t Get a Mortgage Loan – Join the Party!

Posted in American Economy, Buying a Home, Mortgage Rates, Real Estate Prices on April 6, 2011 by David Griffith

David Griffith’s Note: Another unintended consequence of our financial crisis, which we can blame on the failure of government watchdogs and Wall Street greed, is that the pendulum has now swung back too far in the other direction, from easy credit to non-existent credit, and home buyers can’t get a loan, even with great credit and substantial cash in the bank.

Les Christie, April 6, 2011

Yep, mortgage interest rates are low, but there’s a catch: It doesn’t matter how cheap rates are if you can’t get a loan.

And these days, only highly qualified borrowers can get financing — let alone the best rates.

Nearly a quarter of people who apply for loans are turned down, according to the Federal Reserve.

“Good borrowers with one or two blemishes on their credit are being denied credit,” said Lawrence Yun, chief economist for the National Association of Realtors.

The denial rates tell only half the story. Many potential buyers aren’t even applying for loans because they assume they can’t get one.

“A lot of people know it’s very difficult to get a mortgage and they’re not even trying,” said Alan Rosenbaum, CEO of GuardHill Financial, a New York-based mortgage broker.

That shows up in credit scores for loans financed with backing from Fannie Mae and Freddie Mac. The average credit score has risen to 760 from 720 a few years ago. For FHA loans, the average score has gone to 700 from 660. Loans made to borrowers with sub-620 scores are almost nonexistent.

Another factor keeping people out of the mortgage market is that lenders now require much more up-front cash. The median down payment for purchase is about 15%. During the housing boom, it approached zero.

On most loans, banks want 20% down. On $200,000 purchases, that’s $40,000, an insurmountable obstacle for many young house hunters. Or, in New York City, where the median home price is $800,000, buyers need $160,000 up front.

Industry insiders say all these factors have reduced the pool of buyers, lowering demand for homes and hurting prices.

“We feel it really reduces the demand for houses,” said Mike D’Alonzo, president of the National Association of Mortgage Brokers. “It’s an unbelievable buyer’s market, but there hasn’t been as much activity as you would expect because not as many people qualify for loans.”

Jerry Howard, CEO of the National Association of Home Builders said, “You only have to look at the recent sales reports to see what the impact of the credit crunch has had. The statistics speak for themselves.”

Sales of existing homes in February, despite very affordable prices, were 30% off their peak, and home prices fell for the sixth consecutive month in January.

Anthony Sanders, director of Real Estate Entrepreneurship at George Mason University, speculates the tougher credit standards may have stripped as much as 30% of the buyers off the market, compared with normal times.

And it’s about to get harder for buyers. Federal regulators proposed rules last week that are designed to discourage risky lending but that will also likely further restrict lending.

Banks would be required to keep 5% of some loans, specifically those with less than 20% down payments, on their books rather than selling them all off as securities. As a result, banks make be unlikely to issue loans where less than 20% is put down. So much for first-time buyers.

“We think the new rules are appalling,” said the NAHB’s Howard. “Only the wealthy will be able to buy homes at low interest cost.”

It could also further erode consumer demand for homes.

“It’s disturbing,” said Lennox Scott, head of John LA. Scott Real estate in the Pacific Northwest. “We’re just starting to feel healthier in inventory levels and prices and this is a potential headwind.”

The immediate impact, should the new regulations get adopted, should be minor, according to Steve O’Connor, spokesman for the Mortgage Bankers Association. That’s because Fannie, Freddie and FHA loans are all exempt from the requirements and they represent more than 90% of the market right now.

The government, however, wants to reduce the presence of all three agencies in favor of private lenders, and banking experts fears the long-term impact of abandoning the field to mostly private companies.

“For the first time in 100 years,” said Howard, “the government is discouraging you. It’s saying ‘We intend to make it more difficult for you and your kids to buy homes.'”

Housing – Time to Buy?

Posted in American Economy, Buying a Home, Real Estate Prices with tags , , , , , , , on March 31, 2011 by David Griffith

What It Will Take to Fix the Housing Market

Rick Newman, On Wednesday March 30, 2011

If you’re a squeamish homeowner, you probably can’t bear to follow the housing news anymore. Home prices have fallen by more than 30 percent over the last five years, yet the pain still isn’t over: After a respite when it looked like the bust was ending, price declines have been accelerating once again. Sales are abysmal, despite the lowest interest rates in a generation. The inventory of foreclosures and other fire-sale homes is going up, not down, which will put further downward pressure on prices for much of 2011. Housing usually rebounds after a recession, giving the recovery legs. But the housing market is so bad that some analysts worry it could drag the whole economy back down into a dreaded double-dip recession.

Economists have continually misread the housing market over the last five years, as it metastasized from a modest correction into a once-a-century debacle. Part of the problem now is the uncertainty caused by rising gas prices, which tend to unnerve consumers far more than the added cost warrants, and the nationwide slowdown in foreclosures due to legal questions over fishy bank practices. There’s also a lot of disquiet over unrest in the Middle East, ongoing sovereign debt problems in Europe, and Washington’s own mushrooming debt problems. It doesn’t help that there’s talk of ending some housing subsidies, making it harder to qualify for a 30-year mortgage and even slashing the mortgage-interest deduction that makes homeownership cheaper for millions of middle-class families.

Still, the recovery has absorbed a couple of global shocks, and apparently continues apace. The job market is improving, shoppers are more willing to spend, and corporate profits remain strong. Those are all preconditions for a housing rebound, which is inevitable as long as the nation’s population continues to expand and the economy keeps growing. The only question–and it’s a big one–is when. Here are six missing pieces that still need to fall into place for a housing rebound to take root:

More job gains. The employment picture has been improving for over a year, with the economy adding nearly 1.3 million jobs since the low point in February 2010. That’s a start, but the pace of job growth needs to be about twice that to generate a self-sustaining recovery in which consumers spend more because they’re confident about their jobs, and companies hire more because they need the extra workers to meet growing demand. And we’re not quite at that point yet. While private-sector firms have been hiring, state and local governments have been slashing jobs, slowing overall job gains. That’s likely to continue. And the twin shocks of Middle East unrest and the damage from the Japanese earthquake have added fresh doubts about the sustainability of a global recovery. So it will still take a major ramp-up in private hiring to make the recovery look lasting.

The unemployment rate has been a key indicator of the economy’s health, but even that has become a bit suspect. Since last November, the unemployment rate has dropped sharply, from 9.8 percent to 8.9 percent. That seemingly reflects a dramatic improvement in the job market. But that has happened as the number of people looking for jobs has fallen, too. So in effect, America’s labor force is shrinking at a time when it ought to be growing. Meanwhile, the economy is still down about 7 million jobs from peak levels before the recession, which has hollowed out the pool of potential home buyers. Some of those people need to get back to work before the demand for housing improves.

Outlook: Moody’s Analytics predicts that the pace of job creation by the end of 2011 will be at least 2.5 million new jobs per year, more than twice the current rate. If that holds, it will boost confidence and bring many needed home buyers back into the market.

Fewer foreclosures. It’s impossible to hold the line on retail prices when distressed merchandise keeps hitting the market, and that’s been the problem with an endless stream of foreclosures in hard-hit states like California, Nevada, Arizona, Utah, Michigan, Georgia, Mississippi, and Florida. As foreclosed homes get repossessed and resold, they drag down the prices of most other homes, which perpetuates the vicious cycle of holdout sellers who can’t afford to take a loss and reluctant buyers who don’t want to commit to purchase until they’re sure prices are nearly done falling.

Outlook: The number of delinquent mortgages has been declining, which means foreclosure rates should slow, as long as the job market continues to improve and the economy doesn’t slide back into recession. But there’s an enormous inventory of foreclosed or soon-to-be-foreclosed homes that will depress prices in many markets for months or years. The good news is that 15 to 20 states, mostly in the Northeast and Midwest, have modest foreclosure rates and are better-poised for a housing recovery. It will also help once the state regulators who are dickering with banks over “robosigners” and other fishy foreclosure practices reach some kind of global settlement that will allow normal foreclosures to proceed. News reports suggest a settlement could come within weeks, which would ease delays that have dragged out the whole foreclosure fiasco.

A stable homeownership rate. Until the last decade, the homeownership rate was mostly steady at around 64 percent. Then it rose to a peak of 69 percent in 2004, which was obviously too high. As people who can’t afford homes sell or default, the homeownership rate has been drifting back down, and it’s now around 67 percent. It probably needs to fall back to the historical average of 64 percent or so for the housing market to return to normal.

Outlook: At the current pace, homeownership rates could hit 64 percent again in 2012 or 2013, but there’s a risk they’ll overshoot and go lower than that–which would stretch the huge gap that already exists between the supply of homes and demand. The good news is that housing affordability is the best it’s been in more than 40 years, and banks are starting to ease up on loans, which could lure buyers back sooner.

Clarity from Washington. Buying a home is a complicated ordeal to start with, and now, home buyers also need to worry about battles in Washington over tax policy, housing subsidies, and the entire future of housing finance. Some budget hawks want to reduce the mortgage-interest deduction, to help cut Washington’s huge deficits, which would probably affect purchases of more expensive homes the most. Other proposed changes could effectively require higher down payments and shorter-term mortgages, which would shrink the pool of eligible buyers. And something needs to be done about Fannie Mae and Freddie Mac, the wrecked housing agencies that are now completely run by Washington, at a huge loss to taxpayers. But if changes are too abrupt, it could cause another ruinous pullback in housing.

Outlook: For all the intense talk in Washington, the biggest issues, such as what to do about Fannie and Freddie, probably won’t be addressed until after the 2012 presidential election. And if there ever is a cut in the mortgage-interest deduction, it will probably be phased in slowly, to minimize voter revolt. The biggest risk for buyers today isn’t an abrupt change in housing policy. It’s not leaving enough margin for error in case there’s an unexpected pullback in the future. That’s one more reason to make conservative decisions and leave a lot of cushion in case something goes wrong.

Rising rents. Fewer homeowners means there are more renters, which drive the demand for apartments up, along with rents. That’s a hardship for renters, since it cuts into their disposable income. But it also gives them a good reason to consider buying. With the affordability of homes at record levels, that should eventually turn some renters into buyers, raising demand for homes and helping stabilize prices.

Outlook: Rents have already started going up, and research firm REIS predicts a healthy 3.4 percent rise in rents, on average, in 2011. In a few cities, rents could rise by nearly 10 percent. And in most cities, rents will outpace inflation and wage growth. That won’t turn renters into buyers overnight, since loans are still hard to get and a lot of people can’t come up with money for a down payment. But it will help restore the normal equilibrium between the rental and purchase markets, and increasingly motivate renters to look into buying.

Some courageous buyers. The conventional wisdom at the moment is that the housing bust still has a ways to go, which means it would be foolish to buy until it’s clear that prices have stopped falling. But smart money rarely follows conventional wisdom, and there are good reasons to buy, even now. Getting a good deal on a home is a function of two things: price and interest rates. Prices may fall a bit further, but it’s very likely that interest rates will go up over the next several months, as the global recovery picks up steam and investors begin to anticipate the end of the Federal Reserve’s super-stimulative policies. So in terms of mortgage rates at least, the bottom may be now.

Outlook. “Housing markets across the country are increasingly a good buy,” economist Mark Zandi of Moody’s Analytics said in a recent conference call. “They’re undervalued.” In fact, he predicts that the best buys may be in the most distressed areas, where prices have fallen the most. It might take guts to act on that, and muster a down payment while other buyers are still on the sidelines. But sooner or later, predictions of a housing recovery will turn out to be right.

Life Without Fannie or Freddie

Posted in Buying a Home, Mortgage Rates on March 6, 2011 by David Griffith

Without Loan Giants, 30-Year Mortgage May Fade Away

NEW YORK TIMES

by Binyamin Appelbaum  Friday, March 4, 2011

How might home buying change if the federal government shuts down the housing finance giants Fannie Mae and Freddie Mac?

The 30-year fixed-rate mortgage loan, the steady favorite of American borrowers since the 1950s, could become a luxury product, housing experts on both sides of the political aisle say.

Interest rates would rise for most borrowers, but urban and rural residents could see sharper increases than the coveted customers in the suburbs.

Lenders could charge fees for popular features now taken for granted, like the ability to “lock in” an interest rate weeks or months before taking out a loan.

Life without Fannie and Freddie is the rare goal shared by the Obama administration and House Republicans, although it will not happen soon. Congress must agree on a plan, which could take years, and then the market must be weaned slowly from dependence on the companies and the financial backing they provide.

The reasons by now are well understood. Fannie and Freddie, created to increase the availability of mortgage loans, misused the government’s support to enrich shareholders and executives by backing millions of shoddy loans. Taxpayers so far have spent more than $135 billion on the cleanup.

The much more divisive question is whether the government should preserve the benefits that the companies provide to middle-class borrowers, including lower interest rates, lenient terms and the ability to get a mortgage even when banks are not making other kinds of loans.

Douglas J. Elliott, a financial policy fellow at the Brookings Institution, said Congress was being forced for the first time in decades to grapple with the cost of subsidizing middle-class mortgages. The collapse of Fannie and Freddie took with it the pretense that the government could do so at no risk to taxpayers, he said.

“The politicians would like something that provides a deep and wide subsidy for housing that doesn’t show up on the budget as costing anything. That’s what we had” with Fannie and Freddie, Mr. Elliott said. “But going forward there is going to be more honest accounting.”

Some Republicans and Democrats say the price is too high. They want the government to pull back, letting the market dictate price, terms and availability.

“A purely private mortgage finance market is a very serious and very achievable goal,” Representative Scott Garrett, the New Jersey Republican who oversees the subcommittee that oversees Fannie and Freddie, said at a hearing this week. “No one serious in this debate believes our housing market will return to the 1930s.”

Still, powerful interests in both parties want the government instead to construct a system that would preserve many of the same benefits, with changes intended to minimize the risk of future bailouts. They say the recent crisis showed that the market could not stand on its own.

“The kind of backstop that we have now, if it didn’t exist, we would have had a much more severe recession and a much sharper fall in home values,” said Michael D. Berman, chairman of the Mortgage Bankers Association, which represents the lending industry.

Hanging in the balance are the basic features of a mortgage loan: the interest rate and repayment period.

Fannie and Freddie allow people to borrow at lower rates because investors are so eager to pump money into the two companies that they accept relatively modest returns. The key to that success is the guarantee that investors will be repaid even if borrowers default — a promise ultimately backed by taxpayers.

A long line of studies has found that the benefit to borrowers is relatively modest, less than one percentage point. But that was before the flood. Fannie, Freddie and other federal programs now support roughly 90 percent of new mortgage loans because lenders cannot raise money for mortgages that do not carry government guarantees.

One prominent investor, William H. Gross, the co-head of Pimco, the major bond investment firm, has estimated that he would demand a premium of three percentage points to buy such loans — a cost that would be passed on to the borrower.

Proponents of a private market want the government gradually to withdraw its support, allowing investors to regain confidence. They argue that interest rates would eventually settle into roughly the same patterns that held before the financial crisis.

Some supporters of government backing also like the idea, believing that it will demonstrate the need for a backstop.

“I myself am eager to see whether there needs to be a guarantee,” said Representative Barney Frank of Massachusetts, a crucial Democratic voice on housing issues.

Fannie and Freddie also make ownership more affordable by allowing borrowers to repay loans with fixed-interest rates over an unusually long period. A person who borrows $100,000 at 6 percent interest will pay $600 each month for 30 years, compared to $716 each month for 20 years.

The 30-year loan first became broadly available by an act of Congress in 1954 and, from then until now, the vast majority of such loans have been issued only with government support. Most investors are simply not willing to make such a long-term bet. They prefer loans with adjustable rates.

Alex J. Pollock, a former chief executive of the Federal Home Loan Bank of Chicago, said such loans would remain available in the absence of a federal guarantee, but they might be harder to find. And lenders might demand a larger down payment. Or a better credit score.

That would be a very good thing, said Mr. Pollock, now a fellow at the American Enterprise Institute.

Longer terms make ownership affordable only by increasing the total cost of the loan, because the borrower pays interest for a longer period. Moreover, Mr. Pollock noted that over the last several years, borrowers with adjustable-rate loans paid less as interest rates fell, while those with fixed rates kept paying the same amount for devalued homes.

“One of the reasons that American housing finance is in such bad shape right now is the 30-year mortgage,” he said, noting that such loans are not available in most countries. “For many people, it’s not at all clear that that’s the best product.”

Fannie and Freddie also allow a wide swath of the American public to borrow money at the same interest rates and on the same terms. Borrowers who did not meet their standards were forced to pay higher interest rates to subprime lenders, but the companies essentially persuaded investors to treat a vast number American families as if they were interchangeable.

They took messy bunches of loans, with risks as variable as snowflakes, and created securities of uniform quality, easy to buy and sell. The result was one of the most popular investment products ever created.

And in its absence, experts on housing finance say that fewer borrowers would qualify for the best interest rates.

Susan M. Wachter, a real estate professor at the University of Pennsylvania, said a new government guarantee was needed to preserve a homogenous market.

“There needs to be a systematic way of preventing” fragmentation, said Professor Wachter. “That’s what we need a bulwark against. Because if there isn’t, it will occur.”

The government seems least likely to maintain a final set of benefits — leniencies in loan terms that taxpayers effectively have subsidized for borrowers.

Fannie and Freddie slashed the requirements for down payments in recent years, saying that they were helping people with minimal savings become homeowners. Two-thirds of the borrowers whose loans were guaranteed by the companies from 1997 to 2005 made a down payment of less than 10 percent. But borrowers who invest less default more often. The Obama administration has said that it wants the companies to demand a minimum down payment of 10 percent.

A quirkier example is the ability to “lock in” an interest rate. Fannie and Freddie permitted lenders to make such promises at no risk because the companies had already obtained commitments from investors. In the companies’ absence, borrowers seeking rate locks may need to pay for them.

How Global Events Affect Your Ability to Buy a Home

Posted in American Economy, Buying a Home, Doing Business in California, Mortgage Rates, Real Estate Prices on March 4, 2011 by David Griffith

Today we live in a global economy, an interconnected world where goods and capital move freely at lightning speed across countries. The widely accepted view is that globalization not only benefits all countries across the world but lends itself towards the betterment of the economy as a whole.

As we have seen, globalization can also have a negative impact with a domino effect in times of turmoil and unrest. This impact affects the financial markets both in the U.S. and abroad.

Flight to Safety When there is political unrest, which was sparked recently in Egypt and has spread like wildfire throughout the Middle East, global investors get nervous. Often they shed their risky assets like Stocks and flee to the safe haven of the U.S. Dollar and U.S. Bond market.

This geopolitical unrest can create a buying binge, which helps Bond prices improve. And when Bond prices improve, so do home loan rates. However, there are growing concerns that trump the disturbing news coming from the Middle East, which will be the guiding force of home loan rates in the times ahead. What might that be?

Inflation, Inflation, Inflation Inflation is the arch enemy of Bonds and home loan rates, even if inflation is across the pond. The increase in global unrest, not just in Egypt but in other parts of the world as well, is mostly attributed to economic factors – primarily runaway inflation in commodities and food.

The People’s Bank of China has raised interest rates a couple of times, most recently by 0.25% in an effort to head off a continued rise in consumer prices in China. The culprits? Soaring food prices and higher raw material costs lead the pack.

China has also tightened lending standards by requiring banks to raise their capital reserve requirements. In their latest reporting, China’s inflation rose by 4.9% year over year. This was lower than their expectations, however it still marked their highest reading in a couple of years. China may have to tighten their belt some more.

Brazil is appearing on the scene with the hottest rates of inflation in six years. They are attributing this to a rise in food costs and increased bus fares. It is anticipated the Central Bank will raise the benchmark interest rate in March for a second straight time in an effort to contain the spike in inflation.

The British are grappling with inflation as well. Their year over year reading struck a hot 4%, which is twice the rate of the Central Bank’s target. The UK has yet to address this with rate hikes because their economy is in such bad shape that any hike would make matters worse.

Inflation is beginning to become a problem in Europe where it has risen to 2.4%. This is super hot and well above the European Central Bank‘s (ECB) comfort zone of beneath 2%.

With an inflation problem in Europe, the ECB will eventually have to raise rates to fight it. When they do, the Euro will strengthen against the dollar, making European Bonds relatively more attractive than U.S. BondsThis attraction will likely put a damper on U.S. Bond purchases, and could also cause home loan rates to rise.

Many of these countries within Europe have a high number of union workers. They could very well demand pay increases to offset the higher cost of living resulting from inflation. This would exacerbate matters.

As we see signs of inflation around the world, the U.S. isn’t immune. With the second round of Quantitative Easing, known as QE2, the Federal Reserve’s stated goal is to boost Stock prices, create inflation, and lower the unemployment rate. These are all unfriendly to Bonds and could also cause home loan rates to move higher. As the old trading saying goes, “Don’t Fight the Fed.” It’s a bit like the Golden Rule, “He with the gold, rules.” If the Fed wants to accomplish these goals at the expense of Bonds, they probably will.

Some Good News Despite inflation rising around the world, the global economy will continue to recover and growth will continue to expand. Consumer confidence has picked up, hitting the highest level since February 2008. With continued confidence as the economy picks up speed, housing may begin to show signs of improvement as well.

 

 

Hedge Funds Get Closer Scrutiny

Posted in Regulation of US Capital Markets, US Stock Markets on February 17, 2011 by David Griffith

NEW YORK TIMES   JESSE EISINGER, Wednesday February 16, 2011

Now for a bit of good news: Rationality may be breaking out in the hedge fund world.

Investors are punishing funds that have engaged in questionable behavior and balking at ever-escalating fees. Regulators are showing uncharacteristic backbone, insisting that they will not merely fight the last war when it comes to new rules.

That’s a big change from the old way of doing business in hedge fund land, which was to reward failure and ignore problems.

Think back to Long-Term Capital Management. The multibillion-dollar hedge fund imploded spectacularly in 1998, presaging much of the larger financial crisis a decade later. The fund’s implosion was caused by excessive leverage and gigantic derivatives positions.

The Federal Reserve Bank of New York engineered a Wall Street bailout and, in the immediate aftermath, regulators and investors professed a desire for change. Yet John W. Meriwether, the impresario who had blown up L.T.C.M., soon gathered billions in new assets – only to blow up again. Regulators watched passively as hedge funds grew meteorically without close monitoring.

Now after the financial collapse of 2007-8, changes are dribbling in. It’s all the more surprising since hedge funds were not a cause of the crisis. Banks, especially Wall Street firms, get the credit for that. Plenty of hedge funds went out of business, but almost none of them were systemically important enough to stoke fears of a wider panic.

Nevertheless, the changes are welcome.

One hopeful sign is that institutions like pension funds and foundations are pulling money from hedge funds that acted cavalierly during and after the crisis. They are nervous about the insider trading scandal sweeping the industry.

Funds that had spectacular returns only to crash during the crisis, like Atticus Capital, have wound up their operations. At Harbinger Capital, the founder lent himself money from the fund, and investors have punished him for it. Shumway Capital tried to change its management structures without giving investors what they considered adequate notice, and now it is closing. Funds that have been ensnared in the insider trading investigation, fairly or not, are shutting their doors.

When liquidity dried up at the height of the crisis, certain funds prevented investors from taking money out of their firms. Now, some are suffering large-scale redemptions.

D. E. Shaw, the gigantic hedge fund complex, lost investors throughout last year even though it invoked triggers on terms agreed in advance. Other funds engaged in the more controversial practice of suspending redemptions without a previous contractual agreement. Investors have reacted bitterly to both kinds of suspensions.

Another sign of the new rationality is that hedge fund fees are finally creeping downward, a trend long predicted that had not ever managed to arrive.

In the past, hedge funds have been something of a “Giffen good” – that unusual market phenomena of demand rising as the price climbs. The more the hedge funds charged and the more exclusive they were, the more they were desired. Incentive fees, however, have finally begun to ebb, down to 19 percent, from 19.3 percent three years ago according to Hedge Fund Research.

D. E. Shaw is lowering the management fee on its Composite Fund to 2.5 percent from 3 percent and dropping its performance fee to 25 percent from 30 percent. D. E. Shaw declined to comment on the changes and, with about $19 billion under management, something tells me the firm will manage to scrape by, even with lower rates.

Still, fees ought to come down – the performance hasn’t been there.

Sure, there are examples of funds with spectacular returns, like Daniel S. Loeb‘s Third Point, which had a 34 percent gain last year. Over all, however, performance lagged the stock market. Both the Hedge Fund Research composite index and its index of equity-based hedge funds trailed the Standard & Poor’s 500-stock index’s total return two years running.

Hedge fund managers justifiably argue that investors shouldn’t expect funds to beat the market every year. A well-managed hedge fund is devised to make money in good markets and bad, with less volatile returns.

But since many hedge funds lost spectacular sums in 2008, their credibility has been shaken. It turned out they weren’t hedging enough and were more correlated to the markets than they should have been. Investors weren’t getting what they are paying for.

We’ll see how long these positive developments last. Investors put almost $150 billion into hedge funds in the fourth quarter, a record, according to Hedge Fund Research. Assets now stand at $1.9 trillion, just below the peak reached before the financial crisis.

Still, funds that aim for slow-and-steady returns appear to be thriving amid the new risk-averse mood.

And as money rushes back to the industry, regulators seem poised to impose the first genuine controls on it. Hedge funds will have to register and disclose more about their activities to financial overseers.

Last week, the Federal Reserve issued its definitions of what a “significant nonbank financial institution” will be, drawing the lines broadly enough to include big hedge funds. The Fed, properly, has judged institutions’ significance based, in part, on how interconnected they are: how many trades they do, how many counterparties they have, how much they have borrowed. It’s a good, and necessary, step toward policing systemic risk in the system.

Just because hedge funds didn’t cause the last crisis doesn’t mean they can’t cause the next one

No Commercial Real Estate Meltdown?

Posted in American Economy, Real Estate Prices on February 11, 2011 by David Griffith

The Real Estate Washout That Wasn’t

Brian Louis and David M. Levitt, On Friday February 11, 2011

From Manhattan office towers to Florida apartment buildings to retail properties in Washington, commercial real estate values are rising, defying predictions made as recently as February 2010 of a collapse that would drag the U.S. economy back into recession. Prices of commercial properties sold by institutional investors surged 19 percent in 2010, the second-biggest gain on record, according to an index developed by the MIT Center for Real Estate.

Near-record-low interest rates mean buyers can get cheap financing, which improves their returns. At the same time, rising earnings give banks a cushion to absorb losses, enabling them to sell distressed properties rather than hang on to them. Investors, convinced the worst is over, have pushed prices on bonds backed by commercial mortgages to the highest level in two years. Says Dan Fasulo, managing director at New York-based Real Capital Analytics: “Now that values are on the upswing, it’s given owners and lenders more wiggle room to work out these troubled situations.”

Those taking advantage of improving conditions include Vornado Realty Trust (vno.), which in December resolved a standoff with its lender by paying $115 million to buy the $171.5 million loan on its Springfield Mall in a Virginia suburb of Washington. The loan had been transferred to a special servicer a year earlier because the New York-based real estate investment trust was in danger of “imminent default” on the property, according to Fitch Ratings.

In downtown Fort Lauderdale, a market damaged by declining home values, USAA Real Estate bought Las Olas Centre, a 469,000-square-foot office complex that had been seized by lender Wells Fargo (wfc.). USAA Real Estate, based in San Antonio, paid $170 million in September; the previous owner spent $231 million near the top of the market in July 2007, according to Real Capital.

In February 2010, the Congressional Oversight Panel of the Troubled Asset Relief Program warned that a deteriorating commercial real estate market had the potential to wreck the U.S. economy. It estimated that almost half the $1.4 trillion in commercial property loans set to be paid off by 2014 were underwater, meaning the borrower owed more than the property was worth. Unless refinanced, the debt “could threaten America‘s already weakened financial system,” the panel said in a report.

New York, Washington, and Boston are among the cities leading the recovery as employment growth and large inventories of properties with a lot of rent-paying tenants attract investors.

Market segments including hotels, apartments, and retail are also on the rise. A hotel rebound started last year, with the average occupancy rate in the top 25 U.S. markets rising to 64 percent from 60 percent in 2009, according to Smith Travel Research in Hendersonville, Tenn. Sales of apartment buildings nationwide rose in the fourth quarter as homeownership remained at a 10-year low and demand for rentals pushed lease rates to the highest in four years, according to Axiometrics, a Dallas-based research company. Of the $52 billion of retail properties to fall into default, just over half have completed workouts, “giving the retail sector the distinction as the first property type to pass the halfway point in resolving its distress,” Real Capital analysts wrote in a January report.

“That tsunami of distress that had been forecast has not really materialized,” says Brian Stoffers, co-president of CBRE Capital Markets, a financing and investment sales division of Los Angeles-based broker CB Richard Ellis Group. “The market’s getting stronger.”

The bottom line: More than half of defaulted properties have completed workouts, helping to prevent disaster in the commercial real estate market.