friction in Obama's refi proposal

"The response to President Obama's recent proposal to refinance more borrowers into lower interest rate mortgages was at best underwhelming and at worst scathing. The plan would expand the government's so-far disappointing, Home Affordable Refinance Program (HARP), which helps current but underwater borrowers with Fannie Mae and Freddie Mac loans to refinance. 'Mr. President, the housing market is the foundation of the US economy. It is cracked and chipping away,' writes Florida real estate consultant Jack McCabe in an editorial in the Herald-Tribune. 'The walls are beginning to cave. Your answer, anecdotally, seems to be put a new roof on it.' McCabe is calling for principal write-down for troubled mortgages, not refinances for borrowers who are current on their monthly payments. The argument so far against principal write-down is that it would cost banks and investors (including Fannie Mae and Freddie Mac) too much.

Unfortunately the plan, which could allow borrowers with more than 25% in negative equity to refinance, is being deemed too costly as well. While the Congressional Budget Office estimated it would cost investors in the original mortgages between $13
and $15 billion (while potentially saving 111,000 borrowers from defaulting), analysts at JP Morgan Chase say it would cost more: If such a policy were successful on a large scale, it would clearly devalue higher coupons, and would threaten lower coupons
with incremental gross supply. A more modest HARP overhaul, while less disruptive, still forces investors to require more conservative valuations until details emerge.

All these arguments, however, may be moot, as the overseer of Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA), which would have to approve the refinance effort, is sounding wildly cautious. In a statement following the President's speech, Director Ed DeMarco states, 'If there are frictions associated with the origination of HARP loans that can be eased while still achieving the program's intent of assisting borrowers and reducing credit risk for the Enterprises, we will seek to do so.' He goes on to say, however, that there are 'several challenging issues to work through,' and then he uses the word 'uncertain' twice in characterizing any outcome. While DeMarco doesn't detail said 'frictions,' they are vast and not limited to investor cost. First of all, too many borrowers probably still wouldn't qualify if they just did away with the loan to value ratio of 125%. Of the 838,400 HARP refinancings done so far, only 62,432 had LTVs above 105%, according to Jaret Seiberg at MF Global. 'We believe lenders are reluctant to HARP a loan if they fear the borrower is so underwater that they might default anyway,' writes Seiberg. Then there are issues of loan origination dates, put-backs on loans that default and borrower qualifications. Frictions. Beyond the friction, however, is the simple fact that a refinance program, while potentially an economic stimulus, is not a housing stimulus and shouldn't be characterized as such. The HARP program is and always was for current borrowers and does nothing to address the millions of non-current borrowers, bank-owned foreclosed homes and falling home prices."

US to sue banks

The Federal Housing Finance Agency, which oversees the mortgage giants Fannie Mae and Freddie Mac, is set to file suits against more than a dozen big banks, accusing them f misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.

The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others. The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value. Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers. In July, the agency filed suit against UBS, another major mortgage securitizer, seeking to recover at least $900 million, and the individuals with knowledge of the case said the new litigation would be similar in scope.

Home Builders Face New Hurdles

Builders are on track to construct the fewest single family homes in history this year. Total housing starts in July were down 1.7 percent, month to month, which may not sound like a lot, but when you break the number down, you see the problem. Single family starts were down 4.9 percent, while Multi-family starts rose 6.3 percent. Rental demand continues to rise, as consumer confidence in homeownership was decimated yet again by the recent debt turmoil in the economy. I am reporting these numbers today from a construction site. Mid-Atlantic Builders of Rockville, MD is putting up the last phase of a large single family development out in Bowie, MD, which is about 15 minutes outside the DC Beltway. According to executive VP Stephen Paul, "We started what we call the spring market in February. We started out very strong, we had a good February, March, even into April. What started to cause consumer confidence to wane was the escalation of gas prices, the debt issue with the government, and what's going on in Europe." In other words: Confidence. "We see people not sure what to do at this moment and a little unsure," adds Paul, though he is confident that things will pick up this Fall, but housing analysts aren't so sure. "The market is continuing to adjust to a reduction in the national home ownership rate at the same time the supply of existing single family homes remain excessive," writes Peter Boockvar at Miller Tabak. Builder Stephen Paul told me of a new trend I'd heard of only anecdotally: We're seeing more multi-generational families moving into our homes, so we're selling in-law suites, with the regular part of the house, and the parents are moving in and actually helping pay, funding the mortgage, so that's helping with the affordability." That's precisely why we are seeing a drop in household formation. Add that to the surge in renting and it's pretty clear why the nation's home builders are in for a long
haul back to recovery.

Home prices trending up

Home prices and inventory levels are trending upward in many US cities tracked by Altos Research, according to the firm's latest Housing Market Update. The median national home price for all 26 markets covered by Altos hit $450,358 in June, up from $444,273 in May. Meanwhile, in the past three months, listing prices rose 2.31% and inventory levels grew 3.52%. The only city to report a drop in home prices in June was Las Vegas and even that was amere 0.86% decline when compared to the month before. When analyzing home price data for the past three months, both New York and Las Vegas experienced falling prices, reporting drops of 2.2% and 1.61%, respectively, Altos said.

Inventory rose in 12 of the major markets tracked by Altos last month, while falling in the remaining 14 composite cities. The biggest inventory jump occurred in Boston, with the city's inventory level rising to 5.8%. Phoenix, on the other hand, experienced the largest inventory level drop, falling 7.93%. Even though the 90-day home price trends rose somewhat, Altos said a weekly sample taken from the month of June still shows a "slight flattening" in home prices. Comparatively, the latest S&P/Case Shiller report said the average price of a single-family home rose for the first time in eight months during the month of April. Altos suspects the S&P/Case-Shiller will be reporting a few positive trends through September. At the same time when looking forward, Altos foresees a slowing or plateau of home prices in the fourth quarter.

household shifts could affect recovery

"Every now and then you need to take a step back and put the housing market into perspective, take a break from all the monthly motions and commotions, stress and distress. Today I read a report that did just that. It takes a big-picture snapshot of how housing has fundamentally changed over the past several decades, which could have a big impact on its future as the industry rebuilds itself, literally and economically.

The report, from John Burns Real Estate Consulting's Chris Porter, is titled simply, Tremendous Demographic Shift.' And the numbers are pretty tremendous. 'The number of non-family households—people living alone or households that do not have any members related to the householder—has increased nearly five times in the last 50 years, from 7.9 million to 39.2 million. At the same time, the number of family households has increased by just 1.7 times, from 45.1 million to 77.5 million,' according to Porter. In addition, married couples have dropped to less than half of all US households from 75% in 1960. So let's think about the current housing stock, much of which is more than 50 years old. We've recently seen a downsizing trend for several reasons, namely the weak economy and builders constructing cheaper homes to meet the demand but also the environmental movement and the high cost of energy.

But this comes right after the 'McMansion' era when oversized homes were all the rage. Those homes, of course, still exist in vast quantities, despite the fact that there are, according to this report, fewer big family households and therefore less need for large square footage. We've also talked a lot about the surge in renting; we've blamed it on the housing crash, fear of buying into a depreciating market and the tight credit conditions that are pricing many potential buyers out. Perhaps there's more to it than that as well. Perhaps with fewer large family households and less desire for a big space, smaller, full-service rental apartments are more desirable to a growing segment of the population. 'Family households are more likely to stretch for size over location. Non-family households are more likely to value location—proximity to work, entertainment,etc.—and then size. They are less willing to commute than a family household,' noted Porter. We also have to look at the growing population of Americans who intend to 'age in place,' that is, the baby boomers who are moving out of the big family homes but not into what we used to call 'retirement homes.' Now they're 'active adult communities,' with smaller one-story homes. That demographic, though, plays against a growing demographic of Hispanic Americans. The average Hispanic household is statistically larger than the national average.

So what should home builders and housing watchers take from all this?

Obviously there are and always will be large families in the suburbs who want to live in big houses. There will always be wealthy Americans who desire to live in spaces that far exceed their needs. But the shift in household size cannot simply be considered anecdotal. When you couple that shift with a much-changed mortgage market, one that prices so many more Americans out of larger, move-up homes, you have to be concerned about what happens to the stock of larger homes, old and new. Do we see huge price reductions as demand falters?"

Retailers have strong June sales

American consumers that were enticed by warmer weather and deep discounts of up to 80% on summer merchandise went on a buying binge in June, helping many retailers deliver robust revenue gains for what is typically the second-biggest shopping month of the year. Big merchants Target Corp., Costco Wholesale Corp., Limited Brands Inc. as well as teen retailers such as The Buckle were among the companies that posted June results that beat Wall Street estimates. The few stragglers included Destination Maternity Corp. and Bon Ton Stores, which reported declines. The figures are based on revenue at stores opened at least a year. This measure is considered a key indicator of a retailer's health because it excludes results from stores opened or closed during the year. June is the second most important month on a retailers' sales calendar behind December. During the month, stores typically clear out summer merchandise to make room for fall goods. But this time, it took deep discounts of up to 80% to get shoppers to buy amid worries about the economy.

Analysts fear that retailers have not quite turned a corner. After all, gas prices are still 35% higher than last year at this time. Moreover, prices in the food aisle remain high and this fall, shoppers will be seeing the price tags of fashion and accessories rise as retailers try to offset higher labor costs in China and soaring prices of raw materials like cotton. Shoppers' biggest concerns remain a weak job recovery and stagnant wages. These worries sent consumer confidence to a seven-year low in June, according to the Conference Board's survey released last
week. In fact, consumer confidence has never been this low in the 24th month of a recovery, according to David A. Rosenberg, chief economist and investment strategist at the Toronto-based money management firm Gluskin Sheff. Historically at the two-year mark, confidence is at 94, not 58.5, which was recorded by The Conference Board's June survey.

Wells Fargo modification outnumber Obama's 5 to 1

Wells Fargo completed or started trials on roughly 585,000 mortgage modifications through its private programs since the beginning of 2009, more than five times the 101,000 initiated through the Home Affordable Modification Program (HAMP). HAMP launched in March 2009 but almost immediately drew criticism. Treasury officials admit the more than 3 million modifications initially promised was over estimated. Through May, servicers started roughly 731,000 permanent loan modifications and have been averaging between 25,000 and 30,000 per month this year. According to a recent poll of housing counselors, only 9% of borrowers who entered the program described it as a "positive" experience. Homeowners continually blame servicers for mishandling documentation. Overwhelmed servicers point out many borrowers are simply out of reach. "Avoiding foreclosure is a top priority for us and when customers work with us, we can help seven of every 10 to stay out of foreclosure," said Teri Schrettenbrunner, senior vice president, Wells Fargo Home Mortgage.

The Treasury points out most of the private programs built since the foreclosure crisis use HAMP as a model. But since mishandled foreclosure and modification processes came to light late last year, new standards were put in place, including a single point of contact that servicers are required to provide throughout the loss-mitigation process. The Treasury began to clamp down on poorly performing servicers — at least to the extent their contracts with these firms allow. In June, the Treasury announced it was withholding HAMP payments from Bank of America, JPMorgan Chase and Wells. Schrettenbrunner said the bank continues to build on its primary contact model it established last summer, and the bank has met with 58,000 borrowers at 31 home preservation workshops. Half of those received a decision on the spot or shortly after the event. Schrettenbrunner said the department continues to "aggressively reach out" to borrowers behind on payments to bridge the communication gap as quickly as possible. "We also continue to aggressively reach out to customers 60 or more days behind on their home loans via mail and telephone in an effort to engage them," Schrettenbrunner said.

NAR - existing home sales decline

According to the National Association of Realtors (NAR), Existing-home sales, (completed transactions that include single-family, townhomes, condominiums and co-ops), fell 3.8% to a seasonally adjusted annual rate of 4.81 million in May from a downwardly revised 5.00 million in April, and are 15.3% below a 5.68 million pace in May 2010 when sales were surging to beat the deadline for the home buyer tax credit. There were notable regional differences in home sales. “A large decline in Midwestern existing-home sales can be attributed partly to the flooding and other severe weather patterns that occurred, but this also implies a temporary nature of soft market activity,” Lawrence Yun, NAR chief economist, explained.

The national median existing-home price for all housing types was $166,500 in May, down 4.6% from May 2010. Distressed homes3 – typically sold at a discount of about 20% – accounted for 31% of sales in May, down from 37% in April; they were 31% in May 2010. NAR President Ron Phipps, broker-president of Phipps Realty in Warwick, R.I., said a number of proposals being considered in Washington could further jeopardize the housing recovery. “We’re concerned about the flow of available capital, including a possible rule that would effectively raise minimum downpayment requirements to 20%,” he said. “We don’t need to throw the baby out with the bath water – increasing downpayment requirements would effectively shut many qualified families out of the market. What we critically need is a return to the basics of providing safe mortgages to creditworthy buyers willing to stay well within their budget.”

WSJ - mortgage rates flat

Mortgage rates changed little for a second straight week,according to the latest survey from Freddie Mac. Mortgage ratesgenerally track Treasury yields, which move inversely to Treasury prices. Rates have slumped for months as yields on Treasury’sslid amid economic uncertainty. Freddie Mac Chief EconomistFrank Nothaft pointed to more signs of a softening US housing market, including the Federal Reserve's policy-committee statement on Wednesday, which acknowledged continued weakness in the sector. "Although new construction on single-family homes ticked up in May from April, it was still below the overall pace set in 2010," Mr. Nothaft said. "Moreover, existing home sales fell 3.8% in May to the fewest since November 2010."

The 30-year fixed-rate mortgage was at 4.5% in the week ended Thursday, the same rate as in the previous week, though the rate was below last year's 4.69% average. The 30-year rate has fallen steadily since reaching the 2011 high of 5.05% in early February. Rates on 15-year fixed-rate mortgages edged up to 3.69% from 3.67% the previous week but were down from 4.13% a year earlier.

Five-year Treasury-indexed hybrid adjustable-rate mortgages decreased to 3.25%, down from 3.27% last week and 3.84% a year earlier. One-year Treasury-indexed ARM rates ticked up to 2.99% from 2.97% the prior week, but still well below the prior year's 3.77% rate. To obtain the rates, 30-year and 15-year fixed-rate borrowers required an average payment of 0.8 point and 0.7 point, respectively. Five-year hybrid adjustable rate mortgages required a 0.6-point payment, while one-year adjustable-rate mortgages required a 0.5-point payment. A point is 1% of the mortgage amount, charged as prepaid interest.

Q1 mortgage volume drops
Independent mortgage banks and subsidiaries made an average profit of $346 on each loan they originated in the first quarter of 2011, down from $1,082 per loan in the fourth quarter of 2010, according to the Mortgage Bankers Association’s (MBA) First Quarter 2011 Mortgage Bankers Performance Report released yesterday. “Mortgage origination volume in the first quarter of 2011 dropped significantly from the refinance-heavy fourth quarter of 2010. As in the past, mortgage companies had difficulty managing staff levels to reflect the drop in loan volume. This caused higher per-loan production costs. Even though overall revenues went up, they did not go up fast enough to offset the higher costs,” said Marina Walsh, MBA's Associate Vice President of Industry Analysis. Walsh continued, “In the first quarter of 2011, changes in compensation plans and investor expectations are additional factors that likely drove up loan production expenses per loan to the highest levels ever reported for this study.”

Among the other key findings of MBA’s Quarterly Mortgage Bankers Performance Report are:

- Average production volume was $164 million per company in the first quarter of 2011, down from $286 million per company in the fourth quarter of 2010.

- The refinance share of total originations by dollar amount for this sample of independent mortgage bankers and subsidiaries was 50% in the first quarter of 2011, compared to 63% in the fourth quarter of 2010.

- Average loan balances dropped to $196,456 in the first quarter of 2011, from $208,319 in the fourth quarter of 2010.

- Measured in basis points, net secondary marketing income rose to 201 basis points in the first quarter 2011, compared to 188 basis points in the fourth quarter of 2010. But with the decreasing average loan balances, net secondary marketing income dropped to $3,827 per loan in the first quarter of 2011, from $3,870 per loan in the fourth quarter of 2010.

- Personnel expense drove the majority of the change in net production income, rising to $3,640 per loan in the first quarter of 2011, compared to $3,124 per loan in the fourth quarter of 2010.

- Total production operating expenses - commissions, compensation, occupancy and equipment, and other production expenses and corporate allocations - rose to $5,837 per loan in the first quarter of 2011, compared to $4,930 in the fourth quarter of 2010.

- The "net cost to originate" increased to $3,540 in the first quarter of 2011, from $2,827 per loan in the fourth quarter of 2010. The "net cost to originate" includes all production operating expenses and commissions minus all fee income but excludes secondary marketing gains, capitalized servicing, servicing released premiums and warehouse interest spread.

- 63% of the firms in the study posted pre-tax net financial profits in the first quarter of 2011, compared to 84% in the fourth quarter of 2010.

- Full-year 2010 production profits were $1,054 per loan originated. In comparison, average production profits in 2009 were $1,135 per loan originated and $305 per loan originated in 2008, based on MBA’s Annual Summary Report, which is available free to annual subscribers of MBA’s quarterly reports.

hard to make a call on housing

[Friday's] report on consumer confidence, or the striking lack of it, is yet another sign that housing is going to be in a very sticky state for a while. It's hard to say whether housing is weighing on confidence or lack of confidence is weighing on housing; the answer lies somewhere in the middle. Next week is a big week for housing because we get the all-important readings on existing and new home sales for May. The pending home sales index, based on contracts signed, not closings, fell dramatically in April, and that has the housing prognosticators building another arc for the flood of bad news yet to come. Home builder sentiment fell in June, largely based on competition from distressed properties and high material costs, but you can bet the builders know we're in for some tough sales numbers in their market as well.

I know I've said this before, but here I go again: All real estate is local, but confidence is national. Potential summer buyers, who are historically few and far between, will be watching the national numbers, as they try to time the bottom of the market, which is of course impossible to do. You can't time the bottom of this market, because it will likely bounce along the bottom for several years. You also have no historical perspective because we've never seen a crash like this ever before. The two greatest factors that will keep us bouncing are the huge volume of distressed properties and uncertainty over the direction of new regulation in the mortgage market.

Regulators pushed back the deadline for a huge decision on risk retention for the mortgage market, and that has talk abounding that the entire proposal is going back to the drawing board. This is the proposal that would require, among many other things, a 20% down payment on loans for them to be exempt from risk retention. Without that, banks would have to hold 5% risk on their books when securitizing the loan.

All this uncertainty in the mortgage market, piled on top of all kinds of new regulations now going into action, just makes lending more expensive for the banks and borrowing more expensive for consumers. It's no surprise that confidence in housing is so low, despite the fact that now may in fact be one of the best times to get into the housing market. You just have to have a long view, which foreign buyers apparently have but Americans sorely lack.

Fannie Freddie are better, but still cash drains

Conservatorship has been good for Fannie Mae and Freddie Mac, but
the companies continue to drain federal resources away from other
government operations, according to the regulator of the mortgage
giants. In its third annual letter to Congress, the Federal
Housing Finance Agency (FHFA ) said stronger loan underwriting
standards enabled the companies to narrow losses in 2010 to $28
billion from $93.6 billion a year earlier. The companies have
received more than $160 billion funding from the Treasury
Department the past few years. "Since being placed under
conservatorship in 2008, Fannie Mae and Freddie Mac remain
critical supervisory concerns," said Edward DeMarco, acting
director of the FHFA. This is a "result of continuing credit
losses in 2010 from loans originated during 2005 through 2007 as
well as forecasted losses from loans originated during that
time." Still, DeMarco said governmental control allowed the
companies to "accomplish their statutory mission of facilitating
stability and liquidity for single-family and multifamily housing
finance."

The FHFA said Fannie and Freddie remain plagued by "credit risk,
operational risk, modeling risks and retention of qualified
leadership and personnel." The companies hold a 60% share of
single-family loan production. As conservator, the FHFA is
tasked with minimizing credit losses at the GSEs, and DeMarco
said more stringent underwriting standards and a stronger price
structure have helped. "Although past business decisions leading
to these losses cannot be undone, each enterprise, under the
oversight and guidance of FHFA as conservator and regulator, has
improved underwriting standards for loan purchases in the past
two years.," he said. "Another way FHFA minimized losses was to
require the enterprises to enforce existing contractual
representation and warranty loan repurchase agreements with
lenders." The FHFA also oversees the dozen Federal Home Loan
Banks and said all 12 reported profits in 2010. Loans to the
banks dropped to $479 billion last year from $631 billion at the
end 2009. The regulator said the banks' financial condition and
performance stabilized in 2010, but several continue "to be
negatively affected by their exposure to private-label
mortgage-backed securities."

Mini-budget cuts signed

President Obama signed a budget cutting stop-gap spending bill yesterday after it was passed by the Senate by 91 votes. The bill terminates eight government programs, for savings of $1.24 billion, while an additional $2.7 billion in earmarks are eliminated. On the chopping block were eight programs involving broadband access in rural communities, education, highway construction and the Smithsonian Institution. All eight had been identified by both parties as wasteful and unnecessary. The programs that were cut fall into two umbrella categories: ineffective or duplicative. The bill eliminated $75 million in election assistance grants, which are funds allocated to help states upgrade voting machines and voter rolls.

Since 2002, Washington has pumped $3 billion into the program, but states have only found ways to spend $2 billion. And that rural broadband program? The Agriculture Department's inspector general uncovered "abuses and inconsistencies" as well as "a lack of focus on the rural communities it was intended to serve." The four education programs total $468 million, and are being eliminated for being outdated, ineffective or duplicative. The highway funds, $650 million in total, were originally budgeted as a one-time payment for 2010 but never cut. The remaining $2.7 billion in cuts cover almost 50 different earmark programs that will no longer be funded because House Republicans have instituted a new rule banning that type of spending.

Obama tries to force mortgage deal

WSJ - Obama tries to force mortgage deal

The Obama administration is trying to push through a settlement over mortgage-servicing breakdowns that could force America's largest banks to pay for reductions in loan principal worth billions of dollars. Terms of the administration's proposal include a commitment from mortgage servicers to reduce the loan balances of troubled borrowers who owe more than their homes are worth, people familiar with the matter said. The cost of those writedowns won't be borne by investors who purchased mortgage-backed securities, these people said. If a unified settlement can be reached, some state attorneys general and federal agencies are pushing for banks to pay more than $20 billion in civil fines or to fund a comparable amount of loan modifications for distressed borrowers, these people said. But forging a comprehensive settlement may be difficult. A deal would have to win approval from federal regulators and state attorneys general, as well as some of the nation's largest mortgage ser
vicers, including Bank of America Corp., Wells Fargo & Co, and J.P. Morgan Chase & Co. Those banks declined to comment.

So far, most loan modifications have focused on shrinking monthly payments by lowering interest rates and extending loan terms. Banks, as well as mortgage giants Fannie Mae and Freddie Mac, have been shy to embrace principal reductions, in part due to concerns that many borrowers who can afford their loans will stop paying in the hope of being rewarded with a smaller loan. Several federal agencies have been scrutinizing the nation's largest banks over breakdowns in foreclosure procedures that erupted last fall. Last week, the Office of the Comptroller of the Currency said only a small number of borrowers had been improperly foreclosed upon. But the regulator raised concerns over inadequate staffing and weak controls over certain foreclosure processes.

A settlement must satisfy an unwieldy mix of authorities, including state attorneys general and regulators such as the newly formed Bureau of Consumer Financial Protection, who support heftier fines. They must also appease banking regulators, such as the OCC, that are concerned penalties could be too stiff. "Nothing has been finalized among the states, and it's our understanding that the federal agencies we are in discussions with have not finalized their positions," said a spokesman for Iowa Attorney General Tom Miller, who is spearheading a 50-state investigation of mortgage-servicing practices.

Create A Note -- And Sell It!

Credit of the Property Buyer(s)
The better it is, the more valuable the carryback note is going to be to a prospective note buyer. Don't know what the property buyer's credit is? Then don't bet the barn on a great note
sale, because the note buyer will want to know the buyer's credit. And if the property buyers are husband and wife, or more than one buyer, demand credit and financial statements from everyone. These days it's common for the wife to earn more than the husband, and you want to know all about both. If the noteholder is not equipped to obtain a credit report, ask your bank or local credit agency. They'll help you get it.

Sales Price of the Property
This should be at or LESS than the provable/establishable value of the property. Is it more than the actual value of the property? Then expect your note to sell for LESS than you want,
because the experienced note buyer wants the property buyer to have some equity in the property so the property buyer isn't likely to default.

Provable Value of the Property
Don't know? And the property buyer hasn't demanded an appraisal of any kind? Great, if the property is selling for all cash -- but if you're taking back a note and you want to sell that
note simultaneously, be aware that the note buyer is going to want to know the property value. And many problems are created if your note sale is AFTER the property sale, and the property is now inaccessible to an appraiser.

Down Payment
Zero down deals are done all the time but are not popular with note buyers. They want to know that the buyer has immediate equity in the property, something to protect, so the less the down payment you're taking, the less the cash you're going to be selling your note for.

Terms Of The Carry-Back Note
A. Interest Rate: The higher the better, but not so high as to gamble with usury law violations. Many states have usury laws that govern personal, consumer loans (e.g. Washington State has a 12% "do not exceed" rate); however, not all states have usury laws. So check before you structure your deal. Don't know what a good interest rate is for your deal? Ask a mortgage person or residential agent. They live with this on a daily basis and they'll give you some good advice. The lower the rate, the poorer the deal for the note buyer, and he'll just make it up by charging you more of a discount when he buys it.

B. Length of Note: Again, ask what is normal currently. Probably the typical length is 5 years, or maybe 10 to 25 years but with 3 to 5 year balloon. This is important to the note buyer, because he doesn't want to wait forever to get repaid. But not too short...I've seen notes with 6-12 months go begging for a buyer because the note buyers feared the property buyer couldn't pay it off in that time period.

C. Balloon: Again, the note buyer wants to have this on his books for no more than 3-5 years, so even if the new note has a 20-25 year amortization period, to keep the monthly payments
within reason, the note should have a 5 or so year balloon for full payoff in that time.

D. Loan-To-Value Ratio (LTV): Total loan-to-value, of both the first and new second, must be considered, and typically not to exceed 75% of provable value, for the buyer of the new
second to be seriously interested. Also, many second buyers want the ratio of the first to the second to be no more than 4:1. Translation: they don't want a little second that's behind a huge first, which might have a much bigger RATIO than 4:1. (e.g. $100,000 first and $10,000 second would be 10:1; but $30,000 first and $10,000 second would be 3:1). Do some shopping and learn what note buyers would accept before you structure your property sale. Of all the elements listed here, this is probably the one most ignored by note buyers. If they like everything else, they might not care at all about the LTV.

E. Will the Lender on the First Permit the Second You're Willing to Carry? Frequently, the lender on a new institutional loan inserts a clause to the effect that it is permitting NO carryback loan by the seller, and you'd better hammer this out up-front if you plan to carry a second and are expecting to sell it.

F. Security For Your Second: Normally it should be a recordable deed of trust, or mortgage in non-deed of trust states, drafted to comply with laws of property situs (where it's at!) to secure payment of the second. And to be recordable in deed records it should normally be signed and acknowledged by a notary. Further, it should normally have provisions to the effect that any default on buyer's part in payment of his first note is also a default in the carryback second. And, although frequently omitted, it should contain explicit, written permission for its holder to verify the current status of the first.

G. Buyer's Identity: If the payors are husband and wife, make sure they ARE husband and wife and have both executed the note and deed of trust individually. Don't permit one to sign for both. This is not permissible or binding on the spouse in every state, and you don't even know for sure they're still married. If you're selling to a corporation or LLC, make sure you're also getting the buyers on the note and deed of trust INDIVIDUALLY. I see too many notes where ONLY the corp/LLC is on there, and the people signing, sign ONLY as corporate officers -- this doesn't bind them individually and your note isn't going to sell.

One element that has not been addressed in this article is "seasoning," or aging. While there is no doubt that a note that has a few years successful seasoning is a more valuable note, of course this element is completely absent in a "simultaneous" sale, where the note is purchased as the property sale is closed.

FHFA presents new compensation model

The Federal Housing Finance Agency (FHFA) has issued a 28-page document that presents several alternatives it plans to consider for how Fannie Mae and Freddie Mac compensate mortgage servicers. The report is part of joint initiative announced by FHFA and HUD in January to revise the compensation model for mortgage servicing. The new payment models are also being considered for companies that service Federal Housing Administration (FHA) loans on behalf of Ginnie Mae. Currently, the typical compensation structure pays the loan servicer from a strip of the interest on each mortgage, an “IO” strip, regardless of loan status, FHFA explained.

The agency says the IO strip is a difficult asset to manage and results in a servicer receiving more than enough income to cover the expenses of servicing performing loans, but not enough when a portfolio includes a significant number of nonperforming loans. FHFA says this arrangement decreases the flexibility needed to ensure optimal servicing of nonperforming loans during times of high defaults like the industry is currently experiencing. The document outlines various alternatives to the current pay model, including a fee-for-service compensation structure for nonperforming loans and reducing or eliminating the minimum mortgage servicing fee for performing loans. FHFA provides extensive analysis of the alternative scenarios that encompasses illustrations of cash flows and accounting, capital calculations and requirements, and mortgage rate setting. FHFA says the ideas, models, and alternatives included in the presentation should be used as starting points “to generate
thinking and to explain concerns with the current compensation system.”

The agency said it is coordinating the efforts of the initiative to gather feedback from the industry, consumer groups, investors, and other regulators and government agencies. FHFA has established a dedicated Web link to post information related to the servicing compensation initiative, including background materials and issues that should be considered as development moves forward. When the administration released its plan for winding down Fannie Mae and Freddie Mac earlier this month, officials stressed that one of the near-term reforms on the agenda is reforming servicing compensation. FHFA said in January that implementation of a new servicing compensation structure is not expected to occur before the summer of 2012.

President tries to curb mortgage interest rate deduction

President tries to curb mortgage interest rate deduction

The president proposed in his budget to curtail high-income earners' tax deduction for mortgage interest payments and charitable contributions. Under his proposal, taxpayers in the 33% and 35% tax brackets would only be able to deduct their contributions and mortgage interest payments at the 28% rate. It would affect those with taxable income of $250,000 and up and bring in $321 billion over 10 years, according to the White House. The Obama administration, as well as several tax and deficit commissions, have called for limiting or eliminating the deductions in the past. But the proposals have gone nowhere and the same outcome is expected this year. Still, the real estate industry and non-profit sector are not taking any chances. They are making it clear to both Congress and the White House that they strongly oppose any limits to the deductions.

The industry is concerned that capping the deduction will hurt the housing market, which continues to stumble. The tax break makes homeownership more affordable, they argue. This is the second time in recent months that the Obama administration has recommended curtailing the deduction, which costs the Treasury Department an estimated $131 billion a year. In December, a presidential debt panel recommended turning the itemized deduction in to a 12% non-refundable tax credit available to everyone. It would also cut the size of eligible mortgages in half to up to $500,000. "NAR will remain vigilant in opposing any plan that modifies or excludes the deductibility of mortgage interest," National Association of Realtors President Ron Phipps said at the time.

Foreclosures falling - not

The number of homes receiving foreclosure filings, default notices, auctions, and repossessions, fell 17% in January compared to a year earlier, RealtyTrac reported today. But that's still 261,333 properties and a 1% increase compared to December. Even with the slowdown, more than 78,000 borrowers lost their homes in January, easing off the record 102,000 that was reached last September. Besides, it's less a sign of a robust housing recovery and more a sign that lenders have become bogged down in reviewing procedures, resubmitting paperwork and formulating legal arguments related to accusations of improper foreclosure processing.

"We expect a spike in the first quarter," said Rick Sharga, a RealtyTrac spokesman. "If we don't get that, it could mean that the foreclosures are being pushed back even more and that the time needed for recovery will be prolonged." There was a bit of a shakeup among the individual states at the top of RealtyTrac's hardest-hit states. Florida, which had been outpacing all others for years, fell to ninth place in January, with a rate of one in ever 409 homes receiving a filing. Year-over-year, filings are off by 54% in the Sunshine State. Now, the seven states with the highest rate of foreclosure filings in January were all in non-judicial states, where foreclosure auctions can be scheduled and homes repossessed without any court hearing. Nevada led the states for the 49th consecutive month; Arizona was second and California third. Idaho and Utah filled out the top five worst-hit states. Among metro areas of more than 200,000 residents, Las Vegas had, as usual, the highest
foreclosure rate.

Bank of America splits mortgage department

Bank of America splits mortgage department

Bank of America (BOA) created a separate mortgage servicing unit that will handle loans in default, while performing ones will stay in the bank's home loan division, the company said Friday. Regulators, lawmakers consumer advocates and even some players within the industry have been calling for mortgage servicing companies to divide their departments into performing and nonperforming sections as they work toward a new national servicing standard due out in 2012, according to the Federal Housing Finance Agency. BOA's announcement could be the first step in that process. Proponents of a new system have also called on servicers to provide a single point of contact at the bank and develop new servicing fees where companies are paid more for the extra work required in working out delinquent loans.

The bank appointed Terry Laughlin as the head of the "Legacy Asset Servicing" unit. In this role, Laughlin will oversee the company's mortgage modification and foreclosure programs. Barbara Desoer will continue to manage the company's home loan division, which will service performing loans and hold the bank's origination department, which wrote $306 billion in new loans during 2010. Laughlin will also be in charge of sorting out the bank's mortgage representation and warranties repurchase claims. Fannie Mae, Freddie Mac and private investors have put major lenders under pressure to buy back defaulted loans they say were not originated to standard. BOA settled with the GSEs late in December to pay $3 billion for their claims. "This alignment allows two strong executives and their teams to continue to lead the strongest home loans business in the industry, while providing greater focus on resolving legacy mortgage issues," BofA CEO Brian Moynihan said. "We believe this will
best serve customers — both those seeking homeownership and those who face mortgage challenges — as well as our shareholders and the communities we serve."

In 2010, BOA completed 285,000 modifications through both its private programs and the government's Home Affordable Modification program. It has boosted its default servicing staff to 30,000, and it said it will hold 400 events this year to put borrowers in touch with those employees.

MBA - 2010 ranking of servicers

The Mortgage Bankers Association's (MBA) year-end ranking of commercial and multifamily mortgage servicers as of the end of December 31, 2010 was released yesterday. On top of the list of firms is Wells Fargo with $451.1 billion in US master and primary servicing, followed by PNC Real Estate/Midland Loan Services with $337.4 billion, Berkadia Commercial Mortgage with $194.9 billion, Bank of America Merrill Lynch with $126.6 billion, and KeyBank Real Estate Capital with $118.9 billion. Specific breakouts in the report include:

- Total US Master and Primary Servicing Volume
- US Commercial Mortgage-backed Securities (CMBS), Collateralized Debt Obligations (CDOs) and Other Asset-Backed Securities (ABS) Master and Primary Servicing Volume
- US Commercial Banks and Savings Institution Volume
- US Credit Company, Pension Funds, REITs, and Investment Funds Volume
- Fannie Mae and Freddie Mac Servicing Volume
- Federal Housing Administration (FHA) Servicing Volume
- US Life Company Servicing Volume
- US Warehouse Volume
- US Other Investor Volume
- US CMBS Named Special Servicing Volume
- Total Non-US Master and Primary Servicing Volume

A primary servicer is generally responsible for collecting loan payments from borrowers, performing property inspections and other property-related activities. A master servicer is typically responsible for collecting cash and data from primary servicers and then providing that cash and data, through trustees, to investors. Unless otherwise noted, MBA tabulations that combine different roles do not double-count loans for which a single servicer performs multiple roles.

Wells Fargo, PNC/Midland, Berkadia, Bank of America Merrill Lynch and KeyBank are the largest master and primary servicers of commercial/multifamily loans in US CMBS, CDO and other ABS; PNC/Midland, GEMSA Loan Services, Prudential Asset Resources, Northwestern Mutual, and Northmarq Capital are the largest servicers for life companies; PNC/Midland, Wells Fargo, Berkadia, Deutsche Bank Commercial Real Estate and Prudential Asset Resources are the largest Fannie Mae/Freddie Mac servicers. PNC/Midland ranks as the top master and primary servicer of commercial bank and savings institution loans; GEMSA the top credit company, pension funds, REITs, and investment funds servicer; PNC/Midland the top FHA and Ginnie Mae servicer; Wells Fargo the top for mortgages in warehouse facilities; and Berkadia the top for other investor type loans.