Welcome 2010! We are coming into a new year. With the economy stable and troubled, real estate stable and troubled and the job market still in flux, we will see continued efforts from the federal government to make an impact on the economy starting with more corrections to improve the housing market.
Housing is a big driver in the economy, new home sales create secondary demand for "durable goods" like home appliances and fixtures. Unlike a year ago, loans are now available but new home sales are still low and housing starts have not yet shown any signs of improvement. Real estate recover is going to be driven by resales. Through 2009, year foreclosures have continued at historicly high rates and defaults are continuing in record numbers.
Me and others have commented on the existence of Phantom Inventory. I recently posted about the number of foreclosures at auction and the number of homes released for sale not being equal. In addition to all this market insanity, the banks have been slow to release a number of homes in this area. Moderating the number of listings, while lending conditions have improved has created an artifical shortage and has inflated prices.
The reason this is nuts is that all the while the above is happening, foreclosures are continuing at a rate higher than the listed foreclosure inventory is sold. (If anyone at the too big to fail bank are listening, could you kindly release all your bay area real estate under 500k, we need more of those homes on the market.)
To add to the insanity, investors are snapping up foreclosures at auction, cleaning them up and reselling them at a profit. On one hand this is good for the economy, good for the banks but on the other hand it is bad for homeowners in distress and first time home buyers. It is adding unnecessary expense for the people who are actually buying homes to live in. What a crazy idea that is...
To my point, more changes are on the way for consumers in morgage trouble. As we speak the federal government is creating legislation to make it easier for short sales to occur by limiting damands by second lenders and creating new rules and incentives for banks to operate with to try to stop the impending flood of foreclosures. We should see these rules in place and I would guess by the third quarter of this year those homes will reach the market.
From an agents perspective this whole short sale process is madness. Lost papers, delays, buyers backing out (I have had to get 2 offers at different times on each of mine), the process has to restart once a buyer backs out, there are no guarentees that the bank is going to approve the sale or they demand a top dollar and unreasonable price. It's nuts. The consequences of this madness is that short sales have to offered at a discount to foreclosures.
Think about that. The administrative costs are higher on short sales, the offer price is lower to incentivise buyers to stick the process out. The banks provide awful service on Short Sales and they demand top dollar. (Sounds a lot like the Microsoft business model). I wish everyone could a business that way. It would solve the job's problem in an instant.
The last thing I learned in business business school is that good corporate citizenship is the key to free enterprise. When you start to generate profits at the expense of your consumers, expect the government to get involved to solve the problem in ways businesses won't like. The good news for homeonwers in distress is that help may actually be on the way. It only took 3 years. The question is, is it too little too late.
Saturday, December 26, 2009
Tuesday, November 3, 2009
Putting Foreclosures in Perspective
Putting Foreclosures in Perspective
By George W. Mantor
RISMEDIA, November 3, 2009—When considering the implications of the current foreclosure situation, I believe we are being misinformed about the forces behind the high rate of mortgage defaults.
I also believe there is more to learn about the lack of success in getting mortgages modified.
Or, as recently published reports on certain court cases have shown, why foreclosing entities either cannot or will not produce a valid chain of title in foreclosure proceedings even though it may cost them the case or sanctions by the courts.
Just as baffling, why would a lender make a loan and then lose the means by which to repossess the asset? There are, as it turns out, other ways for financial institutions to make money and when they can, they do.
That goes to the very heart of what happened to our prosperity. By reclassifying liabilities as assets, Wall Street was able to sell debt as an investment. Any kind of debt will do because the debt doesn’t matter. No risk is too great because there is no risk. They sell the loan and then make a bet that it will default. It’s called a Credit Default Swap (CDS).
A CDS is the most widely traded type of derivative, and these investments represent the biggest financial market in the world. CDS resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to increase profits by gambling on market changes
According, to the Bank of International Settlements [BIS], the aggregate derivative positions of banks grew from $100 trillion in 2002 to — believe it — $516 trillions in 2007; that is over 500 per cent in five years.
The BIS recently reported that total derivatives trades exceeded one quadrillion dollars – that’s 1,000 trillion dollars. This is curious when you realize that the gross domestic product of all the countries in the world is only about 60 trillion dollars.
The answer is that gamblers can bet as much as they want. They can bet money they don’t have, and that is where the huge increase in risk comes in. There is no regulation of these instruments and they do not show as liabilities on the balance sheets of the institutions.
A Derivative is a financial instrument whose value is not its own, but derived from something else, on some underlying asset or transaction, such as commodities, equities (stocks) bonds, interest rates, exchange rates, stock market indexes, why, even inflation indexes, index of weather. Basically, they are just bets. You can “hedge your bet” that something you own will go up by placing a side bet that it will go down. “Hedge funds” hedge bets in the derivatives market.
Nor, did mortgage defaults cause the crisis. Mortgage securities made up only $7 trillion of the huge derivative market.
To the extent that any information is available on what brought us to this point, it is mostly bloggers.
Most of the blogging perceives the foreclosure problem as the result of sub-prime loans, irresponsible borrowers, and mortgage resets.
Such a superficial view reveals a complete lack of understanding of how the securitization of mortgages makes Wall Street all of that money out of nothing at all. You have to follow the money.
An important distinction is that the consumer was not the driving force behind this money binge, but the profits Wall Streets was making on Derivatives.
When you break it all down, it looks to me like Wall Street possibly took a lesson from Broadway. The Producers is about a Broadway producer and his accountant who realize they can make more money with a musical that was guaranteed to fail than one that would succeed. But, the musical’s sure-to-fail hit song, “Springtime for Hitler” surprisingly turned out to be an astonishing success. When the investors came for their profits, there were too many investors to pay back.
Wall Street, where life imitates art.
George W. Mantor is known as “The Real Estate Professor” for his wealth building formula, Lx2+(U²)xTFP=$? and consumer education efforts. During a career that has spanned more than three decades, he has amassed experience in new home and resale residential real estate, resort marketing, and commercial and investment property. He is currently the founder and president of The Associates Financial Group, a real estate consulting firm.
Mantor can be reached at GWMantor@aol.com.
Don’t miss more news on RISMedia.com:Read more: http://rismedia.com
By George W. Mantor
RISMEDIA, November 3, 2009—When considering the implications of the current foreclosure situation, I believe we are being misinformed about the forces behind the high rate of mortgage defaults.
I also believe there is more to learn about the lack of success in getting mortgages modified.
Or, as recently published reports on certain court cases have shown, why foreclosing entities either cannot or will not produce a valid chain of title in foreclosure proceedings even though it may cost them the case or sanctions by the courts.
Just as baffling, why would a lender make a loan and then lose the means by which to repossess the asset? There are, as it turns out, other ways for financial institutions to make money and when they can, they do.
That goes to the very heart of what happened to our prosperity. By reclassifying liabilities as assets, Wall Street was able to sell debt as an investment. Any kind of debt will do because the debt doesn’t matter. No risk is too great because there is no risk. They sell the loan and then make a bet that it will default. It’s called a Credit Default Swap (CDS).
A CDS is the most widely traded type of derivative, and these investments represent the biggest financial market in the world. CDS resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to increase profits by gambling on market changes
According, to the Bank of International Settlements [BIS], the aggregate derivative positions of banks grew from $100 trillion in 2002 to — believe it — $516 trillions in 2007; that is over 500 per cent in five years.
The BIS recently reported that total derivatives trades exceeded one quadrillion dollars – that’s 1,000 trillion dollars. This is curious when you realize that the gross domestic product of all the countries in the world is only about 60 trillion dollars.
The answer is that gamblers can bet as much as they want. They can bet money they don’t have, and that is where the huge increase in risk comes in. There is no regulation of these instruments and they do not show as liabilities on the balance sheets of the institutions.
A Derivative is a financial instrument whose value is not its own, but derived from something else, on some underlying asset or transaction, such as commodities, equities (stocks) bonds, interest rates, exchange rates, stock market indexes, why, even inflation indexes, index of weather. Basically, they are just bets. You can “hedge your bet” that something you own will go up by placing a side bet that it will go down. “Hedge funds” hedge bets in the derivatives market.
Nor, did mortgage defaults cause the crisis. Mortgage securities made up only $7 trillion of the huge derivative market.
To the extent that any information is available on what brought us to this point, it is mostly bloggers.
Most of the blogging perceives the foreclosure problem as the result of sub-prime loans, irresponsible borrowers, and mortgage resets.
Such a superficial view reveals a complete lack of understanding of how the securitization of mortgages makes Wall Street all of that money out of nothing at all. You have to follow the money.
An important distinction is that the consumer was not the driving force behind this money binge, but the profits Wall Streets was making on Derivatives.
When you break it all down, it looks to me like Wall Street possibly took a lesson from Broadway. The Producers is about a Broadway producer and his accountant who realize they can make more money with a musical that was guaranteed to fail than one that would succeed. But, the musical’s sure-to-fail hit song, “Springtime for Hitler” surprisingly turned out to be an astonishing success. When the investors came for their profits, there were too many investors to pay back.
Wall Street, where life imitates art.
George W. Mantor is known as “The Real Estate Professor” for his wealth building formula, Lx2+(U²)xTFP=$? and consumer education efforts. During a career that has spanned more than three decades, he has amassed experience in new home and resale residential real estate, resort marketing, and commercial and investment property. He is currently the founder and president of The Associates Financial Group, a real estate consulting firm.
Mantor can be reached at GWMantor@aol.com.
Don’t miss more news on RISMedia.com:Read more: http://rismedia.com
The Difference Between Loan and Appraisal Contingencies
This question was asked by a Trulia Blogger. Here was the question.
I am trying to understand the difference between both. If there is an agreement to put 20% on a home with no appraisal contingency and if the bank estimates the home to be of much lower value would the situation not be covered by loan contingency (since bank may refuse to give the loan asked for)? What is the use of the appraisal contingency in cases where buyer only puts 20% down?
Here was my response.
The two are interrelated but there is a sharp difference between them. What is implied by your post, I would characterize as loan contingency consideration. In other words it strength of buyer in regards to financing.
(Lets start by discussing) the financing. Lets say we have a 400k loan and a buyer with 20% down payment of 100k on a 500k purchase. I use this beacuse I can do the math in my head easily. So buyer is in contract and the home appraises for 450k. Now like you descibe there is no problem with the loan approval. The buyer puts 90k down instead of 100k and you go to close right? Well no. A an appraisal contingency states that the contract is valid only if the property appraises for price on the contract. The buyer can now walk away. Right? Well no.
This is one way realtors make their money. Realtors make money by getting contracts to close. Our contracts state that the buyer just cant walk away. Buyers have to give the sellers a chance to reduce the sale price to the appriasal or get another appraisal (or lately go through an administrative appeals process which I wont get into here.) Clearly the buyer isn't going to balk, they loved the house at 500k at 450k it would be assumed they are now ecstatic.
Lets now say that the sellers pay for a 2nd appraisal and they lose the administraitve appeal. The value of the home is $450 per appriasal and there is an appraisal contingency and the contract says 20% down. The seller says, "I don't care, but I'll take 475k and I won't take a penny less." Now, we know the buyer can offer the seller the additonal 10k (The difference between 20% of 500k vs 20% of 450k) without a problem. The loan contingency though says that the buyer can only put down 20%. There is a 15k gap.
This is why there is a separate contingency for loan and appriasal.
Web Reference: http://bob2sell.com
I am trying to understand the difference between both. If there is an agreement to put 20% on a home with no appraisal contingency and if the bank estimates the home to be of much lower value would the situation not be covered by loan contingency (since bank may refuse to give the loan asked for)? What is the use of the appraisal contingency in cases where buyer only puts 20% down?
Here was my response.
The two are interrelated but there is a sharp difference between them. What is implied by your post, I would characterize as loan contingency consideration. In other words it strength of buyer in regards to financing.
(Lets start by discussing) the financing. Lets say we have a 400k loan and a buyer with 20% down payment of 100k on a 500k purchase. I use this beacuse I can do the math in my head easily. So buyer is in contract and the home appraises for 450k. Now like you descibe there is no problem with the loan approval. The buyer puts 90k down instead of 100k and you go to close right? Well no. A an appraisal contingency states that the contract is valid only if the property appraises for price on the contract. The buyer can now walk away. Right? Well no.
This is one way realtors make their money. Realtors make money by getting contracts to close. Our contracts state that the buyer just cant walk away. Buyers have to give the sellers a chance to reduce the sale price to the appriasal or get another appraisal (or lately go through an administrative appeals process which I wont get into here.) Clearly the buyer isn't going to balk, they loved the house at 500k at 450k it would be assumed they are now ecstatic.
Lets now say that the sellers pay for a 2nd appraisal and they lose the administraitve appeal. The value of the home is $450 per appriasal and there is an appraisal contingency and the contract says 20% down. The seller says, "I don't care, but I'll take 475k and I won't take a penny less." Now, we know the buyer can offer the seller the additonal 10k (The difference between 20% of 500k vs 20% of 450k) without a problem. The loan contingency though says that the buyer can only put down 20%. There is a 15k gap.
This is why there is a separate contingency for loan and appriasal.
Web Reference: http://bob2sell.com
Wednesday, October 28, 2009
Schizophrenic Sales Data
Don't believe what you read! Just kidding. This is a great lesson about what is going on in our market today and why it is great that we live in such a special state. In today's CAR newsletter the following short stories were in the same article.
C.A.R. releases Sept. sales and price report
Home sales increased 2.1 percent in September in California compared with the same period a year ago, while the median price of an existing home declined 7.3 percent, C.A.R. reported yesterday.
The median price of an existing, single-family detached home in California during September 2009 was $296,090, a 7.3 percent decrease from the revised $319,310 median for September 2008, C.A.R. reported. The September 2009 median price rose 1.1 percent compared with August’s $292,960 median price.
“A new milestone was reached in September, when five C.A.R. regions reported positive year-to-year increases in the median price, the first such increase since January 2008,” said C.A.R. Vice President and Chief Economist Leslie-Appleton-Young. “September also marked the seventh consecutive month of month-to-month increases in the statewide median price and the first single-digit decline in the year-to-year median price since October 2007, after 22 consecutive months of double-digit decreases.”
Home prices decline 0.3 percent nationwide
Home prices decreased 0.3 percent nationwide on a seasonally adjusted basis from July to August, according to the Federal Housing Finance Agency’s (FHFA) monthly House Price Index. The FHFA’s index is calculated using purchase prices of houses owned or guaranteed by Fannie Mae or Freddie Mac. For the 12 months ending in August, U.S. home prices decreased 3.6 percent. The U.S. index is 10.7 percent below its April 2007 peak.
Makes you wonder how both can be true. The answer is simple. Real estate is a local phenomenon subject to many more factors beyond being a home and a price. Jobs, income bracket, community, age demographic, price point, financing, interest rates all play a part in the value of real estate.
The median price is up due to liquidity that was in the process ot tightening up last year. A year ago a loan over $700k simply didn't exist so selling a home in that price point was an extreme challenge. Now the laon market has stabilized and more buyers have the capaility to purchase a home. More recently inventory has dried up and banks have slowed the rate in foreclosures into the market. These two factors have created a mini boom in the lower price points and as more homes have sold in the 500k-800k range, the median goes up and prices overall fall. I won't even the high end freefall of prices but this is simply icing on the cake.
C.A.R. releases Sept. sales and price report
Home sales increased 2.1 percent in September in California compared with the same period a year ago, while the median price of an existing home declined 7.3 percent, C.A.R. reported yesterday.
The median price of an existing, single-family detached home in California during September 2009 was $296,090, a 7.3 percent decrease from the revised $319,310 median for September 2008, C.A.R. reported. The September 2009 median price rose 1.1 percent compared with August’s $292,960 median price.
“A new milestone was reached in September, when five C.A.R. regions reported positive year-to-year increases in the median price, the first such increase since January 2008,” said C.A.R. Vice President and Chief Economist Leslie-Appleton-Young. “September also marked the seventh consecutive month of month-to-month increases in the statewide median price and the first single-digit decline in the year-to-year median price since October 2007, after 22 consecutive months of double-digit decreases.”
Home prices decline 0.3 percent nationwide
Home prices decreased 0.3 percent nationwide on a seasonally adjusted basis from July to August, according to the Federal Housing Finance Agency’s (FHFA) monthly House Price Index. The FHFA’s index is calculated using purchase prices of houses owned or guaranteed by Fannie Mae or Freddie Mac. For the 12 months ending in August, U.S. home prices decreased 3.6 percent. The U.S. index is 10.7 percent below its April 2007 peak.
Makes you wonder how both can be true. The answer is simple. Real estate is a local phenomenon subject to many more factors beyond being a home and a price. Jobs, income bracket, community, age demographic, price point, financing, interest rates all play a part in the value of real estate.
The median price is up due to liquidity that was in the process ot tightening up last year. A year ago a loan over $700k simply didn't exist so selling a home in that price point was an extreme challenge. Now the laon market has stabilized and more buyers have the capaility to purchase a home. More recently inventory has dried up and banks have slowed the rate in foreclosures into the market. These two factors have created a mini boom in the lower price points and as more homes have sold in the 500k-800k range, the median goes up and prices overall fall. I won't even the high end freefall of prices but this is simply icing on the cake.
Wednesday, October 21, 2009
Yahoo News Link
Here is a quick news link from Yahoo on the state of the market.
http://finance.yahoo.com/news/Homes-About-to-get-much-cnnm-699910894.html?x=0
http://finance.yahoo.com/news/Homes-About-to-get-much-cnnm-699910894.html?x=0
Wednesday, September 9, 2009
Home Improvement Rules of Thumb.
On a zillow blog a poster asked about how much to invest in a kitchen remodel. Stan at Brandon Handyman.com, "Realtors_Fix It Guy" posted in response. "Cost of kitchen upgrade should be at or near 1/5th in porportion but not exceeding 25% of total home value... As for a bath redo, stay around 20% overall value divided by number of bathrooms... ie. 2 baths = 10% ea... or 12.5% and 7.5%, etc.
I like this advice it though it provides a very generous range. This rule of thumb I would further advise is for owners who are planning on being in their home more than 5 years. Another poster in the kithcen and bath busess elaborated further.
your remodel, and as with all things in life, you will usually get what you pay for. If you want the products with finer quality, or more options, or the better quality, the more costly the remodel is going to be.
"...I usually suggest a project budget starting point of 15-20% as this will allow you to select the better quality materials and products that you will invariably want. If this is your "dream home" and you want this to be your "dream kitchen" you can easily shoot right past the 25% end of the rule, but then you are doing this for yourself, it's your dream, and you deserve it now don't you!! If you are remodeling to sell or you are planning on being in the home less than 2 years, I recommend shooting for the 10% end of the rule. By staying around 10% you will still be putting in good quality materials but you will not be spending unnecessarily. And while it is possible to spend less (I help clients do it all the time), if you go too much below the 10% rule, you may then start to devalue the home instead of increasing it's value. (things look cheap for a reason)."
I have to put a serious issue with the other guy's comments.
If a seller came up to me and told me they were going to put 10% of the cost of their home into the kitchen. The first question I would ask is how long are you going to live there? The psoter said if the answer is 2 years then clsoer to the 10% is closer. I say that if the number is less than 2 years do a cosmetic remodel because you are more likely going to get 70 cents on the dollar return on your money. The lower one is on the home price range, the lower that return goes. This requires some elaboration.
If you live in a $300k home and put $30k into the kitchen then learned you had to sell right away. It is very resonable to expect $330k back right away but probaly more like $320k all other things equal. But I will share that if one planned to remodeled the kitchen with the intent to sell on the plannable horizon, I could put you in touch with people who could do it for $12k and we could sell the home for $330k. Sound good to you?
Most people don't know the difference between a "value" remodel or "quality" remodel. To he honest (and this is no disparaging any one here) I have seem the same quality of materials used for both a 15k and 30k remodel. The poster comes form San Ramon CA. I advised they go out to the new construction in the Dougherty Valley, an area where much development is happening, and look at the "quality" materials some builders are putting in those homes with masontie laminate covered drawer bottoms and laminate shelving. I ask would this be a 15k or 30k kitchen? Those builders use high end looking finishes which is what people want. They want nice looking and new.
If one is going to put in a kitchen in the 300k home would anyone really advise they spend 75k?
I would condition these statements by saying a homeowner should take the average cost of the home in their neighborhood then add the cost of the remodel. If that number is meaningfully over the most expensive recent sale in the area, then lower your budget.
I like this advice it though it provides a very generous range. This rule of thumb I would further advise is for owners who are planning on being in their home more than 5 years. Another poster in the kithcen and bath busess elaborated further.
your remodel, and as with all things in life, you will usually get what you pay for. If you want the products with finer quality, or more options, or the better quality, the more costly the remodel is going to be.
"...I usually suggest a project budget starting point of 15-20% as this will allow you to select the better quality materials and products that you will invariably want. If this is your "dream home" and you want this to be your "dream kitchen" you can easily shoot right past the 25% end of the rule, but then you are doing this for yourself, it's your dream, and you deserve it now don't you!! If you are remodeling to sell or you are planning on being in the home less than 2 years, I recommend shooting for the 10% end of the rule. By staying around 10% you will still be putting in good quality materials but you will not be spending unnecessarily. And while it is possible to spend less (I help clients do it all the time), if you go too much below the 10% rule, you may then start to devalue the home instead of increasing it's value. (things look cheap for a reason)."
I have to put a serious issue with the other guy's comments.
If a seller came up to me and told me they were going to put 10% of the cost of their home into the kitchen. The first question I would ask is how long are you going to live there? The psoter said if the answer is 2 years then clsoer to the 10% is closer. I say that if the number is less than 2 years do a cosmetic remodel because you are more likely going to get 70 cents on the dollar return on your money. The lower one is on the home price range, the lower that return goes. This requires some elaboration.
If you live in a $300k home and put $30k into the kitchen then learned you had to sell right away. It is very resonable to expect $330k back right away but probaly more like $320k all other things equal. But I will share that if one planned to remodeled the kitchen with the intent to sell on the plannable horizon, I could put you in touch with people who could do it for $12k and we could sell the home for $330k. Sound good to you?
Most people don't know the difference between a "value" remodel or "quality" remodel. To he honest (and this is no disparaging any one here) I have seem the same quality of materials used for both a 15k and 30k remodel. The poster comes form San Ramon CA. I advised they go out to the new construction in the Dougherty Valley, an area where much development is happening, and look at the "quality" materials some builders are putting in those homes with masontie laminate covered drawer bottoms and laminate shelving. I ask would this be a 15k or 30k kitchen? Those builders use high end looking finishes which is what people want. They want nice looking and new.
If one is going to put in a kitchen in the 300k home would anyone really advise they spend 75k?
I would condition these statements by saying a homeowner should take the average cost of the home in their neighborhood then add the cost of the remodel. If that number is meaningfully over the most expensive recent sale in the area, then lower your budget.
Tuesday, August 11, 2009
Maybe it’s time to let Bankruptcy Courts deal with Neg-Am Mortgages.
This blog should fall into the arena of gossip for some more educated source to follow up and provide better and more firm facts.
Someone I trust was talking to a banker and they started to discuss the problems with the banking system. After covering all the numerous talking points about who was to blame and pointing the usual fingers; the Community Investment Act, Fannie and Freddie Mac acting as irresponsible investor on bad loans, and the removal of the restriction preventing Investment Banks from engaging in real estate (Glass-Stegal). In other words the usual complaints. They then started to discuss possible solutions to the debacle, this is where I became interested.
Most real estate agents, and others who have attempted a loan modification, know what kind of a byzantine nightmare the process can be. Many calls, lost paperwork, and low level staff manning the phones that have no authority other than the right to tell you 'NO' and 'declined'.
They talked about the system. Once a bank receives the modification or short sale request, it has to go to its files and pull the loan documents, submit all the paperwork to an underwriter who was given a set of policies drafted by the banks attorney's who may also eventually research the loan. At the same time, if there is a second loan, a concurrent negotiation occurs with an institution that has their own phalanx of underwriters, attorneys, and guidelines.
Part of the bank's research is to determine if there was mortgage insurance and if there was an investor on the loan. Once it is discovered that these entities exist, there are yet another set of guidelines to deal with from corporations who have yet another series of underwriters, guidelines, and attorneys.
So lets review, under the ideal situation in any short sale or loan modification with one loan there
could be as few one and many as three institutions involved; the bank then additionally one insurer and/or one investor. If there are two mortgages, then there are two to six institutions.
Now let's complicate the matter, like the reality for most. No bank has one investor, nor do they use one insurer. So as the pool of loans grows and the number of vendors grows, and the process gets more and more complicated. Other complications arise when you consider the myriad of state laws and the fact that many of the investors are overseas. but then it gets really tricky.
Somewhere along the line, investment banks created these "so-called" risk hedges called the collateralized mortgage obligation or collateralized debt obligation (CMO's or CDO's). This was a new form of investment designed to reduce losses on bad mortgages. So the banks take their pool of assets backed by debt and people's incomes and they divide these obligations into investment vehicles, using another set of contracts (drafted by attorneys) and start trading them on Wall Street to institutional investors (who have their own attorneys).
So at the peak of the bubble we had we had little or no oversight from the Republicans, We had Democrats pushing banks to underwrite bad loans that were purchased by Fannie Mae and Freddie Mac. The Investment Banks poured money into the mortgage market. Banks wrote loans, sold some to investors, and insured others, all while packaging bundles of investments and selling them to insurance companies, other banks, foreign governments and hedge funds.
So now the banker gets to the end of his discussion. "Event's didn't work out so well." he says. "Real Estate agents are working the short sales and individuals are trying to perform loan modifications." He continued, "The reason most loan mod's and short sales do not get approved is because it is just cheaper to foreclose than to deal with all the various companies and their attorneys. Every bank can't come up with one set of guidleines to deal with all the different situations all these contracts and attorneys have created." Once the foreclosure occurs then it wipes the slate clean for the bank holding the loan at the core of this complex system of contracts. The homeowner is treated like one of the investors and gets wiped out with the foreclosure.
This is why it's so hard to do a short sale or loan mod.
Someone I trust was talking to a banker and they started to discuss the problems with the banking system. After covering all the numerous talking points about who was to blame and pointing the usual fingers; the Community Investment Act, Fannie and Freddie Mac acting as irresponsible investor on bad loans, and the removal of the restriction preventing Investment Banks from engaging in real estate (Glass-Stegal). In other words the usual complaints. They then started to discuss possible solutions to the debacle, this is where I became interested.
Most real estate agents, and others who have attempted a loan modification, know what kind of a byzantine nightmare the process can be. Many calls, lost paperwork, and low level staff manning the phones that have no authority other than the right to tell you 'NO' and 'declined'.
They talked about the system. Once a bank receives the modification or short sale request, it has to go to its files and pull the loan documents, submit all the paperwork to an underwriter who was given a set of policies drafted by the banks attorney's who may also eventually research the loan. At the same time, if there is a second loan, a concurrent negotiation occurs with an institution that has their own phalanx of underwriters, attorneys, and guidelines.
Part of the bank's research is to determine if there was mortgage insurance and if there was an investor on the loan. Once it is discovered that these entities exist, there are yet another set of guidelines to deal with from corporations who have yet another series of underwriters, guidelines, and attorneys.
So lets review, under the ideal situation in any short sale or loan modification with one loan there
could be as few one and many as three institutions involved; the bank then additionally one insurer and/or one investor. If there are two mortgages, then there are two to six institutions.
Now let's complicate the matter, like the reality for most. No bank has one investor, nor do they use one insurer. So as the pool of loans grows and the number of vendors grows, and the process gets more and more complicated. Other complications arise when you consider the myriad of state laws and the fact that many of the investors are overseas. but then it gets really tricky.
Somewhere along the line, investment banks created these "so-called" risk hedges called the collateralized mortgage obligation or collateralized debt obligation (CMO's or CDO's). This was a new form of investment designed to reduce losses on bad mortgages. So the banks take their pool of assets backed by debt and people's incomes and they divide these obligations into investment vehicles, using another set of contracts (drafted by attorneys) and start trading them on Wall Street to institutional investors (who have their own attorneys).
So at the peak of the bubble we had we had little or no oversight from the Republicans, We had Democrats pushing banks to underwrite bad loans that were purchased by Fannie Mae and Freddie Mac. The Investment Banks poured money into the mortgage market. Banks wrote loans, sold some to investors, and insured others, all while packaging bundles of investments and selling them to insurance companies, other banks, foreign governments and hedge funds.
So now the banker gets to the end of his discussion. "Event's didn't work out so well." he says. "Real Estate agents are working the short sales and individuals are trying to perform loan modifications." He continued, "The reason most loan mod's and short sales do not get approved is because it is just cheaper to foreclose than to deal with all the various companies and their attorneys. Every bank can't come up with one set of guidleines to deal with all the different situations all these contracts and attorneys have created." Once the foreclosure occurs then it wipes the slate clean for the bank holding the loan at the core of this complex system of contracts. The homeowner is treated like one of the investors and gets wiped out with the foreclosure.
This is why it's so hard to do a short sale or loan mod.
Subscribe to:
Posts (Atom)
