What will happen to Fannie Mae and Freddie Mac?

Want to get a good (and opinionated, but I like opinionated) summary of how Fannie and Freddie got into their current mess and what's likely to happen? First, be sure to check out Lou Barnes' latest edition of Mortgage Credit News:

The Fannie-Freddie story will be widely mis-reported, especially in those journals hostile to housing or to any intervention by government into markets.
The real story is a tale of public policy mangled by everybody connected to the two Agencies in the last 15 years -- both parties, two Administrations, eight Congresses, and real estate- and mortgage-industry lobbying...

The real story is very good news. Fannie and Freddie have high-quality portfolios, the only trash the “affordables” forced on them by Congress. A government takeover would wipe out stockholders, but might not cost a dime. Then the original charters will be restored: upon return of good times, both outfits will gradually sell their portfolios....

I have believed since August that a nouveau Resolution Trust Corp would be required to extract the worst of the assets, take stock in the institutions, and work out the trash over a long time. That extraction will work (we’ve done it many times), but I’m a tad nervous that we waited too long, damage from credit starvation now may be hard to stop, especially in housing.
Some good news: the same Congresspersons who insisted all fall and winter, “No bailouts! Punish the lenders!”, by this weekend began a different chorus. “Necessary evil... Regrettable but unavoidable.” About time, guys; and I hope in time.

To me, the knee-jerk 'no bail-out' crowd never seemed the grasp how intertwined the mortgage crisis is to the overall economy. After all, why learn about how the world works when you can simply shout out platitudes instead (you know, like the politicians!).

So where are we at now with the two mortgage giants? The Wall Street Journal summarizes in this article:

The government headed into the weekend deliberating the state of struggling mortgage giants Fannie Mae and Freddie Mac, with Treasury Secretary Henry Paulson insisting that any potential rescue plan not benefit the companies' shareholders, according to people familiar with the matter...

The discussions at Treasury highlight the dilemma created by the financial crisis gripping the U.S: Some institutions are considered too big to fail, but propping them up could erode the market's incentive to properly judge risk by offering investors a false sense of security.

After a week of near panic among shareholders of the two companies -- and a stomach-churning day on Wall Street Friday -- the next big test will come Monday when Freddie Mac is due to sell $3 billion of short-term debt. An unsuccessful sale could be a major blow to investor confidence. If the administration were to intervene, it could do so before markets opened that day, according to a person familiar with the deliberations...

How any rescue might be orchestrated remains unclear. The administration doesn't expect the firms to fail and it is "not talking about nationalizing" the struggling mortgage giants, according to a person familiar with its thinking. Mr. Paulson issued a written statement Friday saying that the administration's "primary focus is supporting Fannie Mae and Freddie Mac in their current form."

One possible option would have the government buy a chunk of Fannie and Freddie's preferred stock with terms that dilute the equity of common shareholders. The Federal Reserve could support Fannie Mae or Freddie Mac in a short-term funding crisis through its lending operations, which were extended to investment banks in March with the downfall of Bear Stearns Cos. A spokeswoman said Friday the Fed hasn't discussed that possibility with either company...

Investors are worried the firms will suffer more losses as mortgage defaults rise. Stock-market investors are also worried the companies will need to raise significant amounts of capital to cover those losses. For investors, that means the value of their ownership stakes in the company will be cut. Bond investors continue to lend to both companies, though they are also demanding slightly higher interest rates.

If a rescue becomes necessary, Mr. Paulson does not want to help the shareholders because of the "moral hazard" it would create -- desensitizing investors to risk because they believe the government will bail them out. It's a similar position he took during the government-orchestrated rescue of Bear Stearns by J.P. Morgan Chase & Co...

The crisis has been exacerbated by the strange hybrid nature of the two companies, which have prospered because they are seen as having the implicit backing of the U.S. government. Chartered by Congress to ensure a steady flow of money into housing finance, they can borrow cheaply because investors believe the government probably would rescue them in a crisis. Yet they are owned by private shareholders who want profit growth and dividends.

The implicit guarantee has allowed the companies to borrow at lower rates and buy more mortgages, providing a benefit to shareholders. There's a belief among many politicians and officials that it is the shareholders -- not taxpayers -- who should bear those risks because they benefited greatly in the past from the implied government backing.

The government has increasingly leaned on the so-called government-sponsored enterprises to provide stability to a housing market crippled by falling home prices and banks too nervous to lend...

"Do a little examination and ask yourself, 'What do you think the housing market in the U.S. would look like without the GSEs now?"' Richard Syron, Freddie's chairman and chief executive, said earlier this year.

The Bush administration has long worried about the systemic risk posed by the companies. The administration has pushed for a regulatory revamp, including a new, more powerful regulator to oversee them. Long-awaited legislation that would do that passed the Senate on Friday.

So how exactly do these two mortgage giants work and what would be the consequences of a bailout? A slideshow from the New York Times helps explain.

Builders ramp up political donations

You may recall a couple of months ago, when the NAHB pulled back on their political giving because they weren't too happy with help they were getting from Congress. Today, however, having walked the halls of Capitol Hill and emerged with some more help for the flailing building industry, builders as well as mortgage brokers and others in the housing food chain have re-opened their pocketbooks. From a Wall Street Journal article:

The housing industry already has given more money in political contributions this election cycle than in the entire previous cycle, while winning favorable provisions in an emergency housing bill moving through the legislature.

Through May, mortgage bankers and brokers, real-estate companies and home builders had given more than $95 million to federal candidates and political parties so far this election cycle, according to the nonpartisan Center for Responsive Politics. That compares to about $57 million at this point in the 2006 cycle...

The contributions, which are entirely legal, are a tool for "relationship building...a way to educate [lawmakers] as to how our industry works and its perspective," said Steve O'Connor, senior vice president for government affairs at the Mortgage Bankers Association, a lobbying group for home lenders. "I can't change the perception" that the subprime problems have sullied the sector's political giving, he said. "All I can do is control what we do."...

The contributions serve as carrot and stick, awarded to lawmakers who share the groups' positions and withheld from those who don't. When the National Association of Home Builders wasn't getting what it wanted in the housing bill, it shut off the campaign-cash spigot.

The group's chief executive, Jerry Howard, said it withdrew contributions until Congress included measures it wanted, including a credit for first-time home buyers. The group's members made 300 visits to lawmakers and 1,200 phone calls demanding action, and the group's board voted to resume contributions when the measure began to take a shape more to its liking.

The bill now includes an $8,000 tax credit for first-time home buyers, which was also high on the wish list of the National Association of Realtors.

Las Vegas feeling impact of recession

For years Las Vegas managed to continue growing despite national peaks and troughs in the economy, but today a combination of higher gas prices, pricier airline tickets, a shift away from gambling revenue towards high-end restaurants and shops and new competition abroad is taking its toll. What does that mean for Sin City? A story in the Wall Street Journal speculates:

The gambling slowdown that began early this year is taking a serious toll on Las Vegas, with banks, investors and private-equity funds growing as tightfisted as the consumers who are gambling less in the slumping economy.

Once believed to be recession-proof, casinos are proving to be highly vulnerable to the economic downturn, which is striking the industry at a bad time. Las Vegas is entering its lethargic summer season, and a boom-time frenzy of grand expansion plans and private-equity buyouts has left casinos laden with debt...

The industry is facing what insiders and analysts call its biggest challenge in years. Rising gasoline prices, the housing crisis and other economic troubles are prompting consumers not just to gamble less, but to spend less at the luxury boutiques and restaurants where casinos draw most of their profits. Struggling airlines are cutting service to Las Vegas. And pressures are building on casinos that cater to local residents, who have been hard hit by economic troubles...

The gambling industry has survived economic famine before. But the current consumer-driven downturn, coupled with a recent industry shift away from gambling and toward luxury amenities, high-priced entertainment and dining, has created a dangerous situation for Las Vegas.

The problems are weighing heavily on gambling companies that cater to the local Las Vegas population with low-glitz, high-profit casinos built away from the tourist zone known as the Las Vegas Strip. Those companies thrived on the boom in southern Nevada's population, as families flocked to the area for jobs in the casino industry. But now those customers are holding back, pinched by a housing crunch and rising unemployment.

News Summary for Sunday 6/22/08

Commercial developers seeing return of recourse loans (Wall Street Journal)

Rates improving for some home loans (Wall Street Journal)

FHA wants to phase out seller-funded down payment charities (Washington Post)

Website pushes real estate analytics to new level (Inman News)

MLSs and brokers adding consumer-friendly tools to websites (Inman News)

Bush and Congress may finally negotiate housing deal (CNNMoney)

States increasingly tackling rising foreclosures (CNNMoney)

San Francisco launches solar roof program (BuilderOnline)

Diary of a homebuilder exiting a market (BuilderOnline)

Gas prices increasingly impacting homebuying decisions (USA T0day)

Builders change tax-break stance

The Nat'l Association of Homebuilders (NAHB) has re-opened its donation coffers after shutting it down in February when it felt builders were being ignored by Congress. Now that the tax carry-back plan seems DOA -- and never made into the House version of a home sales stimulus plan -- the group is focusing on special tax credits to buyers to stimulate the market. From a Wall Street Journal story:

The National Association of Home Builders is playing nice with Congress again.

The trade group, representing thousands of home builders, has switched its lobbying tactics and its political action committee has resumed doling out political donations, after halting them in February to protest what the group said was policy makers' failure to help the housing industry and overall economy.

The association had been pressing for a tax break that would have allowed builders to apply losses to taxes paid four years ago, instead of the current two-year carry-back. But the group has backed off that effort and is focusing now on a proposed tax credit for home buyers to stimulate demand...

The trade group's shift on the tax break comes after the Senate came under fire for including it in its housing-relief plan. Critics said lawmakers were favoring builders over strapped homeowners. The House version of the plan doesn't include a carry-back provision...

Meantime, the home builders' political action committee, BUILD-PAC, is giving out political donations again. Ed Brady, chairman of BUILD-PAC, said the group lifted the ban last month because, "we felt like people were paying attention to us again."

During the current election cycle, the group has given about $977,000, with 45% going to Democrats and 55% to Republicans, according to the Center for Responsive Politics.

Why walking away hurts everyone else, too

A recent story in the Wall Street Journal profiles a woman who intends to buy a new home and then stop making payments on her old one, forcing it into foreclosure. She's taking advantage of an underwriting loophole that allows her to tap 75% of what she expects to get in rent to qualify for the new home. But now, with this type of mortgage fraud rising -- which is what it is -- FNMA is changing their guidelines, forcing borrowers to prove they can make both payments in order to clamp down on this most unethical of behaviors.

So why does this hurt everyone else? Because one of the best ways to slowly add new properties to a real estate portfolio is to (a) buy a home; (b) rent it out; and (c) use the rent to qualify for a new home while keeping the second as an income property. How do I know? Because I've done this before, and had intended to continue doing so as long as the investments cash flow.

But now, because of people like Michelle Augustine of Sacramento, that plan could now be history, and many others will be paying the price of her own -- and others whose brains misfire like hers -- poor planning and selfishness. I think people like her -- and her enablers in the real estate industry -- belong in jail, so I really hope that the DA for her county prosecutes her -- and her agent Linda Caoili -- for mortgage fraud. If he/she doesn't, what's the point of having a DA in the first place? What's the point of having a Department of Real Estate that is supposed to regulate such behavior? From the story:

Next month, Michelle Augustine plans to walk away from her four-bedroom house in a Sacramento, Calif., subdivision and let the property fall into foreclosure. But before doing so, she hopes to lock in the purchase of another home nearby.

"I can find the same exact house as what I live in right now for half the price," says Ms. Augustine, 44 years old, who runs a child-care service out of her home. She says she soon will be unable to afford her monthly payments, which will jump to $4,000 from $3,300 in August, and she doesn't want to continue to own a home that is now worth $200,000 less than what she paid for it two years ago.

In markets hit hardest by falling home prices and rising foreclosures, lenders and brokers are discovering a new phenomenon: the "buy and bail," in which borrowers with good credit buy a new home -- often at a much lower price -- then bail out of the "upside down" mortgage on their first home.

Homeowners are able to pull off this gambit -- which some lenders and real-estate agents call mortgage fraud -- by taking advantage of mortgage-lending practices that allow them to buy a new primary residence before their existing residence has been sold. And with the lending industry in disarray as it tries to restructure millions of mortgages, some boast they are able to pull off the strategy with ease.

In some cases, homeowners are coached through the buy-and-bail process by real-estate agents and brokers who see nothing wrong with it. Some blame the phenomenon in part on lenders' unwillingness to cut deals or restructure loans made when home prices were inflated. "It's just a business decision," says Linda Caoili, a Sacramento real-estate agent who is working with Ms. Augustine and others who are considering walking away from their mortgages. "If you're upside-down $250,000, why would you keep it? It just doesn't make sense."...

While buy-and-bail is on the rise, the practice doesn't appear to be widespread. Credit is much tighter now than it was during the real-estate boom, and most families with an upside-down mortgage likely will hold on to their homes and hope the market improves in the future -- even though many of them could lose their properties.

Still, with home prices falling rapidly in some parts of the country, a growing number of frustrated consumers are willing to take the risk -- especially in so-called nondeficiency states such as California and Arizona, where it is more difficult for a lender to sue consumers who walk away from their mortgages. Borrowers who bought or refinanced their home with a personal line of credit, however, instead of a home-purchase loan -- a common practice during the housing boom -- could be sued by a lender in those states. Borrowers also could be on the hook if lenders can show that homeowners committed fraud by misrepresenting themselves on their loan application.

Yet even in cases in which a lender could attach a lien on the new home, some homeowners simply assume that lenders are too swamped. "So many people are foreclosing, is it cost effective for lenders to go after all of these people?" says Steve Hawks, a Las Vegas real-estate agent who handles lender-owned properties...

Ms. Augustine, the Sacramento day-care provider, became a first-time homeowner in November 2006 by taking out two loans with nothing down to cover the $426,000 home purchase. With her home valued at about $220,000 now, she is actively looking in nearby communities for another one to buy before the bank forecloses on her current home.

The mortgage industry is starting to wise up to the practice and is scrambling to fight back. Buy-and-bail is "certainly fraudulent and unfortunately on an uptick," says Gwen Muse-Evans, vice president for credit policy and controls at Fannie Mae. Although she doesn't have data to quantify the size and scope of the trend, Ms. Muse-Evans says overwhelming anecdotal reports have prompted the agency to draft tougher regulations aimed at closing one big loophole that allows underwater homeowners to qualify for new home loans.

That loophole currently works like this: Homeowners provide a rental agreement showing that they will rent out their first home, and underwriters allow rental income to cover as much as 75% of the mortgage payments on the first home when determining whether the borrower can make payments on two homes. This allows homeowners to secure a second mortgage that they might not otherwise afford.

Under revised Fannie Mae guidelines, which could take effect next week, loan applicants who claim they will rent out their first home will have to produce supporting evidence, including an executed lease agreement. Borrowers also will have to prove that they can pay the mortgage, property taxes and insurance for both residences. The guidelines will make an exception only for borrowers who have at least 30% equity in their current home...

Some private lenders aren't waiting for Fannie's lead. In April, underwriters handling bank-owned properties at IndyMac Bancorp Inc. told brokers they would require borrowers purchasing new homes while retaining their existing home as a rental to prove that they could make full payments on both homes to qualify for a loan. A memo sent to a Southern California broker said the policy change was prompted by "losses from individuals walking away from properties after the acquisition of a new home."...

Meanwhile, Mr. Hawks, the Las Vegas broker, says he receives one to two dozen inquiries every week from individuals inquiring about a buy-and-bail. "People are starting to ask how much their good credit is worth," particularly when their home is underwater by hundreds of thousands of dollars.

The tactic doesn't appeal to people such as John Ristuccia, a 48-year-old Buckeye, Ariz., paper-company sales director whose job was moved to Houston in August. He is trying to complete a "short sale" for $425,000 on his five-bedroom, 4,000-square-foot home, which was appraised for $800,000 last year. In a short sale, a lender allows the sale of property for less than the amount due on the outstanding loan and often forgives the remaining debt.

Even though he might be able to qualify for a second home loan, Mr. Ristuccia says he wouldn't consider sticking his bank with his suburban Phoenix property. "Just personally I've got a problem with that," he says. "I really can't put it in terms other than it feels wrong."

It's too bad that Mr. Ristuccia is such a rare person in the U.S. these days -- someone with a working conscience.

Celebrities endorsing Middle East developments

Apparently the allure of worldwide celebrity has been very successful for splashy projects in the Middle East, especially Dubai. While it's difficult to say if this trend will translate to the U.S. market (it's worked with both positive and negative results leveraging the names of George Clooney and Donald Trump), I could to see it working for certain types of projects. If anyone has a project and is seriously considering a celebrity endorser, let me know -- I have a friend who runs the commercials/endorsements division for one of major talent agencies. From a Wall Street Journal story:

Property developers in this Persian Gulf sheikdom, famous for its grandiose projects, are increasingly turning to American and European celebrities to help sell the properties to wealthy consumers. The latest luminary to lend his name to a development here is Hollywood star Brad Pitt, who will design a five-star hotel and resort for Zabeel Properties, a relatively new company in the lodging industry. The 800-room hotel will feature "environmentally friendly architecture," Mr. Pitt said in a prepared statement. The actor will work with Graft LLC, an architecture firm based in Los Angeles.

Mr. Pitt joins Wimbledon champion Boris Becker, fashion designer Giorgio Armani and golfers Greg Norman and Tiger Woods, among others, who have staked their reputations on helping Dubai property agents lure wealthy foreigners.

Mr. Armani's development, which includes condos and a hotel being built by Emaar Properties, will compete with Palazzo Versace, a hotel that will feature furniture and fittings selected by rival designer Donatella Versace.

"Real-estate branding involving global celebrities is here on a scale that doesn't happen in markets anywhere else," Blair Hagkull, managing director of Jones Lang LaSalle's Middle East unit, told Zawya Dow Jones. "Developers are going to huge extents to attract investors" as competition rises, he says.

Glitzy marketing that uses celebrities to sell homes and fill hotel rooms and office space is no guarantee that the developments will be successful -- and in some cases can even hint of problems ahead. A few years ago in Las Vegas, several splashy condominium projects associated with celebrities -- including Hall of Fame baseball slugger Reggie Jackson and actor George Clooney -- were canceled when it became clear that the market was overbuilt... Sales, so far, remain brisk. Villas attached to a golf course designed and endorsed by Mr. Norman sold out within a week, according to the project's developer. Prices ranged from $4 million to $8 million.

The obsession with celebrity in Dubai's real-estate industry is such that even B-list stars are in demand. The face of Niki Lauda, made famous by a near-fatal racing-car accident in 1976 on the Nurburgring in Germany, will be emblazoned across one of three office towers in Dubai planned by ACI Real Estate...

"Celebrity endorsements make sense where they clearly add value to a project and there's a direct correlation between the celebrity and the development," said LaSalle's Mr. Hagkull.

Bargain hunters help push up pending sales index

It looks like prices have dropped enough in certain markets that bargain hunters are re-emerging, raising pending sales during April by 6.3% from the previous month. In the West, the news is even better: pending sales up by 8.3% from March and by 4.0% from April of 2007. From a Wall Street Journal story:

A forecasting gauge of home sales climbed to its highest level in six months during April, given a lift by bargain hunters.

The National Association of Realtors' index for pending sales of previously owned homes rose 6.3% to 88.2 from March, the industry group said Monday...

Lawrence Yun, NAR chief economist, said pending sales contracts picked up in areas where housing prices have dropped significantly.

"Bargain hunters have entered the market en masse, especially in areas that have experienced double-digit price declines, but it's unclear if they are investors or owner-occupants," he said.

In its monthly forecast on the industry, the NAR projected existing-home sales at 5.40 million this year and 5.74 million in 2009. That compares with 5.65 million in 2007.

The median price for an existing home is seen at $205,000 in 2008 and $213,900 in 2009. It was $218,900 in 2007.

A month ago, the NAR forecast 2008 sales at 5.39 million and 2009 sales at 5.72 million. The 2008 median price was projected at $213,700 and the 2009 price at $222,600.

The NAR pending sales index, based on signed contracts for previously owned homes, was 13.1% below the level of 101.5 in April 2007...

By region, pending sales in the Northeast decreased 1.9% in April from March; they had fallen 12.2% since April 2007. The Midwest rose 13.0% in April from March; it had dropped 13.1% since April 2007. The South increased 4.6% in April from March; it had fallen 22.5% since April 2007. The West increased 8.3% in April from March; it has gone up 4.0% since April 2007.

Price declines and rising foreclosures now capturing prime borrowers

It looks like we're entering a phase of this housing cycle in which even the more conservative 'prime' borrowers -- those whom are able to document their assets and income and maintain higher credit scores -- are feeling the pain of declining home prices and even at an increasing risk of foreclosure. From a story in the Wall Street Journal:

Mortgage delinquencies and foreclosures continued to surpass record levels in the first quarter, as the prolonged decline in home prices and shifting economic conditions trapped a growing number of prime borrowers.

Delinquencies and foreclosures increased at the fastest pace for borrowers with prime adjustable-rate mortgages, according to the Mortgage Bankers Association, though borrowers with subprime ARMs still account for the largest share of troubled loans. The number of new prime ARM foreclosures increased by 29,000 to 117,000 in the first quarter, while the number of new subprime ARM foreclosures increased by 20,000 to 195,000. This is the first time prime foreclosures have grown faster than subprime foreclosures, the MBA said...

The increase in delinquencies has been highest in states where there has been a lot of overbuilding, said Jay Brinkmann, the MBA's vice president for research and economics. New subdivisions in those states have seen the biggest price drops, he said, as builders have cut prices to reduce inventories. That has made it more difficult for borrowers in the same or nearby subdivisions to sell or refinance if they get into trouble. About 10% of the homes built after 2000 are now vacant, according to the Census Bureau, compared with roughly 2% of homes built earlier...

Still, the rise in past-due loans was widespread, with delinquencies up year over year in every state except Louisiana. Thirty-nine percent of subprime ARMs and more than 10% of prime adjustables are at least one payment past due. Option ARMs, which carry a low introductory rate but can lead to a rising loan balance, account for much of the rise in delinquent prime ARMs, Mr. Brinkmann said.

The data provide little evidence things will improve soon. Mark Zandi, chief economist at Moody's Economy.com, notes credit-bureau data from April show delinquencies have become "measurably worse" in the second quarter. "The problem now is negative equity combined with a weakening job market," he said, rather than resetting adjustable-rate mortgages.

Falling home prices have exacerbated the problems in the mortgage market by making it more difficult for borrowers who run into trouble to refinance or sell their homes. "The only alternative for them is foreclosure," says Paul Willen, a senior economist with the Federal Reserve Bank of Boston. "That accounts for a lot of what we are seeing."...

Falling home prices are also making it more difficult for borrowers to tap their equity to pay bills. At LSS Financial Counseling Service, based in Duluth, Minn., the average borrower seeking foreclosure counseling had nearly $17,000 in credit-card debt, compared with about $13,000 two years ago.

Banks about to face the real estate music

According to a story in the Wall Street Journal, the second phase of financial pain from the real estate bust is about to begin: whereas phase one was focused on the 'demand' side (i.e., homebuyers & mortgages), phase two will be centered on the 'supply' side (i.e., banks forced to mark their real estate collateral to current pricing). As Ivy Zelman concludes, "...this period of procrastination is nearly over."

Federal regulators warned Thursday that banking-industry turmoil would continue as financial institutions come to terms with piles of bad loans they made to finance the construction of homes and condominiums.

Until now, most of the damage to banks from the housing crisis has come from homeowners defaulting on their mortgages. But amid a dismal spring sales season for new homes, loans to home and condo builders are looking increasingly shaky. Banks have begun to dump them at what will likely be steep discounts, setting the stage for billions of dollars in fresh losses...

The surprisingly gloomy outlook is at odds with the sentiment of investors, who appear to have moved on from worrying about the health of the financial system to obsessing about gasoline prices and consumer spending. The Dow Jones Industrial Average rose 213.97 points, or 1.7%, on Thursday on the back of surprisingly strong retail-sales data.

The health of the economy is heavily dependent on the willingness of banks and other financial institutions to lend to consumers and businesses. Many banks have already taken substantial losses, and either will have to pare their lending or raise new capital to rebuild their safety nets. The Federal Reserve and Treasury Department have been pressing banks to raise capital so as not to further reduce lending.

Banks with swelling portfolios of troubled loans tied to land and housing are struggling to unload some of their real-estate debt. IndyMac Bancorp Inc., a Pasadena, Calif., lender, is trying to sell $540 million in loans made to finance land purchases and housing construction projects. Winning bids on many of the loans were, on average, about 60 cents on the dollar, according to people familiar with the matter. But some winning bids were only about 20 cents on the dollar...

The sales are a response to a growing problem: Home builders are falling behind on loan payments, and the value of the land and housing developments that serve as loan collateral is plummeting. Over the next five years, U.S. banks could "charge off" as bad debt between 10% and 26% of their loans tied to residential construction and land assets, which would amount to about $65 billion to $165 billion, according to a report sent to clients Thursday by housing research firm Zelman & Associates. That compares with charge-offs of about 10% of construction-related bank assets, totaling $31.6 billion, when adjusted for inflation, during the last housing downturn in the late 1980s and early 1990s. In 2007 and the first quarter of this year, banks wrote down just 0.7% of such assets, according to Zelman...

The prospect of a new wave of losses worries federal regulators, given the large proportion of loans to housing developers held by many banks and thrifts. The problems are worse at small banks that can't easily absorb losses, and at banks with big exposure in states hit hard by the housing crisis. Banks in Arizona have 36% of their total loans tied to construction and development. In Georgia that number is 34%, and in North Carolina it's 28%. Zelman said construction and development loans, as a percentage of total loans, are at their highest levels since at least 1975.

IndyMac is trying to sell debt backed by a grab bag of assets, including partially built subdivisions, condo buildings and large parcels of raw land covered in sagebrush in parts of California, where the housing crisis is acute, according to people familiar with the offering.

Selling real-estate loans could help larger lenders like IndyMac shore up their balance sheets. But such sales, by setting a market value for distressed real-estate loans, could trigger problems at smaller banks with real-estate exposure, which might have a difficult time absorbing such losses...

Real-estate lenders had been hoping for a decent spring sales season for new homes, which would have helped builders stay current on their loans. But the selling season has been a bust. The rate of foreclosures on homeowners hit a record, as did the rate at which they fell behind on their mortgage payments. In the first quarter, 6.35% of mortgages were at least 30 days delinquent, not including those already in foreclosure, a rise of 1.51 percentage points from the year-earlier period.

"We've seen a real change in the market," says Ricardo Chance, a managing director at KPMG Corporate Finance LLC, who is helping troubled builders restructure their businesses. "Finally the banks are capitulating and saying, 'Let's mark to market and flush this all out.' The market is going to get worse. We don't want to hold on to this stuff."

Foreclosures still rising even though lenders are (finally) getting serious about cutting prices

As the tide of foreclosed properties continue to rise, lenders are finally realizing that they need to cut prices -- fast and low -- to move inventory to a skittish public and a tight credit market. But have they waited too long to do so? From a Wall Street Journal article:

The number of foreclosed homes owned by lenders continues to rise despite signs that they are increasingly willing to slash prices to sell those properties.

Lenders and investors in mortgages owned about 660,000 foreclosed homes in April, up from 493,000 in January and 231,000 in January 2007, according to First American CoreLogic, a research firm based in Santa Ana, Calif., that collects data from lenders and county clerks. The April total works out to about one in seven previously occupied homes available for sale nationwide.

A surge in defaults has increased the inventory of bank-owned homes, known in the trade as REO, for "real estate owned." By cutting prices, lenders have managed to increase sales of such homes sharply in recent months in some cities hit hard by foreclosures, including Las Vegas, Detroit and Sacramento, Calif., local real-estate brokers say.

With home prices falling, "holding the assets means further losses," said Mark Fleming, chief economist for First American CoreLogic. Some lenders now are cutting prices as often as every 20 days on homes that aren't selling, said David McCarthy, chief executive officer of Integrated Asset Services LLC, a Denver-based company that helps banks value and sell REO homes.

But lenders haven't yet managed to catch up with the inflow of foreclosed homes. Mark Zandi, chief economist at Moody's Economy.com, forecasts that the inventory of REO homes won't peak before the end of 2009...

The REO glut is weighing on house prices in many areas, as banks tend to cut prices faster than other sellers. A new set of local home-price indexes, to be introduced this week by Integrated Asset Services, shows that the median price of homes sold in Riverside County, Calif., in April was down about 29% from a year earlier. The median price fell about 13% in Clark County, Nev., and 12% in Arizona's Maricopa and Pima counties. Median-price comparisons can be skewed by shifts in the proportions of high- and lower-priced homes sold from one year to the next but provide a broad indication of market trends.

To avoid or at least delay losses, many lenders are trying to avert foreclosures by easing loan terms or giving struggling borrowers more time to catch up. Hope Now, an alliance of mortgage companies and investors, said last week that mortgage companies completed loan workouts for 183,000 households in April, up from 160,000 in March.

Not a surprise: report finds mortgage brokers charge more than direct lenders

I have to admit that I'm not a big fan of mortgage brokers: although they claim to work with numerous lenders to get you the best deal, most smart people with decent credit and a willingness to document their income and assets (imagine that crazy idea!) could find good deals on their own.

So how do I know this? Because when I was too busy to do so for myself, I've used mortgage brokers twice in the last few years, and now I know that (a) I paid needless fees and points (I shouldn't have paid any points at all); and (b) I'm paying higher rates on the notes (generally just 1/4 point, but that can add up over a long period of time). The lowest-rate mortgage I ever got was through a direct lender - 5.50%, no points, 30-year fixed (I'm also not a fan of adjustable rate mortgages, having lived through that mistake in the 1990s).

And don't even get me started on the junk fees like $50 FedEx packages and "document preparation fees," as if it takes an act of Congress to key in a few numbers into a template (which, by the way, often contained numerous mistakes).

So it comes as no surprise to me to see this article in the Wall Street Journal citing a recent study by the Dept. of Housing and Urban Development (HUD) that concludes borrowers pay a lot more to get a loan from a broker than through a direct lender:

The home-mortgage industry takes advantage of consumers' confusion to charge some people much higher fees than others, according to a study prepared for the Department of Housing and Urban Development.

The study by Susan Woodward, a former chief economist for HUD, also found that loans arranged by brokers typically carried higher fees than those obtained directly from lenders...

Total fees paid to the lender and broker averaged nearly $3,400 on loans with an average initial principal balance of $105,000, the report said. For brokered loans, the average fees were $4,000, compared with $3,150 for loans made directly by the lender. Those fees are a combination of upfront charges and additional funds brokers and lenders get for selling loans with relatively high interest rates.

For brokers, these additional payments are known as yield-spread premiums. Brokers often defend yield-spread premiums as a way for borrowers to reduce their upfront fees in exchange for paying a slightly higher interest rate. But the study found that the yield-spread premiums mainly benefited the brokers. For every $100 extra they paid in higher rates, the borrowers on average received only a $7 reduction in upfront fees. Banks also typically kept most of the benefit when borrowers paid above-market interest rates, the study said.

Borrowers who paid "discount points" to lower their interest rates typically didn't benefit from a corresponding savings in their interest costs, the study said. It found that borrowers who chose "no-cost" loans -- in which all fees are built into the interest rate -- typically paid the lowest effective fees.

Here's the defense from the mortgage brokers association:

Roy DeLoach, executive vice president of the National Association of Mortgage Brokers, said that the study relies on "stale" seven-year-old data and that other studies have shown consumers save money by obtaining loans through brokers.

Prices in certain areas still holding up

Although you'd never hear this from many housing bust bloggers, there are certain areas in which prices are holding up -- namely urban cores which offer proximity to employment, shopping, transportation and entertainment options. A recent story in the Wall Street Journal discusses some of these areas in more detail:

Downtown: It's been among the safest places to hide from the housing downturn.

Much has been made of the way the nation's real-estate bust is affecting some American cities far more than others. But even within a single metro area, changes in housing prices can show wild variations.

And in big cities, prices in the central cores often fare the best. Far-flung suburbs -- where home building exploded in recent years -- have more typically gotten hammered. In between is a patchwork of established suburbs and city neighborhoods peripheral to downtown that can be all over the map in terms of price declines -- or even increases...

For today's buyers, all this means that shopping for housing bargains is increasingly complicated. The best deals may be where prices have slid the most, but such areas could easily fall a good bit more before hitting bottom. Meanwhile, you'll get few bargains if you buy a home in San Francisco or Manhattan or downtown Boston. Of course, if the housing crisis broadens, the central core areas also could see price drops...

L.A. is an anomaly. No real urban core exists. The area is just a sprawling string of suburbs that run together.

And most of that sprawl is bathed in red ink. Median prices in communities throughout Riverside and San Bernardino counties -- the distant, inland suburbs that are at the epicenter of the region's subprime and foreclosure crises -- are down, often sharply.

Lower-priced homes in tony Palm Springs have lost about 24%, though more-expensive homes are up slightly. Less-affluent cities such as Ontario, Chino and Rancho Cucamonga are all down between 15% and 31%. Los Angeles County, Orange County to the south and Ventura County to the north are suffering equally.

The only notable area of strength: high-end real estate. L.A.'s Westside, home to affluent neighborhoods such as Brentwood and Westwood, "tends to be more insulated because this is where people with money want to be," says Madison Offenhauser, regional director in Los Angeles for Keller Williams Realty.

Median prices in Brentwood are up 16%. The Hollywood Hills, up 26% to a median price of more than $2.1 million. Rancho Palos Verdes and the Palos Verdes peninsula, up 17%. Parts of Newport Beach, one of Orange County's poshest addresses, are up as much as 67% to $2.75 million. The coastal village of Laguna Beach is up 6%.

Lee Ann Canaday, owner of the Canaday Group, a Laguna Beach real-estate firm, says "almost every deal I've done this year" in Laguna and Newport Beach has had multiple offers.

Delinquent HOA fees another consequence of the housing bust

Chalk up another reason that a disorderly reduction in home prices and sales isn't the best thing for the housing market, as many angry renters (and bloggers) would believe. There's a story in the Wall Street Journal about what happens to condo (and master-planned) communities running deficits because of delinquent HOA fees (I saw a similar story last weekend on CNN which featured an existing resident running around the community with weed killer to help protect her investment):

Here's another consequence of the troubled housing market: Some homeowners associations are running low on cash...a growing number of homeowner and condominium associations across the country are raising their fees or putting the brakes on clubhouse improvements, new landscaping and other shared neighborhood amenities. The kitty is so low for some that essential services, such as building maintenance, electricity, trash removal and repairs have been cut.

As community residents lose their homes to foreclosure and new home building has slowed considerably, many of the roughly 300,000 neighborhood associations in the U.S. are grappling with shrunken budgets. One estimate puts the delinquency rate on dues at less than 5% in many markets -- higher than normal, though still not enough to threaten basic services, says John Carona, president of Associa, a Dallas-based company that represents 7,000 community associations in 26 states. Normally, the delinquency rate is about 2%, he says.

Elsewhere, the rate is much higher. At Spanos Park East in Stockton, Calif., owners of about 25% of the development's 1,500 single-family homes have been delinquent in paying their quarterly dues, according to Adrianne Bretao, a manager at M&C Associations Management Services, which helps to manage the community association. As a result, the association has put off expanding a patio area in the clubhouse and swimming pool this year, says Denise Laven, the association's president...

Rules on fees and services are outlined in association bylaws, and some states have laws that cover governance of the associations. So individual homeowners often have little power to fight increases in dues and cuts in services -- as long as the board is following the rules. They also have little recourse against delinquent neighbors other than filing lawsuits, which can be costly and time-consuming.

That's why housing experts advise homeowners to read the bylaws thoroughly, asking what services are guaranteed and whether annual fees are capped. Still, since bylaws were drafted when the community was first built, few outline contingencies in the event of a wave of foreclosures...

housing experts say a growing number of banks aren't paying association dues on properties on which they have foreclosed and now own.

Colin Hendrick, president of the Carlisle on the Ocean Condominium Units Association Inc. in Surfside, Fla., has filed six lawsuits since December against banks that failed to pay dues on foreclosed units.

One of those banks, Minneapolis-based U.S. Bancorp, says it isn't responsible for the assessment fees, saying that they are merely the trustees of the property and that the service agent is responsible for the payments. But Florida lawyers say that since the bank is the ultimate owner, it should have to pay.

So far, no overdue fees have been recovered as a result of the lawsuits. With 20 of the development's 115 luxury condominium units in foreclosure and an additional 35 units either behind on their fees or not paying them at all, the association says, it had no choice but to jack up fees 10% to $470 a month...

The tough economy is hurting associations even in areas where the housing market has been relatively stable. Rob Rosenberg, president of Massingham & Associates Management Inc. in Hayward, Calif., says 90% of the 350 home associations managed by his company in the Bay area of California are seeing a rise in the number of residents who pay their dues late or not at all. Some of the associations are toughening their payment policies by sending out more reminder letters, and many will have to start cutting amenities or services after another six months if they don't start collecting more fees, Mr. Rosenberg says.

Craig Koss, president of Kramer-Triad Management Group LLC in Ann Arbor, Mich., says he advised his 300 local homeowner associations to cushion their budgets with additional dollars in anticipation of the heavy foreclosures last year, but only about 25% of the associations did so. He says fiscally responsible associations will keep reserve funds, but in most states, there is not a state agency to oversee the associations to ensure that reserve funds are set up. "A lot of people won't plan until they have to," he says. "They won't have a rainy day fund until it's pouring."

Has the U.S. avoided a recession?

According to a story in the Wall Street Journal, the recession that many economists said was inevitable has either taken a detour or been postponed:

A funny thing happened to the economy on its way to recession: It's taken a detour.

That, at least, is the view of a growing number of economists -- including some who not long ago were saying a recession was all but inevitable. They note that stock and credit markets have steadily improved since the Federal Reserve intervened to keep Bear Stearns Cos. from bankruptcy in early March, while a series of economic reports have been stronger than expected.

Economists also cite swift policy responses, including a sharp reduction in interest rates by the Fed -- to 2% from 5.25% last September -- and the distribution of fiscal-stimulus checks to millions of Americans, as factors possibly easing the downturn...

Wachovia now puts the odds of recession at 45%, down from 90% in April, and expects growth in gross domestic product of 0.6% at an annual rate in the first and second quarters of this year, followed by 1.2% growth in the third and fourth quarters. While he doesn't expect a recession, he says growth will be very weak through next year.

Indeed, plenty of economic warning signs remain, as reflected in plunging consumer confidence data and polls reflecting deep unease among voters. Rising prices for food and other commodities are prompting Americans to trim some spending and stoking concerns about inflation. The ongoing run-up in oil prices has pushed the average price of a gallon of gasoline to $3.73 as of Tuesday, according to AAA, the automobile group. Home prices continue to decline and many economists expect that to depress spending in the months ahead...

Job losses, meanwhile, have been less severe than they usually are in recessions. And many economists think the government's earliest estimate of first-quarter GDP growth -- 0.6% -- will be revised upward. After reviewing the retail-sales data, economists at Global Insight, a Waltham, Mass.-based forecasting firm, predicted the government would increase its assessment of GDP growth in the first quarter to 1% at an annual rate. They forecast continued growth in consumer spending, partly because of tax rebates and stimulus checks...

The question remains open, since recessions typically aren't officially diagnosed until some time after pain hits consumers. A common definition of a recession is at least two consecutive quarters of negative GDP. But the National Bureau of Economic Research -- the nonprofit group that is the official arbiter of when recessions begin and end -- defines a recession as a period of significant decline in economic activity across GDP, income, employment and retail sales that lasts more than a few months.

John Lonski, Moody's chief economist, said recent labor market data and signs the credit crunch is easing on Wall Street have made him less gloomy than he was a few months ago. In the latest WSJ.com survey of economists, conducted in May, he said the likelihood of a recession was 60% -- down from the 90% he predicted in the April survey...

Claims for unemployment benefits -- which typically rise well above 400,000 a week during recessions -- have stayed well below that level, and fell last week. In addition, the economy isn't shedding hundreds of thousands of jobs a month, as it usually does in an economic contraction. In April, employers cut just 20,000 jobs, and the unemployment rate fell.

Even Alan Greenspan, who in early April said the U.S. was in the "throes of recession" and is going through the "most wrenching" crisis since World War II, has more recently toned down the warnings, saying the U.S. is in an "awfully pale recession." George Soros, who has long argued the U.S. is headed for a major crisis, also recently remarked that the "acute phase" of the crisis has now passed.

To be sure, even economists who are becoming more upbeat say the U.S. may be in for a period of protracted sluggish growth...

"I think the problems are just starting," said Lehman Brothers economist Drew Matus, citing high gasoline prices and tightening lending standards, saying that prolonged stagnation can be worse than a recession.

The pros and cons of a bailout

The Wall Street Journal's David Wessel argues that if the government does anything about rising foreclosures due to unaffordable loans and negative equity, the Barney Frank plan about to be vetoed by the Bush Administration might be an experiment worth pursuing:

The latest flash point in the debate over the nation's bursting housing bubble is this: Since so many American houses are worth less than their mortgages, should the government do more to get lenders to settle for less than the full debt, even if it may cost taxpayers some money?

The White House and Treasury say "No!" House Financial Services Committee Chairman Barney Frank and other House Democrats, with the quiet backing of Federal Reserve Chairman Ben Bernanke, say "Yes!"

Of the 80 million houses in the U.S., about 55 million have mortgages. Of those, four million are behind on payments. Foreclosure proceedings were begun on about 1.5 million homes last year, up more than 50% from 2006. This year will be worse. The Treasury, according to presentations its officials have made recently, predicts house prices could fall another 10% to 15% before touching bottom.

Moody's Economy.com estimates that one in roughly 12 American families with mortgages -- four million in all -- already owe more than the current value of their homes. They are said to be "underwater." The firm predicts that by early 2009 nearly one in four, or 12 million, homeowners will be underwater. Most will continue to pay mortgages on time. Many won't, and are at risk of losing their homes...

In ordinary times, a lender shouldn't need prodding from the government to do what's in its self-interest. But these aren't ordinary times. The drop in home prices is pervasive, mortgage markets messy and complexities caused by turning mortgages into securities many. No one in Washington wants to help the "speculators" who bought homes they don't live in or those who lent to them. And there's broad agreement that those who bought more house than they'll ever be able to afford are going to lose out. The debate revolves around the "preventable foreclosures."

Mr. Frank would offer lenders and eligible borrowers a deal: If the lender agrees to cut the debt so the homeowner owes no more than 90% of the house's current value, and the Federal Housing Administration (or an outfit to whom it outsources this) determines the homeowner can afford a new loan, then the lender gets rid of the mortgage and the FHA insures a new mortgage for the remaining balance.

The lender takes a hit, but gets rid of the risk that house prices will keep falling or the borrower will default on a new loan; the government picks up that risk. To create a cushion for the FHA, the lender has to chip in another 5% of the property's current value. The homeowner has to surrender some profits, if any, to the government when the house is sold...

The White House condemns this as a "bailout" and says it won't work. As the Treasury argued in a recent PowerPoint presentation: "Homeowners who can afford their mortgage but walk away because they are underwater are merely speculators." (It's a bit jarring to hear the Treasury vilifying people who are acting in their economic self-interest.) But if not for the widespread decline in house prices -- "a relatively novel phenomenon," Mr. Bernanke labels it -- and the proliferation of no-money-down mortgages made with the acquiescence of regulators, these homeowners wouldn't be underwater.

Despite the restrictions, the plan could allow some homeowners to get a deal they don't deserve; that's the unfortunate byproduct of any rescue. But the Treasury and Fed surrendered the let-the-market-work-it-out high ground when they agreed to risk nearly $30 billion of taxpayer money to shield Bear Stearns, its creditors and counterparties from losses.

This scheme might not work. Mr. Frank has crafted rules aimed at preventing those who can easily afford loans and those who haven't a prayer of paying a new loan from participating, leading the Congressional Budget Office to predict only 500,000 mortgages would be refinanced this way. Some administration experts suspect that's high; they doubt many lenders will play ball. In that event, it won't cost taxpayers much.

So, perhaps it's best considered a prudent experiment for coping with a bad situation that might get worse: Create a mechanism now so the bugs are worked out, in case home prices plunge more than anticipated and push millions more homeowners underwater.

Is the housing crisis nearly over?

Despite the regularity of bad news about the housing market, two writers in the Wall Street Journal argue that we may in fact be hitting a bottom for the housing slump. First, from Brett Arends:

Is it time, at long last, to head down to Florida to start looking at homes?

Maybe.

And the nearby chart shows one reason why.

It comes from Wellesley College Prof. Karl E. Case, one of the leading experts on the housing market in the country. And it suggests we may be at, or near, the bottom of the housing crash.

Of course, even if he's wrong we won't know for sure for many months.

But new housing starts have at last slumped below the seemingly magical one million mark. That happened in March. Every time that has happened in the last 50 years, it proved to be the bottom of a recession...

There is no guarantee this market will be the same but the similarities with the past are striking. Each boom peaked at around the same level of 2.5 million starts as well...

Incidentally, contrarians will also love Tuesday's gloomy first quarter news from leading homebuilding D.R. Horton and from federally sponsored home loan giant Fannie Mae. Both announced massive losses following write-downs. Fannie is holding a $4 billion cash call and both slashed their dividends. You often see these kinds of capitulations at a market bottom, though of course you can see them on the way down as well...

Prices may still fall further. Yet if you are tempted to keep waiting for homes to get a lot cheaper, there are several reasons to think that might not happen.

First, there are too many other bargain hunters out there.

Second, the falling dollar has made these homes even cheaper to foreign buyers. There are plenty of people in Europe for whom Florida is now a bargain.

Third, interest rates are low right now. I hesitate to give my fellow Americans any extra incentive to borrow yet more money, but you can get a 30-year fixed-rate mortgage under 6%. If the economy recovers that won't last. If you are shopping for a home, it is probably worth seeing if you can lock in one of these rates cheaply.

Finally, in an age of weak currencies and rising inflation, "real" or "hard" assets are in demand. That should include land, bricks and mortar.

Next, from an opinion piece by hedge fund manager Cyril Moulle-Berteaux:

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.