Texas Real Estate Daily

Dallas real estate agent Betty Mayes knows all too well about the sluggish Texas economy.

But wait, do the math.  Betty sells homes.  She has clients to buy those homes.  So what’s the problem?  “The requirements for them to prove certain things to the lender are just unbelievable,” Mayes explains. “It’s one hoop, then another hoop and another.  That wasn’t happening before.”

In simple terms, getting a loan today is harder than ever.  “We’re finding that even buyers with good credit and a good job history are finding it a little more difficult to get a loan,” says Mayes.

In fact, even people with good credit are being told, “no”.

Gone are the days of the 100% loan.  Buyers are being asked to put down more of their own cash, which is money many of them simply don’t have.

Those looking to buy a million dollar home are being told to forget it unless they can put down a third in cash. Jumbo loans are also a thing of the past.

But Mary Beth Harrison, with Keller Williams, says it’s not all ‘doom and gloom’.  “We never saw that meteoric rise in price that you saw in California, New York and Florida where things were going up 20, 30, even 50-percent in appreciation, which is crazy.”

While that type of appreciation was happening in other states, North Texans saw their homes appreciate only four to six-percent.  Experts say, that turned out to be a blessing since home values in those other states are now plummeting; making it harder to get a loan there than here.

North Texas mortgage banker Reid Mitchell puts the chances of getting a loan in perspective.  Mitchell says he’s turning down nearly half of those who apply for home loans; even before they start looking at houses.

Both Mayes and Harrison agree that the weak economy is likely to eliminate more than a quarter of the real estate agents currently working in North Texas.

Credits: CBS11TV

Only six months ago, John McCain advocated “temporary” help for homeowners facing foreclosure while preaching against a “bailout” of irresponsible parties – “whether they are big banks or small borrowers.”

On Wednesday, he pitched his new $300 billion plan for the government to buy distressed mortgages from banks without making them take a discount on the sale. The loans would be reduced, at taxpayer expense, so borrowers could afford to keep their homes.

The plan reverses Mr. McCain’s long-held aversion to bailouts, yet reflects a rising consensus that only the federal government’s deep pockets can save both banks and homeowners. Some critics conceded the plan might work even as they criticized it as welfare for banks that made bad loans.

“One of the pluses of Senator McCain’s plan is he’s saying we need to make this happen, the government needs to play a proactive role in buying these loans,” said John Taylor, president of the National Community Reinvestment Coalition.

Yet Mr. McCain would have banks selling the endangered mortgages at face value.

“It’s a total bailout,” Mr. Taylor said.

The proposal is likely to generate fans in some battleground states, such as Ohio, where foreclosure rates are among the nation’s highest. It may be viewed less favorably in states such as Texas, where the number of subprime-loan foreclosures is below the national average.

The plan may also be more difficult to implement than Mr. McCain suggests because individual loans are sliced and wind up as pieces of complex securities held by different investors, making it difficult to determine who owns a single loan.

Democrat Barack Obama criticized the plan Wednesday, saying it would “massively overpay for mortgages” and “guarantee” that taxpayers lose money.

“The biggest beneficiaries of this plan will be the same financial institutions that got us into this mess, some of whom even committed fraud,” his campaign said in a statement.

Critics said Mr. McCain’s idea isn’t new. Elements have appeared in proposals by Hillary Rodham Clinton in March, in the bailout engineered by Treasury Secretary Henry Paulson and by conservative academics in recent weeks.

Mr. McCain’s campaign conceded the plan echoes previous calls for the government to buy mortgages. But the proposal would work more quickly and could reach “millions of people,” said Douglas Holtz-Eakin, Mr. McCain’s senior policy adviser. The plan would use existing government programs to reduce foreclosures and stabilize housing prices.

Borrowers with subprime or adjustable-rate mortgages who can show creditworthiness would get federally insured fixed-rate mortgages. The interest rate would be around 5.25 percent, according to the McCain campaign.

The campaign says that if the program is successful, it could reduce the need to spend even more money to buy mortgage-related securities held by banks. Lawmakers authorized $700 billion for that effort, which can purchase whole mortgages.

Mr. Holtz-Eakin said more lenders would participate if they don’t have to take a loss on loans they sell. Lobbyists for financial-services companies agreed.

“Offering to purchase them at face value vs. a discount would make them more attractive,” said Scott Talbott, a lobbyist at the Financial Services Roundtable, which represents the country’s largest banks and insurance companies.

However, it’s not clear that the mortgages could quickly be sold to the government. The packaging of mortgages to investors creates “a layer of complexity” that may slow progress so much that the effort is “helpful, but too late,” Mr. Taylor said.

But James Gaines, research economist at Texas A&M University’s Real Estate Center, said the government could buy individual mortgages. The government has made some progress refinancing exotic mortgages through a voluntary program known as Hope Now, though its reach has been questioned by some critics.

“It does seem that a fundamental level buying the mortgage might have the most bang for the buck,” Dr. Gaines said. “You’ll be helping the borrower and keeping people in their houses, which also simultaneously might help stem the flow of the real problem, which is declining home prices.”

Yet analysts cautioned that Mr. McCain’s approach might not reach enough borrowers to make a difference.

Many loans were made to borrowers who didn’t provide a down payment or didn’t show proof of income – the latter known as Alt A loans.

In the first half of 2006, 16 percent of the value of all loans was in Alt A loans, according to the Mortgage Bankers Association. Even in the second half of 2007, after lenders began to pull back on such loans, the figure was 7.8 percent.

“In general, he has the right idea,” Dr. Gaines said. “What they are leaving out is there are other loans, beside subprime, that are also problematic.”

Credits: Dallas News

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

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

The decision by the federal government to take over Freddie Mac and Fannie Mae has created some buzz in the local housing industry on how it could help stabilize the mortgage industry and ultimately stimulate sales.

Since the announcement, interest rates for 30-year fixed-rate mortgages have dropped, and the government’s actions are expected to make it easier for buyers to obtain a mortgage in the coming months.

“The lowering of interest rates is always a good thing to attract buyers,” says Tom McCormick, president of Astoria Homes. “I think people are awfully nervous about the economy and sensitive to the opportunities that are out there. It’s one of those deals that if you were considering buying a home, it will be hard not to look because I think this will be the best time people will ever see.”

The local housing market has been picking up, and this will make it even better, McCormick says.

New-home closings have remained weak with only one month so far this year in which there were more than 1,000 sales. The existing-home market has picked up considerably this year: In August sales were 93 percent greater than they were in August 2007, according to the Greater Las Vegas Association of Realtors.

“If you look at the past six months, I think we are moving in the right direction,” McCormick says. “And I see nothing but good going forward. I think you are going to have much better interest rates and better affordability. The federal government can borrow at the cheapest rates of anybody.”

Before the takeover, Fannie Mae and Freddie Mac had been government-sponsored enterprises that owned or guaranteed about half of all U.S. mortgages.

Monica Caruso, spokeswoman for the Southern Nevada Home Builders Association, says it’s unfortunate that it had reached the point where the government had to step in, but her industry sees some positives coming out of it.

“It is going to increase the liquidity in mortgage markets and going to restore confidence in the financial markets,” Caruso says. “I believe it is a step in the right direction for the continued recovery in the financial markets.”

That is important to homebuilders who are trying to maintain their financial arrangements with lenders and enable them to move forward with projects, Caruso says. Lending standards have tightened, which was necessary to restore confidence, but some of those standards will likely be loosened, she says.

“I believe it is going to reduce inventory (of existing homes) by making money available to legitimate buyers,” Caruso says.

She says she doesn’t expect new-home construction to pick up significantly in the next six months, not until the supply of resale homes is whittled further. According to the Realtors group, 22,710 existing homes were for sale at the end of August.

Much of the home construction is taking place because buyers want new homes instead of purchasing existing homes, Caruso says. But there is plenty of pent-up demand from aging Baby Boomers who want to upgrade, but can’t do so until they can sell their homes.

“That is one of the stumbling blocks we face,” Caruso says. “They are in our sales office, and hopefully everything that is going on will help that.”

Steve Bottfeld, executive vice president of Marketing Solutions, agreed the short-term benefits for the housing market could be positive with lower interest rates and increased confidence among lenders, but he has questions about the government’s ability to run the entities over the long run.

Bottfeld also says he is concerned that speculators will be bailed out, and that the nation’s debt will continue to increase.

“The problem we have with nationalizing Fannie Mae and Freddie Mac is the same problem we have with Iraq,” Bottfeld says. “We have no exit strategy.”

The government had no choice but to act because since both enterprises handle about 50 percent of the mortgages in the country, their failure would have been devastating for the economy, Bottfeld says.

“If either of them failed, we would have a depression in 20 minutes,” Bottfeld says. “But all it is putting a Band Aid on cancer. They have to look at the way loans are done. They have not gone after the root cause.”

That means going after the appraisal industry for falsifying appraisals and Wall Street investment bankers who sold the loans to investors knowing what would happen, Bottfeld says.

The next question is what effect the takeover will have on the ongoing foreclosure crisis. Fannie Mae and Freddie Mac have increased payments to loan servers as a way to encourage them to help more borrowers avoid foreclosure.

Bottfeld says he expects short sales will take less time to process and foreclosures should be reduced because homeowners can get refinancing. Banks want to get rid of potential foreclosures because they have a lot of nonperforming assets on their books, Bottfeld says.

Resale home inventory

For the second week in a row, the number of resale homes posted on the Multiple Listing Service remained below 22,000, according to Applied Analysis. Sixty-five percent of the homes on the market are either vacant or occupied by a renter. Owners are living in only 35 percent of the homes.

The number of listings is down 24 percent from a year ago. Much of the drop is attributed to fewer listings of owners who live in their units. There were 7,320 homes under contract with 3,050 pending to close.

Crystal Ball housing seminar

One question haunting members of the Las Vegas real estate community on a daily basis is how to cope with hard times. That’s the theme of the Oct. 23 Crystal Ball seminar looking at the valley’s housing market.

Guest speakers will include Frederick Chin, president of Atalon Group, the takeover group that is managing financially troubled Lake Las Vegas. Other speakers are Mary Connelly, president of William Lyon Homes, Astoria’s McCormick and Mark Stark, president of Prudential Americana Realtors. Larry Murphy will focus on third-quarter housing statistics.

“Our goal was to look at problems facing all of us from the perspective of a private builder, public builder, a major developer and major Realtor,” say Bottfeld, who will moderate the event. “How these people deal with their problems teaches us how to better manage our own.”

Credits: In Business Las Vegas

Standard & Poor’s on Tuesday downgraded three U.S. mortgage insurers, including PMI Group Inc. (PMI.N: Quote, Profile, Research, Stock Buzz), citing further deterioration in the housing market and concerns about the profitability of insured mortgages originated this year.

The credit agency said it expects 2008 vintage mortgages to generate modest underwriting profit for most insurers, but warned they still face risks.

“The significant uncertainty in the mortgage and housing markets — coupled with unfavorable data on early payment defaults — suggests an underwriting loss is a real possibility,” S&P said in a report.

The credit agency said it now expects U.S. home prices to decline 29 percent from the peak in 2006 compared with a 20 percent drop it projected in April. It also sees unemployment rising to above 6.2 percent in 2009 compared to the previous forecast of 5.8 percent.

S&P said higher unemployment may drive significantly greater claims for mortgage insurance.

After reexamining the industry’s fundamentals, the agency concluded the sector’s credit quality was more consistent with the lower end of “A” category.

“Our more pessimistic assessment of the sector reflects our opinion that U.S. mortgage insurers have limited opportunities for long-term growth and diversification,” S&P said.

S&P cut Old Republic International Corp’s (ORI.N: Quote, Profile, Research, Stock Buzz) counterparty credit rating one notch to “A-minus” and financial strength ratings of its key subsidiaries one notch to “A-plus,” the fifth-highest investment grade rating.

It also cut PMI Group Inc’s counterparty rating two notches to “BBB-minus,” just above the junk level. PMI’s mortgage subsidiaries’ ratings were cut two notches to “A-minus” and the agency said it may cut them again.

Radian Group’s (RDN.N: Quote, Profile, Research, Stock Buzz) counterparty credit rating was cut two notches to “BB-plus,” the highest junk level, and its insurance arm’s ratings were cut two notches to “BBB-plus.”

At the same time, S&P affirmed ratings of Genworth Financial Inc (GNW.N: Quote, Profile, Research, Stock Buzz) and MGIC Investment Corp (MTG.N: Quote, Profile, Research, Stock Buzz).

“All the mortgage insurers we downgraded today have capital adequacy ratios above Standard & Poor’s minimum ratio for a “AA” rating. However, we expect the capital adequacy ratios to decline for the next few quarters because of operating losses,” it said.

S&P’s action could further pressure U.S. mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), which must reserve for losses for claims the mortgage insurers might fail to pay.

Credits: Reuters