Industry News
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Affordability rises in California
Real estate brief
Inman News
Inman NewsA growing number of households were able to afford an entry-level home in California in the third quarter, as recent declines in home prices and mortgage rates have brought housing into better alignment with incomes.
According to the California Association of Realtors, 53 percent of households statewide earned the minimum household income needed ($56,100) to purchase an entry-level California home at $287,760 in the third quarter, based on an adjustable interest rate of 5.91 percent and assuming a 10 percent down payment. The monthly payment including taxes and insurance was $1,870 for the third quarter.
A year ago, only 24 percent of households could afford such a purchase, when households needed $100,500 to qualify for a loan on an entry-level home.
The High Desert region was the most affordable area in the state, with 73 percent of households able to buy an entry-level home, followed by Sacramento County at 71 percent.
The San Francisco Bay Area region was the least affordable in the state at 35 percent, followed by the San Luis Obispo County region at 38 percent.
Housing Affordability Index Entry-Level Price Monthly Payment Including Taxes & Insurance Minimum Qualifying Income California 53 $287,760 $1,870 $56,100 California - Condos 57 $260,070 $1,690 $50,700 United States 68 $170,430 $1,110 $33,300 C.A.R. REGION Central Valley n.a. n.a. n.a. n.a. High Desert 73 $143,900 $930 $27,900 Los Angeles County 42 $332,680 $2,160 $64,800 Monterey Region 51 $313,510 $2,040 $61,200 Northern California 51 $278,430 $1,810 $54,300 Northern Wine Country 49 $327,850 $2,130 $63,900 Orange County 43 $439,660 $2,860 $85,800 Palm Sprgs/Lwr Desert 59 $187,270 $1,220 $36,600 Riverside/SBernardino 66 $193,130 $1,250 $37,500 Sacramento County 71 $180,170 $1,170 $35,100 San Diego County 51 $320,710 $2,080 $62,400 San Francisco Bay 35 $523,310 $3,400 $102,000 San Luis Obispo County 38 $356,120 $2,310 $69,300 Santa Barbara Area 45 $335,000 $2,180 $65,400 Santa Clara County 39 $552,500 $3,590 $107,700 Southern California 52 $289,650 $1,880 $56,400 Ventura County 50 $392,310 $2,550 $76,500 COUNTY Alameda 39 $445,860 $2,900 $86,860 Contra Costa 30 $598,640 $3,890 $116,630 Fresno 65 $161,240 $1,050 $31,410 Marin 24 $805,050 $5,230 $156,840 Merced 75 $120,200 $780 $23,420 Riverside 66 $195,150 $1,270 $38,020 San Bernardino 68 $178,470 $1,160 $34,770 San Francisco 26 $645,050 $4,190 $125,670 San Joaquin n.a. n.a. n.a. n.a. San Mateo 29 $661,210 $4,290 $128,820 Santa Cruz 33 $489,180 $3,180 $95,300 Sonoma 52 $323,280 $2,100 $62,980 Stanislaus n.a. n.a. n.a. n.a. ***
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Copyright 2008 Inman News
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Building tomorrow's brokerage
The Davison Files: Roadmap to Recovery
Marc Davison
Inman NewsEditor's note: Inman News is asking our audience to explore the future form and function of the real estate industry. This Roadmap to Recovery editorial project offers an invitation to engage in discussions about the direction of the industry. In this piece, columnist Marc Davison addresses the changes that have swept through the brokerage industry in the past decade, and shines light on a possible path forward.
What you should be
The media center for local real estate.
The repository of real estate facts and truths.
The provider of valued benefits to the community.
The trusted source.
The one-stop provider for everything real estate.
Virtual.
Profitable.What was
In the 1999 release, "Homesurfing.net, The insiders guide to buying and selling your home," writer Blanche Evans documented the eight main services brokerages offered for sellers and buyers. They were:
Sellers
1. Fix-up advice prior to showing.
2. Calculating the listing price.
3. Listing the property in the MLS and on the Internet.
4. Assistance with marketing, including signs, brochures, tours, open house parties, and other advertising.
5. Providing potential buyers with information on various financing alternatives.
6. Negotiating the offer.
7. Arranging the closing.
8. Troubleshooting the gap between offer and closing.Buyers
1. Pre-qualifying the buyer.
2. Matching the buyer's needs and wants against his/her ability to pay.
3. Help with search.
4. Showing the property.
5. Help with the offer.
6. Assistance with inspections.
7. Help with financing.
8. Help with the closing.This was 10 years ago.
What is
A quick scan of the Web reveals how obsolete many of these services have become, due in part to information and/or services now provided by either people and/or technologies that have made these services and specialties ubiquitous.
From the flurry of decision-support content that now resides everywhere to establishing affordability now offered by new entrants like icanbuy.com, what you did as a broker 10 years ago is no longer special, highly regarded or arguably, valued.
Given what's transpired in the past few years -- the decimation of trust in the marketplace alongside the emergence of new participants that are slicing and dicing real estate -- brokers are looking at a grim future and questioning both their services and value. And for good reason.
What you can doThink this through with me.
Consumers search, find and educate themselves via the Web. They can even create marketing material on their home, craft a listing and syndicate it directly to Craigslist. Buyers can search, save, estimate, calculate and through services like N-Play begin the negotiation on their own.
Granted, there are reports that are needed and the coordination of activities that involve the offer that, in time, will be managed by some third-party vendor.
Am I predicting doom for a brokerage? On the contrary, I am documenting a clear path toward what kind of Web site and online service a virtual brokerage must offer going forward. As I see it, if what I just documented is the precise behavior of millions of Americans, why not give them one place to do all of it?
Take Zenbe, a Web 2.0 platform provider that took a similar path. It understood that creating a single destination that organizes all of our e-mail accounts alongside all of our social network accounts would allow us, much like AOL did two decades ago and Yahoo did a decade ago, a new one-stop destination to manage the many things that are important to us all within one framework.
Knowledge management
Knowledge Management is a practice used to identify, create, represent, distribute and enable adoption of insights and experiences. Practitioners of KM treat inherent knowledge as a component of their business activities as an explicit concern leveraging the organizations explicit and tacit intellectual assets to create positive business results.
Apply this to your brokerage. Whether you have eight agents or 800 agents, you are a warehouse of intellectual assets that are right now currently fragmented in that many areas. The result is a fragmented brand and confusing value proposition that sits like a rotting outer layer covering what could be a very sweet core.
My guess is most brokers don't even know what they have, where it might be located and, if you could even find it, might not know how to expose it, market it, drive users to it and earn revenue from it.
My guess is you might be too deeply wed to that service legacy that doesn't work anymore and can't see your way out.
Nagual
You could take a trip to the Sonoran desert, eat some peyote and tap the realm of the unknown. Sometimes, I think that's not a totally bad idea. Carlos Castaneda would regard that as the teaching of Mesoamerican shamanism. Joseph Schumpeter would regard that as simple creative destruction.
I call it survival. And the most obvious next step for a brokerage.
And that's my point, folks. Pick you poison, but right now you need to find a way to dynamite the deeper recesses of your brokerage mine and find that vein that leads to the diamonds. I know it's lying there under the sediment, under the politics, under what your agents think they want, need and force you to be doing.
Brush it off.
Hold it to the light.
We are talking about your future here.Marc Davison is a founding partner of 1000Watt Consulting and national speaker. He can be reached at marc@1000wattconsulting.com.
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Copyright 2008 Marc Davison
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Goodbye to Google ranking
Inman Community brief
Inman News
Inman NewsAs 21st-century real estate professionals, it might be impossible to understate the importance of Google. Not only does Google provide many professionals with free tools for business through Google Apps, but Google search-engine rankings are a pillar of every real estate professional's Internet presence.
Inman member Cheryl Waller started a very interesting discussion about the future of Google's search ranking system. The discussion is lively, and it is most certainly important for any professional who has or wants a significant Internet presence. You can read the discussionon on her topic, "Goodbye to Google Ranking."
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Copyright 2008 Inman News
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Meeting vs. marketing in online real estate
Realtor Notebook
Teresa Boardman
Inman NewsHow effective is social media for marketing? People who ask me that question are asking the wrong question.
Social networking sites are about meeting people and making connections, and people are more likely to do business with people they know.
Last week I introduced a lender and a local Web developer. It turned out that the Web developer had some clients who could use some of my photos on their Web sites. The Web developer found out about my photos through the lender. Selling photos does not pay nearly as well as selling real estate, but it is likely that the photos will introduce me to the Web developer's local clients.
Why would I want to know the Web developer's local clients? Because some of them may need real estate services and others might know people who need real estate services. They will know that I am a Realtor as soon as they see one of my online profiles or get an e-mail from me, and that could lead them to ask me questions about the real estate market.
The real estate business is relationship-based. I try to expand my circle of contacts every day by meeting people in some meaningful way.
The people who ask the question about social media and marketing might be using the wrong approach. It doesn't work to take a tool like Twitter and start sending out messages about listings or open houses. That would be an abuse of the tool. The better way to use Twitter is to ask people questions and engage them in those micro conversations.
Most of us have had the experience of going to a party and ending up with a listing or buyers, often through a friend of a friend. Using social networks on the Internet works the same way except it can be done in pajamas instead of a little black dress.
It works the same way with blogs. People ask me how effective my blog is for marketing my services. It is very effective as long as I refrain from marketing my services. I instead provide information about the local real estate market, a little humor, and pictures of the ordinary. It isn't some kind of soft sell -- it has more to do with attraction and meeting people.
The questions people who are interested in social media on the Internet should be asking are: How can I meet people and when I do will they want to do business with me? Can I build so much credibility with strangers over the Internet that they pick up the phone or send an e-mail asking me to be their Realtor?
If I do get some business from my online contacts, will I be able to do such a good job that they will recommend me to everyone who they know who needs a Realtor? This is where the word "marketing" comes in, because they will market my services.
The above two questions are the only ones that really matter. Please don't use social media tools for marketing; use them for meeting people who know people.
Teresa Boardman is a broker in St. Paul, Minn., and founder of the St. Paul Real Estate blog.
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Copyright 2008 Inman News
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Sales, prices, builder confidence slide
Real estate brief
Inman News
Inman NewsWith third-quarter home sales and prices off considerably from a year ago and builder sentiment flatlining, industry groups hope Congress will pass legislation quickly to stem the tide.
According to the National Association of Realtors, four out of five metropolitan areas recorded lower home prices in the third quarter from a year earlier, while sales of existing homes fell in 32 states from the second quarter.
To jumpstart sales and stabilize prices, NAR recently signed off on a real estate stimulus proposal that includes a temporary $7,500 tax credit for all buyers, with no repayment requirement, and a temporary federal buy-down of mortgage rates to 4.5 percent or less.
The group's plan also calls upon the federal government to make permanent the temporary increase in FHA, Fannie Mae and Freddie Mac loan limits to $729,750 in high-cost areas. The limits are scheduled to roll back to $625,000 on Jan. 1.
Lawrence Yun, NAR's chief economist, said in a press statement, "Historically during recessions, buyers have responded to incentives and it's important for government to keep that in the forefront of stimulus decisions."
NAR said that the large amount of foreclosures and short sales (roughly 35 to 40 percent of third-quarter transactions) pulled the national median price of an existing single-family home down 9 percent from the third quarter of 2007, from $220,300 to $200,500.
The steepest declines in single-family home prices in the third quarter were in three California markets: the Riverside-San Bernardino-Ontario area, where the median price of $227,200 dropped 39.4 percent from a year ago; followed by Sacramento-Arden-Arcade-Roseville at $212,000, down 36.8 percent from the third quarter of 2007; and San Diego-Carlsbad-San Marcos, where the price dropped 36 percent to $377,300.
Total state existing-home sales, including single-family and condo, were at a seasonally adjusted annual rate of 5.04 million units in the third quarter, up 2.6 percent from 4.91 million units in the second quarter, but still 7.7 percent below the 5.46 million-unit pace in the third quarter of 2007, NAR said.
Builder confidence in the market for newly built single-family homes plunged in November as worsening problems in the financial markets, job market weakness and overwhelming uncertainty about the economy continued to negatively impact consumer behavior, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). The HMI sank five points to 9, the lowest level recorded since the series was created in January of 1985.
"Today's report shows that we are in a crisis situation. If there's any hope of turning this economy around, Congress and the administration need to focus on stabilizing housing," said NAHB Chairman Sandy Dunn, in a press statement. "Tremendous economic uncertainties have driven consumers from the housing market, and it's going to take some major incentives to bring them back. Beyond the work that is being done to help reduce foreclosures, Congress must immediately incorporate such incentives for qualified buyers in a new economic recovery package."
NAHB, which supports expanding the first-time home buyer tax credit and providing a government buy-down of mortgage interest rates for home purchasers, said both policies were successful in the 1970s in "stimulating home buyer demand, and could get housing and the national economy moving again."
Two out of three of the HMI's component indexes declined in November, with scores below 50 indicating that more builders view sales conditions as poor than good. The index gauging current sales conditions fell six points to 8, which was a new record low. Likewise, the index gauging traffic of prospective buyers fell four points to 7 -- also a record low. Meanwhile, the index gauging sales expectations in the next six months held firm from the previous month at its record low of 19.
Every region posted declines in builder confidence in November. The Northeast, South and West each registered five-point declines to 11, 11 and 6, respectively, while the Midwest registered a six-point decline to 7.
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Copyright 2008 Inman News
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'Prefabulous' author wins Bob Bruss award
NAREE announces new annual awards program
Inman News
Inman NewsSheri Koones, the author of a book that explores factory-built homes, took top honors in the first annual awards presentation named for longtime real estate columnist Bob Bruss, who died in September 2007.
Koones' "Prefabulous: The House of Your Dreams Delivered Fresh From the Factory," published in March 2007, received the Gold Award in the 2008 Robert Bruss Real Estate Book Awards.
Bruss had given the book a glowing review: "Normally, I am turned off by real estate books with clever, cute titles," Bruss wrote. "However, I am 'turned on' by this great, new, beautiful book that completely changed my mind about so-called 'prefab' homes, which are custom-built in factories to the specifications of the buyers."
The National Association of Real Estate Editors, a real estate journalism organization created in 1929, oversees the awards program, which is supported by grants from NAREE members, Leighand Ivy Robinson of Express Publishing and Inman News Publisher Brad Inman, and in-kind donations from NAREE directors and past presidents.
Bruss, a nationally syndicated Inman News columnist, was a real estate investment and legal expert who sought through his writing to make real estate more transparent and approachable for readers, whether they were laymen or professionals. He was sometimes referred to as the "Dear Abby of Real Estate" and in 1997 won the Norman Woest Outstanding California Real Estate Educator Award.
The judges commented that Koones' book is "written in easy-to-read language, with wonderful four-color photographs," and that the "amount of information is stunning, making this book a necessity for anyone who is considering building this type of house."
Judges for the awards included: Michael Frolove, an instructor at Temple University's Real Estate Institute and a licensed real estate broker and appraiser in New Jersey and Pennsylvania; Allen Norwood, retired Homes section editor for the Charlotte Observer, freelance editor of HGTV online, and a former member of NAREE who also had served as the association's vice president; and Pat Washburn, a journalism professor for Ohio University's E. W. Scripps School of Journalism.
Vernon Swaback, an apprentice to famed architect Frank Lloyd Wright, won the Silver Award for his book, "Creating Value: Smart Development and Green Design." An architect and urban planner, Swaback offers insight for dealing with the problems of sprawl, and he offers suggestions for incorporating environmentally conscious design techniques into residential and commercial building projects.
The book was published in November 2007 by the Urban Land Institute.
A collection of essays about developer Gerald D. Hines and the company that bears his name won the Bronze Award. The book, "Hines: A Legacy of Quality in the Built Environment," published in January 2008, was edited by George Lancaster and includes Essays by David Childs, Lisa Gray, Ann Holmes, Hilary Lewis, Joe Mashburn, William McDonough, William Middleton, Ron Nyren, William Poorvu, Laura Rowley, Mark Seal and Robert A. M. Stern.
Hines, a real estate investment, development and management firm with a headquarters in Houston, has a presence in about 100 cities around the globe.
NAREE also announced that co-authors Carmen Multhauf and Lloyd G. Multhauf share the 2008 First-Time Author Award for "Generational Housing: Myth or Mastery," an analysis of different generations that are participating in the housing market.
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Copyright 2008 Inman News
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Real estate social media on autopilot
Letters From the Home Front
Kris Berg
Inman NewsI may be in over my head. It occurred to me today that no one is driving my social media bus.
It started yesterday when I received a Twitter message. The advanced users call these "tweets," but I am having a really hard time using the term seamlessly and straight-faced in a sentence. My children are already in therapy over my Facebook page; to start talking about "tweets" and "twits" in public and at my age would put them over the edge.
So, the Twitter message I got said something about hoping I was serving food at my open house. Huh? My only plans for the day involved meeting a stager and preparing a comparative market analysis (CMA). The only message I had posted this particular morning was related to a Web site formatting issue I was having. But being a good little networker and not wanting to appear antisocial to my Twitter friend, I feigned a knowing response, something like, "I can't afford to serve food because I am saving up for a Web designer." I signed off very proud of myself indeed.
A couple of hours later I was back at the computer, and now I had another Twitter message. "Good luck at the open house! It looks nice!" she said. Now, I am quite used to being confused. Befuddlement is my life partner. I spend a good chunk of each day trying to make sense of stuff, find stuff and remember stuff, but a quick trip to my calendar confirmed that I wasn't holding any open houses today, or in the foreseeable future for that matter. Then it dawned on me. My social network has taken on a life of its own. It no longer needs me.
I forget a lot of things. Some of it is admittedly related to my high-mileage odometer (I'm definitely low Blue Book), but mostly my forgetfulness stems from trying to do too much and be too much. It seems in this case I had forgotten about enabling a clever little feature on my Web site a couple of weeks ago that automatically posts a Twitter message every time I add a listing or publish an upcoming open house. And, unbeknown to me, one of our buyer's agents had used the set of keys to the Web site that I gave him long ago to promote his own two upcoming open houses. To make matters worse, I had linked my Twitter account to my Facebook account sometime last summer, so all Twitter messages are relayed, through the miracle of technology, to my Facebook page as status updates. Let's review. John modifies the Web site, the Web site calls Twitter, and Twitter puts in an order to Facebook, all while I am at a listing appointment, blissfully unaware that I am at this very moment a maniacal networking genius.
This auto-posting, reciprocal-linking thing is starting to worry me. With all of this automation comes efficiency, of course. One message becomes a two-fer or three-fer deal. On the other hand, my newfound networking efficiency also has a tendency to leave me looking like I am one noodle short of spaghetti night. Anyone who has a Facebook gig knows that status updates are preceded by "User Name is ..." So, when I post on Twitter, "Does anyone know how to set fire to a desktop running on Vista?" the resulting nonsensical string of words often leaves my twit-less Facebook buddies thinking I have officially gone mad. Sometimes this little cross-contamination bug stifles my participation in the social space lest my message get lost in translation; most often it just inspires me to be ornery, resulting in my message making a final, garbled stop on Facebook along the lines of "Kris is @ PhoenixREGuy looking for Kennebunkport agents." I have come to accept that my "network" will either consider me a really deep and complex thinker or they will conclude that I am a raving lunatic crying out for help.
All things considered, though, I am reluctant to relieve my social networking autopilot of his duties. At least it's something, and I simply don't have time to do it "right." Social networks have to be nurtured. To make things more manageable, I have started applying some strategies I picked up during Merlin Mann's "Inbox Zero" presentation at last summer's Inman Connect conference in San Francisco to my social networking obligations. I do see similarities. Each day, I get a dozen or more requests to be Facebook friends or to be LinkedIn, and I get a never-ending stream of notifications that I am being followed by someone new on Twitter. To click the acceptance link on each of these as they file through my inbox would not only fill my day completely, leaving little time for other trivialities like work and sleep, but it might leave me looking desperate. To accept a friendship before they have finished typing the invitation seems a little pathetic.
Mr. Mann said of the e-mail inbox, "It's not like your local bar. It's a place to get into and out of as quickly as possible." I am starting to see my social networking portals in much the same way. So, absent a product that accumulates my invitations, puts them in a tidy little Zip file, and delivers them to me once a week, I have had to adopt my own bulk acceptance practice.
Once every lunar cycle or so, I log in to my various accounts. Time does not allow for proper vetting, so I have a simple three-part screening process. First, if the requester's screen name clearly tells me that he is associated with real estate in some, albeit loose, fashion, even three degrees removed (think Kevin Bacon), he's good. In the case of ButteBrokerBetsy, she's in (while I sit crossing my fingers that her screen name isn't an unfortunate spelling mishap). If I am still uncertain (WichitaHouseStalker), I check his thumbnail photo to see if he is wearing business clothes or a ski mask. Finally, if all else fails, I resort to the "friends and followers in common" test. One shared connection is risky, mostly because my vetting rules were only recently implemented, and I regret that a few sketchy socialites have infiltrated my inner circle. For instance, I am pretty sure that "@Mature_Sexy" is not a business associate, but I really don't have time to go back and clean house. So, it's five from now on. That is the minimum magic number of buddies we must share before I bite, but only if you fail the first two tests.
I wrote awhile back about my failure in the BrightKite space, a site where you can update your physical location for the world to see. Not wanting to miss that boat, I signed up and checked in (at home) four months ago. As far as the other BrightKite disciples know, I am still at home, by all accounts an agoraphobic, yet I really did leave my house -- once (for take-out sushi). More to the point, I received two invitations yesterday to be a BrightKite friend. Why me? Can't you see I am housebound? I have clearly demonstrated that absent a GPS device hung around my neck, I will always be at home. There is nothing to see here. But if my Outlook calendar could talk to my BrightKite account, that might get interesting!
I am seriously considering putting this whole social networking mess I have created on my spring cleaning schedule. I could blowtorch the entire disaster and start over, but I fear my social networks would just reemerge as new and more resilient strains, ones that disintermediate me altogether. What if my Facebook gets access to my Skype account and starts calling my contacts lists while I am out showing property? What if my Flickr photos, the ones of me wearing the green foam Trulia marker in San Francisco last summer, start embedding themselves in my EditGrid spreadsheets, which in turn begin updating, real time, my Web site, which then starts e-mailing my grandmother? It could happen. Face it -- my social network no longer needs me.
Kris Berg is broker-owner of San Diego Castles Realty. She also writes a consumer-focused real estate blog, The San Diego Home Blog.
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Copyright 2008 Inman News
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Cramdowns might raise borrowing costs
A cure worse than the disease?
Matt Carter
Inman NewsLegislation that would force lenders to restructure many loans through means including "cramdowns" by bankruptcy judges could raise the cost of borrowing and make loans harder to obtain, opponents say.
Sen. Richard Durbin's Homeowner Assistance and Taxpayer Protection Act is aimed at forcing lenders and loan servicers to modify hundreds of thousands of mortgages they might otherwise foreclose on.
Backers of the Illinois Democrat's bill say lenders and loan servicers aren't moving fast enough to head off preventable foreclosures -- in part because in many cases, the loans have been securitized and sold to investors.
Durbin's bill would require restructuring of loans where federal regulators such as the FDIC hold a controlling interest, and also require loan servicers to restructure all loans that qualify for the Hope for Homeowners FHA loan guarantee program, which is currently voluntary.
Another controversial provision of Durbin's bill is a proposal to allow bankruptcy judges to modify the terms of mortgages on primary residences, including writing down principal. Senate lawmakers killed an attempt to include cramdown powers in a previous foreclosure prevention bill.
Allowing forced "cramdowns" or "lien-stripping" -- the reduction of mortgages to the fair market value of the property -- will encourage large numbers of bankruptcies, opponents say.
At a Senate Banking Committee hearing today, opponents warned of a potentially bigger problem. If judges can rewrite loan terms, they said, lenders will be even more cautious about extending credit to home buyers -- at a time when the government is trying to relieve pressure on banks and stimulate additional lending at favorable terms and rates.
The unintended result of bankruptcy cramdowns would be "large numbers of bankruptcies, higher losses to servicers, lenders and investors, and reduced ability by the financial industry to extend affordable credit," Mortgage Bankers Association Chairman David Kittle said in prepared testimony to the Senate Banking Committee.
Bankruptcy cramdowns, he said, would "have a negative impact on individual borrowers, a housing recovery and the economy as a whole."
Kittle noted that in recent weeks investors have been less willing to buy mortgage-backed securities backed by Fannie Mae and Freddie Mac.
"Giving bankruptcy judges the ability to cram down mortgage debt does nothing to reassure investors as to the value of their investments," Kittle said.
"If, with a stroke of a pen, the U.S. government could eliminate the secured nature of these investments whenever there is a cyclical downturn, why would investors return to our mortgage markets?" Kittle asked. Investors will "simply take their money to other, more secure and predictable investments or demand a much higher return for the added risks."
Cramdowns would also send the value of existing mortgage-backed securities plummeting, he said, as more investors dumped securities collateralized by subprime mortgages.
In the past, the MBA has warned that cramdowns could increase rates on mortgages by 1.5 percent to 2 percent. That would put further downward pressure on housing prices, as higher interest rates reduce home shoppers' buying power. The National Association of Realtors is pushing for the government to move interest rates in the other direction, through temporary buy-downs of mortgage rates to 4.5 percent or less (see story).
Cramdowns would not only push up interest rates and other fees, Kittle warned, but lenders would have to raise minimum down-payment requirements, because there would be no other way to protect themselves from the risk.
Given an average U.S. home price of $313,600 in 2007, a 10 percent minimum down-payment requirement would mean home buyers would need $31,000 to purchase a home. Many borrowers would be required to put 20 percent down, Kittle said, "leaving them in search of more than $62,000 for a down payment."
Borrowers seeking to purchase a home with a down payment of less than 20 percent rely on FHA and VA guarantee programs and private mortgage insurance that cramdowns will "render useless," Kittle said.
Kittle said the FHA and VA aren't allowed to pay claims for amounts stripped down in bankruptcy court. So servicers that administer Ginnie Mae securities backed by FHA and VA guaranteed loans would be forced to absorb "losses they never contemplated," placing Ginnie Mae in the position of having to keep payments flowing to bond holders.
While Durbin's bill and other failed legislation to allow bankruptcy cramdowns have been aimed at subprime and nontraditional loans, "FHA and VA loans are not insulated from the havoc bankruptcy reform would wreak," Kittle said.
If "subprime" is defined as a loan with an APR three points over comparable Treasury securities, that captures many government and prime loans originated after the first quarter of 2008, when spreads between Treasuries and Ginnie Mae securities widened.
There are similar issues with private mortgage insurance, Kittle said, meaning Fannie Mae, Freddie Mac and portfolio lenders who depend on such insurance would see greater losses from cramdowns than foreclosures.
One proponent of cramdowns, professor Adam Levitin of Georgetown University Law Center, said the foreclosure prevention efforts put in place by the lending industry and government have showed "dismal results." At the current rate, Levitin said, the U.S. is on track for 6.5 million homes to end up in foreclosure by 2012.
While the industry's HOPE Now Alliance of loan servicers claims to have completed nearly 2.5 million workouts, most of those have been repayment plans that provide a short-term fix rather than sustainable loan modifications, Levitin said. The "vast majority" did not reduce monthly payments, making them "near worthless," he said.
Interest by lenders in the FHA's Hope for Homeowners program has been "underwhelming," said Michael Calhoun, president of the Center for Responsible Lending, noting that the FHA received less than 100 applications during its first month of operation.
The Bush administration today announced that it is broadening the Hope for Homeowners program to allow participating lenders to take smaller write-downs when they agree to let troubled borrowers refinance into more affordable loans. The expanded Hope for Homeowners program will also offer holders of second or "piggyback" loans an immediate payment if they agree to release their liens.
Calhoun called another proposal -- for the government guarantee 50 percent of investor losses on loans modified under guidelines proposed by the FDIC -- "the most promising voluntary program proposed to date." The Bush administration has so far rejected that approach, opting instead for a voluntary streamlined modification process spearheaded by the HOPE Now Alliance, Fannie Mae and Freddie Mac.
But Calhoun said even the FDIC proposal may not help significant numbers of subprime borrowers whose loans serve as collateral for "private label" mortgage-backed securities that are not guaranteed by Fannie Mae or Freddie Mac. Cramdowns, he said, would provide "a critical backstop for borrowers who could afford market-rate loans but are not assisted by voluntary efforts."
Calhoun said allowing bankruptcy cramdowns could help 600,000 families at risk of foreclosure remain in their homes. Not all of those families would need to file for bankruptcy, Calhoun said, because loan servicers would be more willing to do voluntary modifications if they knew they could be forced to do so in court.
"The primary goal of lifting the ban on court-supervised modifications is to induce voluntary modifications," Calhoun said.
Because more than 80 percent of residential mortgages are securitized and sold to private investors, "private, voluntary efforts at mortgage modification will inevitably fail," Levitin said. Forced loan modifications by bankruptcy judges are "the only sure method of preventing preventable foreclosures."
Loan servicers are required to follow pooling and servicing agreements, which typically require loans be in default or imminently defaulting before they can be modified. Some agreements forbid loan modifications altogether, or restrict the number and type that can be carried out within a pool of loans.
It's "virtually impossible" to change the terms of a restrictive pooling and service agreement to give servicers more leeway to do modifications, Levitin said, and the consent of all investors in a particular mortgage-backed security is needed to change the agreements. A pool of loans may be held by thousands of investors, and practically speaking, "it is impossible to gather up 100 percent of any MBS issue," Levitin said.
He dismissed past claims by the Mortgage Bankers Association that allowing bankruptcy cramdowns would raise interest rates by 1.5 to 2 percent as "patently false."
Because bankruptcy judges are already allowed to modify the terms of investment properties but not a homeowner's principal residence, the MBA bases its claim on the interest-rate spread between mortgages on single-family homes and investment properties.
Levitin questioned the MBA's calculations of that spread, and said that regardless of how the math is done the idea that the entire spread is due to bankruptcy risk "is preposterous."
"At best, the MBA's figure is a wild and irresponsible guess; at worse it is a deliberately concocted falsehood," Levitin said in his prepared testimony.
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What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.
Copyright 2008 Inman News
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Reinventing the real estate industry
Editorial: A Roadmap to Recovery
Inman News
Inman NewsEditor's note: The U.S. housing market and the real estate industry are in critical condition and they need a roadmap to recovery. But first we must figure out where we should and must go. To help the industry understand that future, Inman News is embarking on a major editorial project to examine how the real estate industry should and will look in coming years. We are seeking more than your input -- we're looking for you to actively participate in mapping out the future of the real estate industry. Read on to find out how you can participate.
In 1996, Inman News called on the industry to create a more transparent real estate transaction. Specifically, we encouraged real estate leaders to fully leverage the Internet by putting the entire multiple listing service on the Web, open up other data sources, digitize the transaction, and add visual images like pictures and virtual tours to listings.
We spent more than a decade pounding on this message and reporting on the reaction, the progress, the controversy, the legal actions, the innovation, the fear and the hope. The job is not done, but substantial progress has been made. When it comes to placing home listings on the Web, the last couple of years look a lot like the fall of the Berlin Wall.
During this same period, the rapidly declining housing market has undergone the worst downturn in our lifetime. Nothing could be more important than covering these market trends, and they will continue to be our focus.
Nevertheless, Inman News is once again putting a stake in the ground about the future of real estate. We are undertaking this major editorial project to peer above the smoke and fire of the housing market battlefront and imagine what the industry and the market will look like into the future.
It is our belief and mantra that transparency is essential for creating a more vigorous, healthy and functioning market and a fundamentally better consumer real estate experience. We believe this will prove essential in rebuilding consumer trust with the industry and achieving a sustainable housing market recovery.
It also means a dramatic facelift for the industry. But the question is: What does it look like? We intend to find out.
Inman News will engage in a vigorous investigation of what the future holds for Realtors, mortgage lenders, the mortgage-backed securities industry, title companies, technology firms and the home-buying and home-selling public.
We will explore where the industry is going, how it will be organized, how it will be regulated and how it will become more transparent, so that both consumers and investors can trust in it and so that the industry has clear operating rules.
Some of our "Roadmap" coverage will focus on forecasts, insight and predictions about where the industry is headed. And while the future may be more unknown than known, there is a clear path being laid as we speak. New regulations are already being hammered out, new funding sources established, and new business practices tried. There are already glimmers of a newly organized real estate environment in which virtual wins over brick and mortar, clarity beats confusion, and responsibility and sensible underwriting trump greed.
The Inman News team -- including staff writers, columnists and contributions from you -- will focus relentlessly on this future in the months and years to come. We intend to offer you a peek into the future with ideas on what the industry will and should look like, and what you need to do to operate in this new environment.
We intend to concentrate on five major areas of coverage in this project:
Regulation: A new regulatory framework must be put in place around mortgage-back securities, their ratings and their packaging; around how loans are underwritten, explained and approved; around how mortgage brokers and Realtors are governed and are paid; and around the relationships between different parties such as title companies, builders, agents and lenders.
Technology: New innovations will lead the housing market out of its current mess. The Web brings transparency to the process through the publication of listings, the addition of related information, and through new applications. Core to this new future are better real estate analytics. The market desperately needs better information on the pricing and the sales trends in micro, regional and national markets.
Markets: The future of the housing market depends on stability, such as working off the excess inventory and boosting pent-up demand for borrowers who cannot get loans. How, when and where will the recovery take place? And what will lead us out of the current market doom?
Marketing: Real estate marketing is changing quickly and more so because of the down housing market. Advertisers are looking for more cost-effective marketing vehicles and online advertising will overwhelm the past dependency on print ads. Properties are taking longer to sell and there is a wide range of online destinations for consumers. Add to that the rise of social media and social networks that have opened up new advertising vehicles. The dependency on print ads is unquestionably over. But what the new form of online marketing looks like is evolving day by day. And the questions remain: What is working now? What will work in the future?
Business practices: Imagine brokers without offices, agents without brokers, and all real estate data accessible and available to all. New business models will emerge, new revenue streams will be uncovered and new partnerships will be tested. Also, relationships between brokers and agents, consumers, vendors and salespeople will change radically. Massive consolidation will dramatically change who leads the industry and who has market share. How and why?
These are just some of the questions that we are considering.
But we need your feedback and help. There are a variety of ways to participate:
1. Click here to participate in our online survey -- we want your feedback on the future. Anyone who completes the survey by Dec. 31, 2008, will enter a drawing for a $200 Amazon.com gift card.
2. Visit this Web page or download this PDF file, answer the 10 questions and send your responses back to future@inman.com by Dec. 31, 2008. Make sure you include your name, title, company and e-mail. We will be publishing these questions and answers over the next few months. We are offering a free pass to the upcoming Real Estate Connect conference (valid for new registrations only) in New York City to the author of any question-and-answer submission that we publish in full. The conference will be held Jan. 7-9, 2009.
3. We are also calling for essays that focus the future of real estate. Write no more than 400 words on how to reinvent the real estate industry and revive the housing market. Pick a category -- brokers, agents, technology, title or lending -- or discuss the entire industry. Our editorial team will review the essays, publish many of them, and hand out a $500 check to the author of the best essay. Also, the authors of all essays published in full will get a free pass (valid for new registrations only) to the upcoming Real Estate Connect conference. Send your essays to future@inman.com by Dec. 31, 2008.
4. We are looking for video submissions that answer this question: If you were God, a king or the President, what would you do to fix the housing market? Start the video with "I would ..." and keep them brief (less than two minutes). The winning video will get two free passes to Real Estate Connect (valid for new registrations only) -- there is a Dec. 31, 2008, deadline for video submissions.
5. Participate in our FREE Town Hall Webinar on Dec. 10.
6. Participate in the following online Group discussions at the Inman.com Community section: Agent of the Future, Brokerage of the Future, The Future of the MLS, the Future of Real Estate Lending.
7. Join us at the Real Estate Connect conference in New York City from Jan. 7-9 -- the Roadmap to Recovery project will be a central theme.
Watch Inman News for more news and information related to the Roadmap to Recovery project.
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What's your opinion? Leave your comments below or send a letter to the editor.
Copyright 2008 Inman News