Texas Real Estate Daily

Your taxpayer credit card is on the counter, all set to get the economy moving again. Caveat emptor – let the buyer beware.

The value of the mortgage-backed securities the federal government is set to buy is hard to decipher when the good, the bad and the scary are bundled together.

Some are arguing that the government could profit by spending $700 billion on bonds discounted by panic that will surely command a higher price when they mature.

“They’re gonna make money on them, in all likelihood,” billionaire investment guru Warren Buffett told CNBC Wednesday as he was flying across the country.

But remember the reason for this rescue. A bubble has collapsed. Home prices are down in Dallas, but they are plunging in California, Florida and the Northeast.

Americans hold $10.6 trillion in mortgage debt. So far in this meltdown, $1.8 trillion or more of that debt is for mortgages that are underwater – loans that are higher than the value of the property.

In the 1980s, residential property values plunged in Texas. Since then, abundant land and loads of builders have resulted in enough houses on the North Texas market to slow home appreciation.

But in California, Nevada, Arizona and all along the Atlantic coast, mortgage lending and borrowing had been based on faith that homes would keep rising in value. If you believed that, all the traditional prudence about buying a home was just silly moralizing.

“A home used to be something you felt people worked for. There was a sense of accomplishment,” said Dallas mortgage lender Karen Watson. “But then it became where a home was almost an entitlement. People said, ‘I deserve it,’ even though they hadn’t saved for it or watched out for their credit.”

In the church of collateral appreciation, lending standards lapsed. Banks outsourced their risk by selling mortgages to investors. People looking for higher returns than those available with stocks and bonds flipped houses.

Crime crept into the process as lenders preyed on naïve borrowers and colluded with others who lied about their creditworthiness.

Computers and the Internet automated credit evaluations, sped appraisals and calculated default and prepayment risks for chopped-up bundles of mortgages so they could be turned into tradable derivatives.

Home, sweet home

The government has done much to encourage homeownership. Mortgage interest was made tax-deductible in the same 1913 legislation creating the federal income tax. Fannie Mae and Freddie Mac were created to provide mortgages with low down payments to qualified buyers and to sell bundles of those mortgages as federally backed bonds.

Prodded by the Clinton administration, Fannie Mae and Freddie Mac relaxed their guidelines in 1998 and encouraged banks to do deals with borrowers not otherwise qualified for a mortgage.

These borrowers were sold subprime and Alt-A (alternative-A paper) mortgages, which carried higher interest rates to compensate for the higher risk of failure. The higher rates meant higher returns for investors. As long as home values rose, a borrower could sell the property before a mortgage became too expensive.

These changes in the mortgage market took off in 2000-2001, when the Federal Reserve lowered interest rates to stave off a recession from the dot-com bust.

More than a third of the 202,000 subprime loans issued in Texas went to borrowers in the Dallas-Fort Worth- Arlington area, according to Dallas Federal Reserve Bank estimates. (By April, of 76,000 subprime mortgages in D-FW, nearly 12,000 were delinquent or in foreclosure.)

A home became collateral for consumer spending. From 2001 to 2004, an astonishing 45 percent of U.S. mortgages were refinanced, according to the Federal Reserve’s 2004 Survey of Consumer Finance.

Business magazines lauded investors who cashed out the equity in their homes and used the money to buy cars or stocks and bonds. A major motivator was that all the mortgage interest was tax-deductible.

“People were [refinancing] to pay off other debts,” said Ms. Watson. “The saying was, ‘Why get a car loan when you can get a mortgage loan and write off your interest?’ Lenders were giving $15,000 or $20,000 lines of credit that would be covered by a home equity loan at the same time they did a refinance, and the buyer didn’t even ask for it.”

The risk in these mortgages spread around the world as the loans were chopped up into bonds and derivatives.

In 2001, lenders sold $1.093 trillion of mortgage-backed securities. In 2003, they sold $2.131 trillion. Between 2001 and 2006, the total came to $6.654 trillion, according to data compiled by the Bond Market Association.

The Treasury Department’s $700 billion rescue plan is aimed at this pool of mortgage- backed securities.

(Why $700 billion? “We wanted to choose a number that was especially large in order to instill market confidence that we have enough authority to deal with the problem,” said Treasury spokeswoman Jennifer Zuccarelli.)

By 2006, nearly half of all new mortgages were subprime or Alt-A.

Crooks on both sides

Increasingly, international economists say, crooks sat on both sides of the table.

“A significant proportion of borrowers were financially overstretching … with many apparently lying about their financial resources to get loans,” John Kiff and Paul Mills of the International Monetary Fund wrote in a July 2007 working paper, “Money for Nothing and Checks for Free.” “Fraud appears to have played a key role in accelerating the deterioration.”

Luci Ellis of the Reserve Bank of Australia, in a paper written last month for the Bank of International Settlements, noted that thousands and thousands of homebuyers were guided to “silent second” mortgages to cover their down payments – silent, because the people evaluating the buyer’s credit risk on a first mortgage were kept in the dark.

Two years ago, silent seconds were used for 25 percent of subprime mortgages and 40 percent of Alt-A mortgages. This isn’t just fraud; it is also predatory lending.

“There is no evidence that silent seconds (as opposed to second mortgages that the lender knows about) exist in any significant numbers in other countries,” Ms. Ellis wrote.

Some lenders offered “statement loan” mortgages – whatever the borrower said was his income was good enough to qualify. Many now derisively call these “liar loans.”

California borrowers scooped up neg-am – negative amortization – mortgages in which the borrower’s discounted payments meant the loan got larger every month.

“The customer was told he could buy a $500,000 home and only owe a $1,000 a month,” Ms. Watson said. “A lot of customers only think in terms of that monthly payment, so that’s what they were sold.”

Typically, these loans were written with adjustable interest rates and balloon payments that kicked in after a few years, pushing up the payment by 50 percent or more. If the value of the house rose fast enough, the borrower could sell or refinance and still come out ahead.

But builders did so much work to meet this demand for homes that there’s now a surplus across the country. In Los Angeles, Las Vegas, Phoenix and other cities, prices have fallen more than 25 percent just in the last year.

As air rushes out of the bubble, resets are kicking in on adjustable-rate mortgages – subprime, Alt-A and prime alike. Economists say it will be at least another year before these are sorted out. Foreclosures, meanwhile, are soaring, with 35,000 a month in Florida alone.

Ms. Watson sees the pendulum swinging toward tougher loan terms. The more exotic mortgages – statement loans, neg-ams, silent seconds and piggybacks – are gone.

Like Warren Buffett, Ms. Watson is confident that the government will make out on the $700 billion rescue plan.

“Will we get our money back? Absolutely. Absolutely,” she said. “Historically, real estate has appreciated.”

Credits: Dallas News

Several taxpayer relief provisions are available in the Texas Property Tax Code for governments, as well as property owners in counties that have been declared a disaster area.

Section 23.02 allows governments to require the appraisal district to reappraise all properties located in their jurisdiction in order to determine the values immediately after a storm.

Galveston County is one of 29 Texas counties declared to be disaster area and, therefore, all 68 taxing jurisdictions located within the county are eligible to require reappraisal. Cost of the reappraisal is shared by all jurisdictions participating.

Section 31.032 of the Texas Property Tax Code allows owners of residential properties of less than five units that were damaged by the storm to make installment payments without incurring penalty and interest if the following conditions are met: The first payment is received by Feb. 2 (second payment by March 31, third by June 1 and fourth by July 31); and a request to take advantage of the payment option is provided to the Tax Office along with the first payment.

Credits: Galvnews

As it struggles through the housing crisis, home builder D.R. Horton Inc. is unloading land across California at big discounts.

Horton, the nation’s largest home builder by unit volume, is jettisoning thousands of house lots in far-flung areas, partly to reap the tax benefits from selling property at a loss.

D.R. Horton recently sold this undeveloped parcel in Chino Hills, Calif., a hard-hit housing market east of Los Angeles.

As builders try to survive one of the worst housing downturns in U.S. history, land buyers and brokers expect more such tax-motivated fire sales of undeveloped land this year. That could set a new low for land prices in California and other troubled housing markets. The sales also could indicate a shift for big builders: from developing huge swaths of land in the exurbs, to building smaller developments closer to metropolitan areas.

Horton two weeks ago sold about 2,000 house lots in Desert Hot Springs, a blue-collar community in the far reaches of Southern California’s Inland Empire, for $7.8 million, according to county records. William Shopoff, a land investor who bid unsuccessfully for the property, estimates Horton paid about $110 million for the land before spending to prepare the property for development by grading and installing infrastructure such as sewers.

Horton also recently sold a four-acre parcel in Escondido, near San Diego, for $4.4 million, about 25% of what it paid for the property in 2005, according to the county assessor.

Horton, based in Fort Worth, Texas, declined to comment for this article.

Buyers of some of Horton’s land in Southern California include a venture between Foremost Communities Inc. and Starwood Capital Group LLC, which together bought 250 house lots from the builder, according to a person familiar with the matter. The investors plan to hold the lots until the market recovers, this person said. A spokesperson for the venture didn’t return a call.

As new-home sales sank to a 17-year low, builders can no longer count on doubling their investments by buying undeveloped parcels, preparing the property and selling the homes on it. Horton, which built nearly 53,000 homes at the peak of the housing boom in 2006, has posted quarterly losses since the April-June quarter of last year.

The fire sales are a silver lining in those clouds. Tax law allows companies to apply losses from land and other asset sales to past profits and reap a tax refund. More sales are expected soon because the companies can apply losses only to profits earned as far back as two years and 2006 was the last profitable full year for most builders.

Horton told investors in June that it expects to receive a tax refund of $519 million over the next two years. At the end of last year, Lennar Corp. pocketed a $200 million tax refund after taking a 60% discount on its sale of 11,100 house lots to a joint venture it formed with Morgan Stanley.

“There’s going to be a rash of builders shedding assets,” said Tom Reimers, executive vice president of O’Donnell/Atkins, a real-estate advisory firm in Irvine, Calif. “It’s all tax-motivated.”

By dumping land, builders are chasing cash that allows them to keep current with lenders and pay overhead expenses.

Horton had $851.2 million in cash on hand at the end of its fiscal third quarter, June 30, up from $270 million at the end of last year, according to research firm Zelman & Associates. Horton owes about $210 million in annual interest payments, according to Zelman.

So far, most publicly traded home builders have managed to muddle through the housing mess. One reason is the builders’ financing arrangements. Many such large companies have long-term corporate debt that doesn’t come due for another year or two, giving them breathing room amid the credit crunch. The builders typically don’t need lender approval to keep building as long as they honor certain debt agreements at a corporate level.

Most closely held builders, on the other hand, use project-specific financing, in which they need a bank’s approval to start each new development. Lenders have completely cut off credit to most small builders, forcing many to file for bankruptcy protection. Analysts expect more than half of the nation’s small and midsize builders will fold during the housing downturn, which has already forced such private companies as Levitt & Sons of Fort Lauderdale, Fla., and Kimball Hill Homes of Rolling Meadows, Ill., to file for bankruptcy.

Still, big builders like Horton aren’t out of the woods. Horton has $585 million in debt that needs to be paid off in 2009, $362 million due in 2010 and $450 million in 2011, according to Zelman.

Horton’s recent land sales also could reflect an industry shift. Over the next few years, builders will likely build smaller developments closer to large metro areas, where house prices are expected to recover faster than in the far-flung regions. That contrasts with 2005, when builders bought massive parcels in California’s exurbs and earned big profits as land values skyrocketed during the housing boom.

Horton, for example, is interested in buying 50- to 150-lot parcels that are already developed and closer to certain cities in the San Francisco Bay area, says a person familiar with the company’s thinking.

“The builders are going to build in the better locations for the next few years, and live to see another day,” said Steve Reilly, a land broker with Prudential Realty in Danville, Calif. “The downside is they are never going to see the kind of margins when lots were doubling and tripling in value in the time it took to build a house.”

Credits: WSJ

There is a move afoot by my state senator, Mike Jackson and others to push local taxing authorities to reappraise properties that were damaged during Hurricane Ike.

“Existing law authorizes local officials in a disaster area to proceed with a reappraisal process so folks who lose their homes or suffer significant damage pay a fair property tax for the portion of the year after their homes were damaged or destroyed,” added Senator Jackson. “It is simple and fair, and is not too much to ask for our homeowners.”

As usual, Mike is straight and to the point. This is simple and fair. Problem is, it is not going to happen because the very nature of relying heavily upon property taxes is complex, unfair and local taxing entities were also damaged and have increased costs due to the storm. Although it would be simple and fair, it is unrealistic to expect it.

Which is why Sen. Dan Patrick’s views on this issue continue to stress the need to change the corrupt system we currently use. Here is his latest press release on the issue.

Current Reappraisal Crisis Illustrates Important Lesson

Senator Patrick renews his promise to move Texas away from property tax reliance.

Yesterday was the first day that homeowners began receiving their property tax bills and those affected by the hurricane are not exempt.

Senator Dan Patrick applauds the efforts of Senator Jackson and Representative Zerwas, as well as Senate District 17 candidate Austen Furse, to push for a reappraisal of property affected by Hurricane Ike.

“I join these leaders in pushing for a reappraisal and I hope that it can be accomplished,” said Senate Patrick, “but this situation is only a symptom of our bigger problem: Texas’ over dependence on property taxes.”

Current law requires each taxing entity to request a reappraisal before their tax levy can be reduced. The likelihood of the 500 taxing entities in Harris County making that request is low because it will basically lower their revenue. Even if the reappraisal does occur, the tax levy will only be reduced for the time period after the hurricane to the end of the year.

“Our continued reliance on property taxes and the legislature’s failure to protect voters from unfair property appraisal is going to result in tax bills arriving in mailboxes at homes that no longer exist,” lamented Patrick. This injustice will be most keenly felt in Galveston which has yet to seek or administer a reappraisal. However, the damage is not just limited to the coastal areas. Homes from Clear Lake to Tomball have lost significant value due to hurricane damage.

Texas is ranked 27 by the nonpartisan Tax Foundation, which compares the property tax burden levied on the citizens of each state. “Texas is a low tax state except for property taxes, which is the worst of all taxes to depend upon,” said Patrick. “Discouraging home ownership through a bewildering labyrinth of tax provisions is rapidly leading Texans to revolt.”

Senator Patrick is currently working with other state legislators to develop a strategy that will lower property taxes by reforming sales taxes. Sales tax is the most transparent, broad-based and fair tax system available. Senator Patrick’s goal is to develop a property/sales tax swap that will guarantee long term property tax relief without negatively impacting Texans’ wallet.

Once again, Sen. Patrick is correct. We MUST change this corrupt system. It will take time and energy but we MUST keep pushing for this change.

In the meantime, you can support Sen. Jackson’s effort by clicking here: Ike Tax Relief. For the last two weeks, I’ve had my hands full trying to restore my home to livable conditions. Sen. Jackson’s home, just down the street, was devastated, with flood waters reaching 5-6 feet inside.

Does anyone seriously think our homes are worth the already overinflated HCAD appraisals? If so, give me a call, I’ll sell today for that appraised amount. As is.

Credits: Lone Star Times

The application was filed Sept. 25 in Jefferson County District Court.

The original loan was for $53,680. The amount owing is $52,400.83.

The lender is represented by the Balcom Law Firm.

Case No. A182-442

# Nationstar Mortgage LLC has filed an application to foreclose on the property of Jeanette Simmons, located at 7025 Limerick Drive, Beaumont, Texas 77706.

The application was filed Sept. 29 in Jefferson County District Court.

The amount owing on the loan is $179,397.63.

The lender is represented by the Baxter & Schwartz law firm.

Case No. B182-461

# Deutsche Bank National Trust Co. has filed an application to foreclose on the property of Linda Rout, located at 5555 Pine Burr Blvd., Beaumont, Texas 77708.

The application was filed Sept. 29 in Jefferson County District Court.

The lender is represented by attorney Brad Kitchens

Case No. A182-465

# Nationstar Mortgage LLC has filed an application to foreclose on the property of Jeanette Simmons, located at 7025 Limerick Drive, Beaumont, Texas 77706.

The application was filed Sept. 29 in Jefferson County District Court.

The amount owing on the loan is $179,397.63.

The lender is represented by the Baxter & Schwartz law firm.

Case No. B182-461

# Wells Fargo Bank has filed an application to foreclose on the property of Stacy and Donald Martin, located at 1519 Ithaca Street, Nederland, Texas 77627.

The application was filed Sept. 30 in Jefferson County District Court.

The original loan was for $41,250. The amount owing is $40,319.06.

The lender is represented by the Mann & Stevens law firm.

Credits: SE Texas Record

The effects of Hurricane Ike on the Texas retail gasoline market faded this week, allowing prices at the pump to fall by an average of 10 cents per gallon.

The weekly AAA Texas gas price survey released Thursday showed regular-grade self-serve was averaging $3.50 per gallon at Texas pumps. Nationally, regular grade averaged $3.60 per gallon, also down a dime from last week.

“Supplies in Texas appear to be sufficient to meet demand, and prices are falling nearly back to the level they were before Hurricane Ike,” said auto club spokeswoman Sarah Schimmer. “The refineries and pipelines are reopened and increasing their capacity to refine and deliver gasoline.”

El Paso has the state’s most expensive gasoline with regular grade averaging $3.59 per gallon, down 6 cents per gallon. Amarillo has the cheapest average price at $3.29 per gallon, down a dime from last week.

Ike struck Southeast Texas on Sept. 13.

Credits: Chron

Graford Independent School District has again received a “superior achievement” in its accountability rating under Texas Schools FIRST financial accountability rating system, as noted at the Board of Trustee’s first public hearing on the matter last week.

The rating is the state’s highest.

In other business, Palo Pinto Chief Appraiser Donna Rhodes briefed the board on appraisal district issues and how it affects the school district.

“Some of the law suits question the methodology using comparable sales,” said GISD Superintendent Chance Welch.

“That keeps us near comparable values with the comptroller.”

Welch said the Texas Comptroller value for property was around $518 million with the comparable sales methodology. If the law suits result in changes of the appraisal method to an equity system, based upon lease value, the overall value would drop to around $400 million, Welch explained.

Credits: Lake Country Sun

Texas real estate continues to be a lot more stable than the rest of the country.

There’s a less than 1 percent chance that home prices will fall in San Antonio, Austin, Houston, Dallas or Fort Worth during the next two years, according to the new Fall 2008 U.S. Market Risk Index.

The index is released by PMI Mortgage Insurance Co. and looks at measures including price appreciation, affordability, unemployment, mortgage origination trends, foreclosures and unsold inventory to predict volatility in home prices in the largest 50 cities.

Nationally, increases in foreclosures and unemployment have made price declines more likely, according to PMI.

The nation’s riskiest real estate markets are in California, Florida, Nevada and Arizona.

There’s more than a 99 percent chance of home prices falling in the next two years in Tampa, Miami, Orlando and Fort Lauderdale, Fla., and in Riverside, Calif., according to the risk index.

In addition to Texas cities, other low-risk markets include Pittsburgh, Indianapolis, Charlotte, N.C., St. Louis and Memphis, Tenn.

All of the low-risk cities on the index had relatively affordable home prices and low unemployment rates. The riskiest cities for real estate had more unaffordable home prices, according to the index.

Credits: My San Antonio

Tracie Staten has everything she needs to buy a house: a down payment, great credit and a job. But with the nation’s economy in turmoil, she lacks the one thing required to move forward — confidence.

“I don’t want to get this house and all of a sudden things go downhill in our economy,” said Staten, a 25-year-old insurance adjuster. “I don’t know what the next few months will hold.”

The government’s struggle to reach an agreement on a $700 billion bailout package, a tightening credit market and lingering effects of Hurricane Ike are adding to the woes of Houston’s already softening real estate market.

“Right now there’s a general pervasive attitude that everything is going down: ‘I don’t want to buy a home now because prices may go down. I don’t want to invest my money because all my friends just lost thousands of dollars in their 401(k) yesterday,’ ” said Jim Gaines, an economist at the Real Estate Center at Texas A&M University.

Houston-area home sales have fallen each of the past 12 months, making their biggest drop in August when they plunged 20 percent. September figures are still being tallied.

Housing experts said the failure of Congress to complete a financial bailout has only worsened the problem.

Sellers have begun pulling homes off the market as they wonder if it is the right time to sell, said Steve Barnes, president and chief operating officer for the Houston region of Coldwell Banker United, Realtors.

Though perceptions about the economy can be blamed for part of it, some is hurricane-related. Insurance companies are requiring buyers to have homes reappraised, reinspected and recertified.

“With Hurricane Ike, coupled with no bailout, consumer confidence has got to be at an all-time low,” Barnes said.

Despite the uncertainty, Houston could be in a better position to weather the storm.

The area housing market has outperformed many others because of energy-related job growth. While sales have been slipping, inventory hasn’t gotten out of whack, and prices have remained stable.

That’s not to say the credit crunch hasn’t affected Houstonians. For months, buyers have been subject to tougher lending standards from banks burned by defaulting borrowers.

Builders have scaled back, too, and some are having a hard time getting loans themselves.

There’s little or no money available for land development loans, also known as “ADC loans,” which stands for acquisition, development and construction, Gaines said.

For those who sell real estate for a living, volumes are down — hurting some more than others.

“Our business has just fallen off a cliff,” said Shad Bogany of ERA Bogany Properties. “We were doing OK until the bailout. It’s almost like the phones have stopped ringing.”

Though buyers are skittish and lenders more cautious, it hasn’t gotten so bad here that it’s halted mortgage lending.

“They’re still in business. And if nothing happens, they won’t make any money,” Gaines said about the lenders.

Complicating matters for would-be buyers, mortgage rates are up over the past week.

In Texas, rates for 30-year mortgages were 5.94 percent at the end of last week, up from 5.75 percent the week before, according to Zillow, a real estate Web site that tracks home prices and mortgage rates.

Still, that doesn’t necessarily mean they’re on an upward trend, said David Zugheri of First Houston Mortgage.

Rates went down when the government said it was taking over Fannie Mae and Freddie Mac, he noted.

“The one thing we all know and can agree upon is the government is fully committed to the housing market,” he said.

Consumer sentiment should improve when the government agrees on a plan that’s expected to put more liquidity in the market, experts said.

Staten, while concerned about her taxes going to rescue banks, is craving some sort of solution. She’s been saving for more than a year and is ready to sign a contract on a three-bedroom Humble-area house.

“To at least have something in place, I would feel a little bit better,” she said.

Credits: Chron

Tarrant County, Fort Worth and Arlington will receive more than $11 million combined from the Department of Housing and Urban Development as part of $178 million in grants awarded to Texas to help neighborhoods hit hard by foreclosures.

Grant recipients can use the funds to buy foreclosed homes, land and property; demolish or renovate abandoned properties; offer help to low- and moderate-income home buyers with down payments and closing costs; and create so-called land banks to manage and encourage development of vacant land, according to Sen. Kay Bailey Hutchison, R-Texas.

Foreclosures continue to climb in North Texas, with 1,380 homes posted for foreclosure at the October auction, a 37.8 percent increase from a year earlier.

Credits: Star Telegram