29 August 2010

On One Block, Resilience and Despair

The Wall Street Journal

NEW ORLEANS—Nilima Mwendo's life, in some ways, is the best it's ever been.

Five years after the floods unleashed by Hurricane Katrina, her memories of the "smell of death and mold and mildew" are receding. Her freshly painted pale green house looks better than it did before the storm, thanks in part to a federal program that offered funds to repair historic houses.

Her four grown children have moved back to New Orleans, to be close to family and part of the city's rebuilding.

"We're a bunch of bad-ass, strong, committed people," said the 56-year-old Ms. Mwendo. She lives on the 800 block of Jourdan Avenue in the Holy Cross neighborhood, which borders the Mississippi River. The damage was heavier there than in many parts of the city, though not as severe as in the rest of the devastated Lower Ninth Ward.

Before Katrina, Ms. Mwendo's block had 11 occupied houses. Now there are seven. Two homes are boarded up, one is being repaired but is unoccupied, and one burned down after the storm. Four households that lived on the block when Katrina hit moved back. In three houses, there are newcomers.

Across the street from Ms. Mwendo, Ann Schexnyder, a 51-year-old dental lab technician, is still trying to reclaim her old life. She moved back into her house last year after three years in a FEMA trailer in her backyard, but work on the house is far from finished. She has running water—cold only—in one room, minimal electricity, and sleeps on a mattress on the bathroom floor, the one part of the house not cluttered with construction supplies.

She, too, received federal aid to rebuild, but says she has had bad luck with contractors and is overwhelmed trying to oversee the renovation by herself. "For the first time, in the last month, I've thought about giving it up and cutting my losses and just leaving," she said.

The contrast between the neighbors' recovery illustrates that five years on, New Orleans is a work in progress. While city residents are returning—the population is back up to 78% of pre-Katrina levels—there are still streets where refurbished homes sit next to ones with boarded windows and shin-high grass.

Some people have been inspired to rebuild or even move to New Orleans for the first time, while others are still trying to get back to where they were. Still others have given up altogether, leaving their homes for new cities.

"We didn't realize it would take so long," said Loretta Harrison, 54, a candy-shop owner who frets that in her neighborhood of New Orleans East, the hospital that closed after being ravaged by the storm hasn't been rebuilt.

In the Lakeview neighborhood, which was deluged after a massive levee break at the 17th Street Canal, Roy Arrigo, a 54-year-old sales manager for an air-conditioning company, has rebuilt his home. He has also erected a sign excoriating the Army Corps of Engineers over the levee failures and comparing the disaster to the Chernobyl meltdown. "Me and all of my neighbors are at a level of bitterness like you've not ever seen," he said.

Meanwhile, in the verdant Gentilly section, in northeast New Orleans, Laurie Watt, a 51-year-old hotel human-resources director, said neighborhood spirit is up since Katrina. "In a weird funky way, I really think the disaster brought us together," she said. The neighborhood was submerged under eight feet of water in some places.

Ms. Schexnyder was one of the first to return to the 800 block of Jourdan Avenue. She snuck in after the storm to check on her historic house, made of wood from barges, and once a music and dance club called "The In For Fun Social Club."

The floodwaters, which reached six feet or more on her block, had receded, but gray mud caked the street, cars were overturned, and her house stank of rotting food. "I threw up," she said.Hearing rumors that the city was going to bulldoze the neighborhood, she spray-painted in red on plywood covering the front window: NOT 4 SALE @ ANY $ I'M STAYING PUT!

After living in an apartment subsidized by FEMA, she moved into a government-issued trailer on her property in May 2006, around the same time neighbor Dianne Blackwell, a 60-year-old widow, took up residence in a FEMA trailer two doors down. Ms. Schexnyder gave her a plastic whistle, a souvenir of a Mardi Gras parade, and kept one next to her own bed so the women could alert one another if danger arose.

Surrounded by the clutter in her own home, Ms. Schexnyder estimated she's received more than $100,000, in insurance, federal Road Home and historic grant funds. But she's hit one snag after another, between contractors who did little, to termite wood damage discovered in the rebuilding. Her father, who she says might have been able to help, died in January 2007.

Mike West and his family chose not to stay put. A French Quarter folk musician who once lived across the street from Ms. Schexnyder with his family and a flock of chickens, Mr. West decided post-Katrina New Orleans was too rough. In November 2005, the family landed in Lawrence, Kan., a city where they knew no one.

Although they still own their Jourdan Avenue home and rent it out, they have no plans to move back. They have made friends in their new city. Mr. West says his children enjoy the local public pools and other recreation facilities, which he says his New Orleans neighborhood lacked even before the storm.

It would be too "psychologically hard to take my kids from living in a safe Midwestern town and move them back to a city which is beautiful and wonderful but which can also kind of devour you," Mr. West said.

But post-Katrina New Orleans is a draw for young idealists coming to work for nonprofits or in urban redevelopment.

This spring, Mary Ellen Stitt and Blake Hansen bought the house next door to Ms. Schexnyder, paying $18,000. The new home for the recent graduates of Carleton College in Minnesota is full of holes, has no running water, and the two use a compost toilet in the backyard.

Ms. Stitt, 24, works at a local nonprofit. Mr. Hansen wants to do urban gardening. "The city just has this energy that captivated me," she said.

28 August 2010

Time to Stop Propping up Home Prices?

LA Times
Many expect another wave of foreclosures to further deflate prices. The government could offer new incentives — or let market forces rule.

You can't force someone to buy a house.

But as a society we've long tried to make homeownership an offer you couldn't refuse.

And since the real estate mega-bubble burst three years ago, the government has tried even more tricks to get people to sign home purchase contracts.
Now, a grim reality has set in: Despite the still-rich basket of tax breaks for residential property owners, and the lowest mortgage rates in a generation, the pool of willing or able buyers is dwindling.

The housing market's new woes expose the limits of government's ability to end the real estate bust, while also raising the odds that policymakers could resort to more dramatic moves to try to support the market.

Reports this week on home purchases in July were beyond dismal. Sales of existing homes tumbled 27% from June and 25% from a year earlier. New-home sales slumped to an annualized rate of just 276,000 units, down 32% from July 2009 and the lowest since at least the early 1960s.

Some of the fall-off undoubtedly reflected the spring expiration of the latest federal housing gimmick — tax credits of $8,000 for first-time buyers who met certain income requirements, and $6,500 for repeat buyers.

But it can't be a coincidence that the summer plunge in housing demand occurred as faith in the year-old economic recovery continued to wane.

"It's not a housing issue anymore — it's an overall economic issue," said David Crowe, chief economist for the National Assn. of Home Builders.

Historically, housing has led the way in recoveries. "But this is a case where housing is going to follow the economy, not lead it," Crowe said.

You need a job to afford a home, unless you're rolling in cash, and everyone knows that the U.S. has created precious few net new jobs since April — just 80,000 over the last three months in a nation of 310 million people.

The national unemployment rate remains stuck at 9.5%, and even among workers who have jobs more than one-quarter live in fear of being laid off, according to a Gallup poll this month.

How do you stoke housing demand given that backdrop?

Congress figured the tax-credit giveaway would encourage buyers, and it did to an extent. The credit helped boost sales of existing homes to an annualized rate of 5.79 million units in April, up from about 5 million in January and February.

But the risk of offering any giveaway with a deadline (in this case, April 30) is that it will artificially inflate activity for a limited period and simply steal from future sales.

"We conferred an $8,000 benefit on people who were going to buy a house anyway," asserts David Resler, chief economist at Nomura Securities in New York.

Though government intervention may be well-meaning, each new effort "completely clouds whether there has been any fundamental improvement in the housing market," he said.

And if you didn't buy in time to get the credit, you may well figure that if you wait long enough Congress will bring it back. So why rush to buy now? The 2010 credit, after all, was an extension of one that expired last November.

Over the last two years, federal attempts to help brake the housing market's plunge have been monumental, of course.

The U.S. has nationalized the biggest sources of mortgage credit ( Fannie Mae and Freddie Mac), pushed home loan rates sharply lower via Federal Reserve purchases of mortgage-backed bonds, and offered to pay banks to get them to agree to loan modifications for struggling borrowers.

A new program will offer no-interest loans of up to $50,000 for unemployed homeowners to help them make their mortgage payments until they find work.

The Obama administration "has taken a broad set of actions to help stabilize the housing market and help American homeowners," Treasury spokesman Mark Paustenbach said.Those programs surely get some credit for the uptick in home prices over the last year. The S&P/Case-Shiller index of home prices in 20 U.S. cities bottomed in April 2009 after plunging 33% from its peak in July 2006. The most recent report, for May, showed the index up 4.7% from a year earlier.

Government policy has been aimed at slowing or stopping the decline in prices, for obvious reasons: A further drop in home values would push more owners underwater, meaning their homes would be worth less than their mortgage balance. An estimated 21.5% of single-family homes with mortgages were underwater in the second quarter, down from 23% a year earlier, according to Zillow Real Estate Market Reports.

A continuing rise in house prices would mean that more homeowners who can no longer afford their mortgages might be able to sell for enough to cover their loans, thus avoiding adding to the mountain of homes already in foreclosure. About 4.6% of all loans outstanding were in the foreclosure process at the end of June, according to the Mortgage Bankers Assn.

Yet the collapse in home sales in July suggests that prices overall are likely to begin sliding again. Despite average 30-year mortgage rates under 4.4%, many would-be buyers who can get financing must not believe that prices are attractive enough to justify taking the plunge.

Given the 4 million existing homes on the market – an inventory that could double based on the number of homes in foreclosure – buyers clearly have the upper hand now.

Dean Baker, co-director of the Center for Economic Policy and Research in Washington, believes home prices still are overvalued by 15% to 20% in many areas.

For government to stand in the way of a further price decline is unfair to the next generation of buyers, he said. "The people who get hurt the most are those who are overpaying for houses today," he said.

Robert Shiller, co-creator of the S&P/Case-Shiller price indexes, said that although he doesn't forecast prices, "I think the scenario of declining home prices for years to come is underemphasized by people."

That's an argument for allowing the housing market to hit bottom sooner, so that a genuine recovery also can begin sooner.

The risk is that another downward spiral in home prices would feed a deflationary mind-set, meaning the sense that prices for all sorts of goods, services and assets can only go lower. That could cause many consumers to severely rein in spending, leading to another recession, or worse.

But a new decline in home values also could force the banking system, and the government, to finally deal realistically with a root cause of the economy's woes: the gigantic debt load consumers took on over the last two decades.

The Obama administration's program to persuade banks to modify troubled home loans has met with relatively little success. And few banks over the last year have been willing to take the step of permanently reducing struggling borrowers' mortgage debt to keep them in their homes.

The initial wave of subprime mortgage foreclosures caused a torrent of losses for the financial system. Writing down millions more mortgages could cause another wave of red ink.

Christian Weller, an economist at the Center for American Progress in Washington, argues that debt reduction on a huge scale is inevitable. "Right now the pain is with the consumer," he said. "We should force the banks to take some of that pain."

Another idea, endorsed by Pimco bond guru Bill Gross, is for Fannie Mae and Freddie Mac to allow even underwater homeowners to refinance their mortgages at current low rates, reducing their monthly payments. No bank on its own would refi a home with negative equity. But the government already bears the risk of default by these borrowers on their Fannie and Freddie loans. Refinancing wouldn't raise that risk.

Richard Green, director of USC's Lusk Center for Real Estate, suggests that lenders and the government should embrace the idea of converting troubled loans into shared-equity mortgages, which forgive a portion of a borrower's principal in return for a stake in any future equity gain when the home is sold.

All of these ideas, however, are bailouts of one sort or another. "There is no 'fair' answer here," Green concedes.

Well, there is one: Leave housing to market forces, let prices fall until buyers are motivated to come in, and hope that the economy can stand one final cathartic wave to clear the excesses of the bubble.

26 August 2010

Toll Share Rise Leads Builders After Surprise Profit


Toll Brothers Inc., the largest U.S. luxury homebuilder, rose the most in three months after unexpectedly reporting its first quarterly profit since 2007.

Net income for the third quarter through July was $27.3 million, or 16 cents a share, compared with a loss of $472.3 million, or $2.93, a year earlier, the Horsham, Pennsylvania- based company said in a statement today. Analysts predicted a loss of 16 cents a share, according to the average of 12 estimates in a Bloomberg survey.

“This was clearly a better quarter than we had anticipated,” Megan McGrath, an analyst with Barclays Plc, wrote in a note to investors today. She had estimated Toll Brothers would lose 10 cents a share for the quarter.

Toll Brothers climbed 5.8 percent to $17.13 at 4:02 p.m. in New York Stock Exchange composite trading, the biggest advance since May 10. The 12-member Standard & Poor’s Supercomposite Homebuilding Index rose 3.7 percent. D.R. Horton Inc. gained 4.6 percent to $10.43 after analyst Stephen East of Ticonderoga Securities LLC raised the stock to “buy” from “neutral.”

Homebuilder shares rose even as a Commerce Department report today showed that new home sales plunged 12 percent in July to an annual pace of 276,000, the lowest in records dating to 1963. Sales of existing homes slid 27 percent in July to the slowest annual pace in records dating to 1999, the National Association of Realtors said yesterday.

Ending Streak

Toll Brothers recorded a $26.5 million gain from a tax benefit. That helped the company end a streak of 11 straight quarterly losses as housing demand slumped. Homebuilder orders have plunged since a federal tax credit of as much as $8,000 for buyers expired April 30.

Pretax writedowns for the period shrank to $12.5 million from $115 million a year earlier, the company said. Gross margins, a measure of profitability, improved to 16.4 percent from 12.9 percent a year earlier before writedowns.

“The improving operating margin is imperative,” East, who is based in New York, wrote in an e-mail. “It’s not stellar, but it’s a step in the right direction.”

Toll spent $104 million buying land in the quarter and now has 35,800 plots owned or under option, compared with 31,700 six months earlier.

The company, which had $1.64 billion in cash and equivalents at the end of the quarter, isn’t currently looking to merge with or acquire another large builder, Chief Executive Officer Douglas Yearley Jr. said in a conference call today.

‘Fragmented’ Industry

“We’ve always maintained there’ll be consolidation in the industry,” Yearley said. “The industry is fragmented so you’d think it would happen over time.”

The builder raised its estimate for the number of homes it will deliver by the end of the fiscal year on Oct. 31 to at least 2,500 units from a minimum estimate of 2,200 homes made three months ago.

The average selling price in the fourth quarter will probably be $560,000 to $570,000, Chief Financial Officer Joel Rassman said in the statement. In May, Rassman estimated average selling prices in the fiscal second half would be $540,000 to $560,000.

Buyers signed contracts for 701 Toll Brothers homes with a total value of $400.1 million in the quarter. A year earlier it sold 837 homes valued at $447.7 million. Revenue fell 1.6 percent to $454 million.

25 August 2010

Plunge in Home Sales Stokes Economy Fears

The Wall Street Journal

U.S. home sales plummeted in July to a level not seen in more than a decade, spurring fears of renewed weakness in housing prices and the broader economy.

Sales of previously owned homes fell 27.2% from June to a seasonally adjusted annual rate of 3.83 million, the National Association of Realtors said Tuesday, the lowest level since the industry group started its tally in 1999.

The expiration of a home-buyer tax credit in the spring was expected to damp buying, though less severely. Economists said the sales drop—together with a corresponding rise in the inventory of unsold homes—meant another decline in housing prices was on the horizon. House prices had stabilized last year after declining since 2006.

High unemployment and meager wage growth already are driving many Americans' reluctance to make major purchases, so a return of falling home equity could further depress confidence and consumer spending.

"At this point in the recovery, every little bit counts," said economist Paul Dales of Capital Economics. "A double dip in the housing market and house prices would not be enough to generate another recession. It would certainly help to hold back the recovery." He expects home prices to fall another 5% after a 30% decline during the recession.

The data sent stocks tumbling, briefly pushing the Dow Jones Industrial Average below 10,000 for the first time since early July. The index closed at 10040.45, down 133.96 points, with investors rushing into safer assets as they reassessed the economic outlook. A rally in Treasurys pushed the yield on the 10-year note as low as 2.47%, its lowest mark since early 2009. Oil prices and other key commodities such as copper fell on expectations of weaker demand.

The renewed worry about housing comes as economists downgrade their forecasts for the economy this year and early next year. Traditionally, the housing sector, along with purchases of durable goods such as furniture, would help pull the economy out of a recession as lower interest rates spurred higher demand. But this time, potential home buyers either don't have the jobs or savings to jump in or are wary of another decline in the market.

"Consumers and housing are in no position to lead us out," said Nigel Gault, chief U.S. economist at IHS Global Insight. "We've gone through the inventory-cycle boost. The stimulus boost is fading. We're falling back on whatever underlying strength there is in the private sector, in exports and business-equipment spending, and there's not a lot."

A sharp drop in mortgage rates in recent months appears to be doing little to stimulate demand. The average rate on a 30-year fixed-rate mortgage has fallen to less than 4.5%, reaching 50-year lows, but demand for new loans is weak. Many borrowers face challenges qualifying for loans because they have lost their jobs or aren't making as much money. Some are simply growing more cautious.

"I'm in no rush," said Steve Hamilton, who sold his Carlsbad, Calif., home two years ago and has been on the sidelines since. He said he was happy to continue renting a home that costs half of what the monthly mortgage payments were just a few years ago. "The tide is still going out," said the 41-year-old commercial-real-estate investor. "When I see a steady increase in local jobs, that's when we'll step back into the market."

Analysts say the big risk to the market is that consumers lose any urgency to buy homes because of new concerns that prices are poised to fall.

While tax credits to spur home sales helped stabilize housing markets across the country over much of the past year, the expiration of that stimulus in April has revealed lingering problems that have restrained housing.

Buyers who signed contracts by April 30 have until the end of next month to close on those sales and receive credits worth as much as $8,000. Sales of homes priced between $100,000 and $250,000, which would have received the biggest benefit from the tax credit, were off 35% in July from a year ago.

The number of unsold homes on the market grew by 2.5% to nearly four million in July. At the current sales pace, it would take 12.5 months to clear that inventory, the highest level in more than a decade.

Sales may have been even worse if mortgage rates hadn't been so low, said David Berson, chief economist at PMI Group Inc., a mortgage insurer in Walnut Creek, Calif. Low mortgage rates won't hurt, he says, but "they will give you less traction in the market than we would normally get."

How long the hangover from the tax credit will last depends on how long the economy takes to recover. Tuesday's housing report was "a wake-up call to anyone who's trying to understand why housing has not been recovering," said Ivy Zelman, president of housing-research firm Zelman & Associates. "The artificial boost from the tax credit masked the impediments."

Nearly one in four homeowners with a mortgage owes more than their home is worth, which means many are unlikely to sell unless their lender approves a short sale, in which the home sells for less than the amount owed.

Price declines could be shaped largely by how banks manage the volumes of more than five million loans that are either seriously delinquent or in foreclosure. If more of those loans are modified, or if the homes sell through short sales, that could spare the housing market from bigger price declines.

One troubling sign for the market is that banks appear to be listing more homes for sale, just as demand has dropped. The number of bank-owned listings increased 12% in August from the previous month. The figures, tracked by Zelman & Associates, include listings for the top 10 U.S. banks in 20 states and from mortgage companies Fannie Mae and Freddie Mac.

Price declines on Raleigh homes could lead to more delinquencies and foreclosures, and additional subsequent price drops. "You end up in a home-price-depreciation death spiral," said Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP in New York. "It's not clear there's enough demand to handle this overhang without another round of price declines."

The median sale price increased 0.7% from one year ago to $182,600 in July, but that was down 0.2% from June. Median prices largely show the shift in the mix of homes that are selling, and analysts attributed the annual increase to a declining share of entry-level home sales.

While prices are expected to fall, fewer analysts expect double-digit plunges, in part because prices in many markets have already fallen sharply.

Sue Dempsey is under contract on a short sale for a three-bedroom home in Las Vegas that sold four years ago for more than $300,000. The price today: less than $120,000. While she missed the deadline for the tax credit, she said the price seemed unbeatable. "We got such a great deal on the house. Golly, we didn't need anything else," said the 58-year-old retiree.

Commercial Property Owners Now Choosing to Default

The Wall Street Journal

Like homeowners walking away from mortgaged houses that plummeted in value, some of the largest commercial-property owners are defaulting on debts and surrendering buildings worth less than their loans.

Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away, sending keys to properties whose values had fallen far below the mortgage amounts, a process known as "jingle mail." These companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense.

"We don't do this lightly," said Robert Taubman, chief executive of Taubman Centers Inc. The luxury-mall owner, with upscale properties such as the Beverly Center in Los Angeles, decided earlier this year to stop covering interest payments on its $135 million mortgage on the Pier Shops at Caesars in Atlantic City, N.J.

Taubman, which estimates the mall is now worth only $52 million, gave it back to its mortgage holder.

"Where it's fairly obvious that the gap is large, as it was with the Pier Shops, individual owners are making very tough decisions," he said.

These pragmatic decisions by companies to walk away from commercial mortgages come as a debate rages in the residential-real-estate world about "strategic defaults," when homeowners stop making loan payments even though they can afford them. Instead, they decide to default because the house is "underwater," meaning its value has fallen to a level less than its debt.

Banking-industry officials and others have argued that homeowners have a moral obligation to pay their debts even when it seems to make good business sense to default. Individuals who walk away from their homes also face blemishes to their credit ratings and, in some states, creditors can sue them for the losses they suffer.

But in the business world, there is less of a stigma even though lenders, including individual investors, get stuck holding a depressed property in a down market. Indeed, investors are rewarding public companies for ditching profit-draining investments. Deutsche Bank AG's RREEF, which manages $56 billion in real-estate investments, now favors companies that jettison cash-draining properties with nonrecourse debt, loans that don't allow banks to hold landlords personally responsible if they default. The theory is that those companies fare better by diverting money to shareholders or more lucrative projects.

"To the extent that they give back assets or are able to rework the [mortgage] terms, it just accrues to the benefit" of the real-estate investment trust, says Jerry Ehlinger, RREEF's co-chief of real-estate securities.

Earlier this month, a group led by investment firms Colony Capital relinquished control of the $2 billion Xanadu retail development in New Jersey to a bank group, blaming their creditors for balking at a restructuring. The lender group said it is "disappointed that despite its best efforts" it couldn't reach a deal.

More landlords are expected to follow suit. Of the $1.4 trillion of commercial-real-estate debt coming due by the end of 2014, roughly 52% is attached to properties that are underwater, according to debt-analysis company Trepp LLC. And as the economic recovery sputters, owners of struggling properties are realizing a big property-value rebound isn't imminent.

Owners of commercial property have an easier time walking away than homeowners because commercial mortgages are typically nonrecourse. That means the biggest penalty for walking away is the forfeiture of assets and cash flow they may generate.

Whether landlords walk away from properties often depends on the lender. In recent years, most projects were financed by the use of commercial-mortgage-backed securities, or CMBS, which are effectively bundles of mortgages sold as bonds to thousands of investors. Restructuring debt with scores of bondholders is more difficult than with banks.

If borrowers do walk from bond-financed properties, the real estate is often foreclosed and sold for less than the loan balance. Investors holding those loans take another hit by paying fees to loan servicers that handle the liquidations.

Also, public and private real-estate companies don't often default on mortgages provided by banks because the same banks are likely to be providers of credit lines or other loans. Playing hardball with a bank on one loan could adversely affect the relationship and other loans.

In one recent CMBS default, Vornado, one of the country's largest owners of offices and malls, stopped payments on an $18 million mortgage on the Cannery at Del Monte Square mixed-use development in San Francisco. Simon Property Group last year also walked away from the struggling Palm Beach Mall in West Palm Beach, Fla. And Macerich in July forfeited Dallas's Valley View Center mall, which was saddled with a $135 million mortgage.

Harris Trifon, head of research on commercial-real-estate debt for Deutsche Bank, says walkaways won't derail the nascent return of CMBS-financed properties. "But you have the potential for more pain for select groups of investors," he says.

23 August 2010

Mortgage Fraud Is on the Rise Again

The Wall Street Journal
Adopting to Tighter Rules After Collapse, Scammers Turn to More Complex Plots

New data suggests that mortgage fraud—which got tougher to pull off after the collapse of the U.S. real estate market—is returning in a big way.

Data prepared for The Wall Street Journal by research firm CoreLogic, examining about seven million home loans made by hundreds of lenders, show that losses from mortgage fraud—ranging from falsified credit reports to identity theft—rose 17% last year after declining 57% in the two years after its 2006 peak.

In 2009, $14 billion in loans, or about 0.7% of all mortgage loans made in the U.S., were originated with fraudulent application data.

The figures are a fraction of the mortgage market, but the increase is sharp.

CoreLogic, which tracks fraud only by mortgage value, examines about 7 million loans each year using a proprietary computer program that detects discrepancies in loan documents and predicts the likelihood of fraud. The real losses to banks won't be known for several years when banks are forced to write off the value of the loans' value.

Some of CoreLogic's profits come from selling market research to lenders aiming to cut losses from mortgage fraud.

Investigators and lenders say they are seeing a similar upswing in fraud.

The Federal Bureau of Investigation in June indicted a Phoenix man for mail and wire fraud among other alleged crimes when the agency says he tried to steal a house from his landlord. Also in June, federal prosecutors in New Jersey charged 29 defendants—including 12 real-estate agents, four mortgage consultants, an appraiser, a bank employee and a mortgage broker—with wire fraud in an alleged scheme involving 17 properties in the state and losses of $5.5 million.

"Even though we have certain compliance measures in place, people will adapt whatever scheme," said Sharon Ormsby, the FBI's section chief for financial crimes. "It doesn't matter if the market is going up or down."

The kinds of fraud that contributed to the mortgage crisis and the collapse of the housing market were relatively simple. Crooks took advantage of the size of mortgage loans and the lax rules governing who qualified for them.

In one common con, they would recruit as accomplices "straw buyers" with good credit to apply for "no-doc" loans, which required no documentation or proof of income, to buy their house. Good credit was required because lenders generally did check a borrower's credit score, even if they didn't require pay stubs or bank statements.

When the bank sent funds, typically to make a down payment or for a home-equity loan, the schemers and the fake buyer would split the profits and walk away, leaving the house to fall into foreclosure and the bank stuck with the loss.

Since the mortgage crisis, banks and the government-sponsored entities that underwrite or insure mortgages, including Fannie Mae, Freddie Mac and the Federal Housing Administration, have tightened lending standards and closely scrutinize mortgage applications.

No-doc loans are a thing of the past, and many lenders now require borrowers to furnish proof of employment, tax forms, credit reports, bank statements and other documents.

Fraudsters have adapted to the new restrictions. With banks less apt to lend to borrowers with shaky finances, criminals rely more on falsifying documents, recruiting loan officers and other bank insiders to work for them, and stealing identities to get loans, federal investigators and mortgage industry research reports.

In the Phoenix case, prosecutors allege, Jose Victor Buencamino did all three. Some people who knew Mr. Buencamino describe him as a large, friendly man devoted to his children, the life of many a party and a passionate golfer. Gary Weaver, who rented a home to Mr. Buencamino last year, has a different impression. He said the Arizona businessman tried to snare him in an elaborate mortgage scheme.

According to a federal indictment unsealed in June, while Mr. Buencamino was renting Mr. Weaver's house on the golf course at Moon Valley Country Club, he intercepted mail intended for Mr. Weaver and obtained his social security number, then applied for a driver's license in Mr. Weaver's name.

Then, the indictment alleges, with the help of a friend who worked as a loan officer at a local branch of Compass Bank, a unit of Spanish bank Banco Bilbao Vizcaya Argentaria SA, Mr. Buencamino obtained a $245,000 cash-out mortgage on the property. A homeowner using a cash-out mortgage refinances the home loan for more than the mortgage is currently worth and pockets the difference in cash.

A Compass Bank spokesman didn't respond to requests for comment. Mr. Buencamino, who couldn't be located for comment, has not responded to the charges.

A federal agent said he had been tracked to Vancouver, where the agent said he is applying for Canadian residency. Prosecutors involved in the case said he didn't have an attorney on whom they could serve court papers. U.S. authorities said they were seeking his extradition.

"Fraud continues to be a pervasive issue, growing and escalating in complexity," said an April report from LexisNexis's Mortgage Asset Research Institute, which cited as reasons easy access to records via the Internet and, in many cases, though not Mr. Weaver's, the vulnerability of cash-strapped homeowners.

MARI's breakdown of the numbers reflects the shift in technique. Fraud related to falsified credit reports has declined each year since the boom years, MARI reports, while the share of mortgage fraud involving false appraisals jumped 50% between 2008 and 2009.

Application fraud—in which borrowers lie about their names, where they live, how much money they earn, their employment, their debt or their assets—remains high, accounting for 59% of all mortgage fraud.

One of the defendants in the New Jersey dragnet, a mortgage consultant with Newark-based Invest & Investors LLC named Viviane Bernardim, allegedly paid accomplices $15,000 apiece to steal the identities of several New Jersey residents who earned $90,000 or more and had good credit ratings. She used those identities to obtain second mortgages on a number of homes in the Newark area, according to U.S. Attorney Paul J. Fishman, head of the office prosecuting the case.

But since good credit ratings are no longer enough to get a mortgage, Ms. Bernardim also needed friends who worked for the lenders to pull off the caper.

"Having players at every level of a conspiracy makes it easier to carry out fraud," said Mr. Fishman. "But each bad actor and criminal act is also another chance for law enforcement to find a way in."

Maria Delgaizo Noto, an attorney for Ms. Bernardim, said that she had no comment until an indictment was unsealed, but that her client "maintains her innocence of any criminal activity."

In Phoenix, Mr. Buencamino's alleged fraud was assisted by an insider, but also by easy access to public documents on the Internet. After intercepting mail intended for Mr. Weaver and obtaining his Social Security number, Mr. Buencamino applied online for an Arizona driver's license in Mr. Weaver's name, according to the criminal complaint and law enforcement agents involved in the case.

When he received the permit, he submitted mortgage application documents by mail to Compass Bank and, with the help of co-conspirator William Baxaveneous, the Compass loan officer, obtained a second mortgage on Mr. Weaver's home—which had no mortgage—without ever having to meet any bank officials face to face, Mr. Weaver said. He said he learned this from the federal agents investigating the case.

Mr. Baxaveneous's attorney said he was trying to settle the case and declined to comment further.

20 August 2010

Mid-America Buys NC Apartment for $33.6 Million

Bloomberg / Business Week

Mid-America Apartment Communities Inc. said Wednesday it completed the acquisition of a 208-unit apartment building in North Carolina for $33.6 million.

Originally developed as condominiums, the high-end apartment and retail property was completed last year and is located in downtown Raleigh real estate.

Mid-America bought the property from the construction lender. The deal was funded by borrowings under existing credit facilities and stock issuances.

Shares of the real estate investment trust rose 43 cents to $56.50.

London’s Opulent Turn To New Brokers In Real Estate Market

Beverley Kirby threw in the towel after trying to purchase a home in London’s Chelsea neighborhood after twice being rejected by owners refuting on deals to sell to her.

As Kirby was due to solidify an agreement on a 4.5 million- pound ($7 million) house, she was unexpectedly over-bid by a 500,000 pound higher offer. The broken deal ended up costing her 4,000 pounds in fees while leaving her only a few months to depart from her apartment she had already sold.

“I was getting desperate,” said Kirby, “There was madness in the market. People had no ethics at all.”

After the incident, coupled with the increase in prices for a limited number of high end properties for sale, motivated Kirby to hire Robert Bailey, a special kind of broker known as a "buying agent". Bailey is an expert in a field that was unheard of in the U.K. several years ago. He was able to pinpoint a home for Kirby that was not advertised. She made the move in early April after Bailey guided her in carrying out refurbishments and obtaining the necessary consent to use the top of the garage as a roof terrace.

The new wave of brokers are spawning from a flaw in Britain that favors sellers, said Phil Spencer, who hosts property-search shows on U.K. television.

Typically, home buyers in U.K.'s real estate market register with “estate agents,” who present properties to potential buyers but are actually paid by the sellers. As for the U.S., both the home buyer and seller will usually hire brokers, though only the seller is required to pay commission. The costs are then shared by both sets of brokers.

Little Help For The Buyer

“A buyer has nobody to help them with the biggest financial decision of their life,” said Spencer, 40.

The proliferation of advisers charge the home buyer a retainer fee in addition to commissions which can cost up-wards to 2.75 percent of the sale price. Many view it as a cottage industry mostly used by the opulent because it is too costly for most individuals with budgets of less than about 500,000 pounds.

Buying agents are taking over the luxury real estate industry of London as a weakened pound has drawn investors from all over the globe. These specialty realtor services take responsibility for everything from targeting the property and negotiating the cost, to organizing survey and legal work and evaluating the negative aspects of buy such as noisy neighbors.

Buying agents are highly sought after largely for accelerating the home buying process to reduce the chance of being overbid before signing off on the deal.

Domestic Perspective

Such buying specialists are also sought after in many USA markets. More home buyers are turning to buyers agents to help them navigate through the pockets of collapse. Buyers are wary of formerly red hot markets that turned ice cold in recent months. One example is Coral Springs, Florida, an affluent, upper income market of million dollar homes located between Ft. Lauderdale and Miami. In the past year many of Coral Springs best neighborhoods became peppered with foreclosures and short sales, which caused home values to fall by as much as 60%.

Home prices in other states have also fallen and buyers agents are being called on to lead home buyers to areas and homes that are fairly priced and will hold their value for years to come.

One Raleigh real estate agency in North Carolina, one of America's top relocation markets, is in high demand. In fact, this specialty home buying agent is defying the stagnant U.S. housing market.

Ann Davis the top Raleigh relocation agent says her exclusive services are more popular than ever "the call volumes are up, we still have many professionals relocating to Raleigh and the Triangle as the jobs are here. Out of town buyers need relocation help".

Ann Davis and her Raleigh real estate agency For Home Buyers work exclusively for the buyer delivering expertise in many areas large and small. "Our team matches home buyers to their lifestyle needs. We identify homes by price range, location, and also by workplace. Daily commute and travel safety become more important factors for out of town buyers. Raleigh real estate can be intimidating to out of market home buyers not familiar with our highways and surface streets".

Buyers agents also play a key role in home loan origination and documentation. Home buyers are more confident at the closing table when the paperwork has been closely examined by their exclusive buyer agent as home mortgage laws are always changing in North Carolina and across the USA. In addition, with the help of a real estate lawyer, home buyers can ensure the legal complexities are soundly in place.

Buying Agents In Demand

“Over the past five years especially, there has been a quadrupling in the number of buying agents in the prime central London market and their numbers increase all the time,” said Noel de Keyzer, home broker of Savills Plc’s Sloane Street branch.

Although demand is increasing, there are less premium properties available in wealthy London neighborhoods. Purchases of residential properties in the Westminster and Kensington & Chelsea boroughs, where average homes are priced up-wards of 1.3 million pounds, are down 23 percent compared to the average in 1996, according to London Central Portfolio Ltd., which works with luxury rental property investments.

Roughly 100 parcels of real estate valued at the low end of 20 million pounds have been bought since 2006 -- a sector that is less than 10 percent of the luxury real estate market in London. A majority of purchases of that size are now handled by buying agents, de Keyzer said.

The lack of premium houses available spiked prices in central London by 23 percent since a yearlong pitfall, which was caused by the worst recession since World War II, Knight Frank LLP approximates. Real estate values in the United Kingdom as a whole rose about 12 percent, according to the Nationwide Building Society.

Golden Opportunities

Buying agents consult with private financial institutions or wealth managers to drive new leads to sustain the flow new opportunities. Several professionals, many of which were brokers in the past, have established their own practice as international buyers flock to the London market.

“All you have to do is two or three deals a year and you earn as much as you did before,” said Johnny Turnbull, who set off on his own since 2006 after leading the London arm of Prime Purchase, Savills’s buying-agent arm.

Many buying agents who work independently claim rivals owned by brokers invoke a conflict of interest because their organizations represent both the buyer and the seller.

“They’re trying to milk the fees at both ends,” said Francis Long, who established Hanslips 12 years ago, a buying agency covering London and southeast England.

‘Chinese Walls’

Savills and Knight Frank claim there are “Chinese walls” and enough transparency to avoid problems, and that not many consumers deal with issues during the arrangement.

Buying agents depend upon quality relationships with brokers, real estate developers and owners to place their clients first in line while buying a home. Offering exceptional service is essential to maintain steady business, said Bailey, who helped Madonna purchase a home in Mayfair in 1999.

Agents research and analyze a property and prepare reports that may expose whether a famous neighbor has a noisy entourage or whether planning authorities are weary to poolside floodlighting.

“What worries me is that people don’t deliver and start to give the rest of us a bad name,” said Bailey, who has 25 years experience in the prime London market.

The Luxury Allure

Dell, 32, developed the London-based company in 2007 and has driven his business through continuous visits to potential home buyers in countries ranging from India to Nigeria.

“It helps us to understand them, to see them in their home and their culture,” said Dell, whose clients demand real estate with feng shui compliance.

Competition for luxury real estate within a reasonable commuting distance of London is just as intense. Here buying agents must research even more extensively, said Mark Parkinson, who aided the development of Middleton Advisors LLP in 2008.

The amount of effort put in is not always appreciated.

“You prepare a detailed report -- down to reminding the buyer of an old rectory that the church bells chime every 15 minutes -- and they probably don’t even read it,” said Parkinson

Spencer and Allsopp

Spencer and Allsopp urge home buyers with smaller budgets to utilize the services of home agents, said Jo Eccles, who established Sourcing Property four years ago and has facilitate roughly 70 purchases or rentals in London worth a combined 40 million pounds.

Not all buying agents will thrive, according to Andrew Giller, head of London searches for The Buying Solution. Intense competition coupled with the recession of deals since the latest financial crisis may result in struggles for individual operators.

Spencer’s London-based search company filed for financial insolvency in February 2009 after a deal drought lasting four-months left the company unable to cover the expenses of running the organization. Unfortunately, the company's bankruptcy lawyer could not find the solutions to keep the company afloat.

He’s no longer a part of the business, in some respects due to Garrington Country, an organization established from its former regional arm. Garrington has since expanded in northern England, said Managing Director Jonathan Hopper.

“The market is an emerging one,” Hopper said. “Who you are dealing with is key -- there’s a mixture of very capable, experienced agents out there and then there are those who are just going out to spend other people’s money.” 

19 August 2010

Lawmaker Wants Hearing into Fannie Allegations

Associated Press

A House Republican is calling for a hearing into a former Fannie Mae employee's allegations that the mortgage giant fired her after she criticized how the company was running a government loan assistance program.

The former Fannie Mae executive, Caroline Herron, made the allegations in a lawsuit filed in June. It was disclosed Friday by the Washington-based Center for Public Integrity.

Fannie Mae executives, the lawsuit alleges, resisted Herron's calls to require borrowers to provide proof of their incomes up front before entering into loan modifications. Fannie Mae, she alleges, had a financial incentive to resist because the company was eligible for government payments.

She also charges that Fannie Mae executives ignored her efforts to develop a Web-based system for collecting information from borrowers' seeking loan assistance.

Rep. Spencer Bachus, the top Republican on the House Financial Services Committee, asked for the hearing in a letter to the committee's chairman, Rep. Barney Frank. Lawmakers, he wrote, need to examine whether Fannie Mae "mishandled and mismanaged" federal programs designed to combat foreclosures.

A spokesman for Frank declined to comment. Brian Faith, a Fannie Mae spokesman, said the company hired an outside law firm earlier this year to investigate Herron's charges. "The investigation found no merit to her allegations," he said,

The lawsuit is the latest problem for the $75 billion Obama administration program, called the Home Affordable Modification Program. It has been widely criticized for failing to help hundreds of thousands of homeowners at risk of losing their homes. More than 40 percent of U.S. homeowners who initially signed up for the program have dropped out, while about 30 percent have received permanent help.

17 August 2010

Pimco’s Gross Urges ‘Full Nationalization’ of Housing Finance

Bloomberg / Business Week

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the U.S. should consider “full nationalization” of the mortgage- finance system as the Obama administration plots the revival of a market that was at the center of the 2008 credit crisis.

“To suggest that there’s a large place for private financing in the future of housing finance is unrealistic,” Gross said today at a U.S. Treasury Department conference in Washington. “Government is part of our future. We need a government balance sheet. To suggest that the private market come back in is simply impractical. It won’t work.”

Treasury Secretary Timothy F. Geithner and Housing and Urban Development Secretary Shaun Donovan gathered housing- industry stakeholders to seek advice as the administration prepares a housing-finance overhaul to be delivered in January. The position taken by Gross, whose firm is among the biggest holders of U.S.-backed mortgage debt, is at odds with industry and government officials who have urged a smaller federal role.

Geithner said the government must reduce its role in housing markets and ensure Fannie Mae and Freddie Mac, the mortgage-finance companies operating under U.S. conservatorship, won’t require future bailouts.

“We will not support returning Fannie and Freddie to the role they played before conservatorship, where they took market share from private competitors while enjoying the perception of government support,” Geithner said today at the conference.

There’s “no clear consensus” on how to design a new system, he said.

Financial Regulation

“The government’s footprint in the housing market needs to be smaller than it is today,” Donovan said at the conference, adding that Fannie Mae, Freddie Mac and the Federal Housing Administration guarantee more than 90 percent of all mortgage loans. “We need to work to foster a strong but healthy market for private capital to harness the vitality, innovation and creativity in our system in a responsible way.”

Fannie Mae, based in Washington, and Freddie Mac of McLean, Virginia, have been sustained by almost $150 in Treasury aid since September 2008 when they were seized by the government amid soaring losses on mortgage investments. The U.S. has promised unlimited support for the two companies.

‘Smaller’ Role

“We need to begin the process of weaning the markets away from government programs and make room for the private sector to get back into the business of providing mortgages,” Geithner said. “We need to continue working to keep overall mortgage rates reasonably priced.”

The Treasury chief also said that plans to reduce the portfolios of Fannie Mae and Freddie Mac should proceed “in a careful way.” The government wouldn’t back away from the companies’ current obligations, Geithner said.

“We need to make it absolutely clear that we will make sure the GSEs have the resources to meet their financial commitments,” he said.

An explicit government guarantee against catastrophic losses could help attract private capital to the housing-finance system, said Mike Heid, co-president of Wells Fargo Home Mortgage.

The major policy challenge will be “how to marry this government guarantee with the maximum use of private capital in a way that minimizes the risk to the taxpayer, encourages competition, and ensures no one institution is too big to fail,” Heid said.

Geithner said the administration “will not support” a system that relies on taxpayer funds to backstop the gains of private shareholders.

“Fixing this system is one of the most consequential and complicated economic policy problems we face as a country,” he said. “This is a test for Washington. The stakes are high. The housing industry supports millions of jobs. For many Americans, their home is their largest financial asset.”

U.S. home ownership rate fell to 66.9 percent in the second quarter, the lowest level since 1999 and down from a peak of 69.2 percent in 2004, according to Commerce Department figures.

Government Starts Talks about New Mortgage System

Associated Press

Talk of shrinking the government's involvement in the mortgage market is growing. Just don't expect action any time soon.

A conference Tuesday at the Treasury Department is the first of many steps toward restructuring the nearly $11 trillion mortgage market. So far, rescuing mortgage giants Fannie Mae and Freddie Mac has cost the government more than $148 billion. That number is expected to grow.

Treasury Secretary Timothy Geithner pledged "fundamental change" to the structure of Fannie and Freddie, which profited tremendously during good times but burdened taxpayers with losses when the housing market went bust. He said the two companies weren't the only cause of the financial crisis, but made it worse.

Geithner, however, did not offer a specific exit strategy for Fannie and Freddie. He said only that, "it is our responsibility to make sure that we create a system that is not vulnerable to these same failures happening again."

With Republicans likely to pick up seats in Congress in November, however, the Obama administration will need support from both political parties for the changes it proposes.

Reflecting this reality, Geithner said that "the failures that produced the system we have today were bipartisan. The solution must be as well."

Executives and mortgage experts are prepared to tell Obama officials that the government must stay in the business of backing U.S. mortgages even if Fannie and Freddie disappear someday.

"At the end of the day, the government will still have a very large role to play," said Mark Zandi, chief economist at Moody's Analytics and a panelist at the event. Others include mortgage executives from Bank of America Corp. and Wells Fargo & Co, plus Bill Gross, managing director of bond giant Pimco and Lewis Ranieri, one of the creators of mortgage bonds.

The Obama administration's management of Fannie and Freddie has been under fire for months from Republicans on Capitol Hill. In December, the Treasury Department eliminated a $400 billion cap on how much money it would give the mortgage giants to keep them from failing. Sen. John McCain, R.-Ariz., has called that a "taxpayer-backed slush fund" and called for the support to be wound down.

Many in the mortgage industry say that's not realistic.

"There has to be a game plan," said Paul Leonard, vice president of government affairs at the Housing Policy Council, a mortgage industry group. "You can't just pull the plug on them."

Fannie and Freddie buy mortgages and package them into securities with a guarantee against default. They have ensured that millions of Americans can get home loans - even after the housing market collapsed.

The two mortgage giants, the Federal Housing Administration and the Veterans Administration together backed about 90 percent of loans made in the first half of the year, according to trade publication Inside Mortgage Finance.

At some point the government will have to scale back the level of support it provided the housing and mortgage markets during the recession and financial crisis.

"The government's footprint in the housing market needs to be smaller than it is today," said Shaun Donovan, President Barack Obama's housing secretary.

Most of the plans being circulated to reshape the mortgage market call for the government to guarantee that investors who buy mortgage-backed securities receive their money even if borrowers default.

Under this system, Fannie and Freddie could either be returned to private ownership or phased out completely. Fannie and Freddie, or their replacements, would pay the government to insure the loans. That money could be tapped if the housing market collapses.

"A government guarantee is both a desirable and necessary component of the country's housing finance system," wrote John Gibbons, a Wells Fargo & Co. executive vice president, in a letter last month to the Treasury Department.

Geithner said that there is a "strong case to be made" for such a government guarantee, but said the government needs to charge enough money to make sure the taxpayer does not get hit with losses in the future.

16 August 2010

Manhattan Luxury Condos Try FHA Backing in `Game Changer'


Whitney Gollinger, marketing chief for a Manhattan condo building with an outdoor movie theater and panoramic city views, is highlighting a different amenity to spur sales: the financial backing of the federal government.

The Federal Housing Administration agreed in March to insure mortgages for apartments at the 98-unit Gramercy Park development, known as Tempo. That enables buyers to make a down payment of as little as 3.5 percent in a building where apartments are listed at $820,000 to $3 million.

“It’s a government seal of approval,” said Gollinger, a director at the Developments Group of New York-based brokerage Prudential Douglas Elliman Real Estate. “We need as many sales tools as we can have these days, and it’s one more tool.”

The FHA, created in 1934 to make homeownership attainable for low- to moderate-income Americans, is now providing a lifeline to new Manhattan luxury condominiums after sales stalled. Buildings featuring pet spas, concierges and rooftop lounges are applying for agency backing to unlock bank financing for purchasers. The FHA guarantees that if a homebuyer defaults on his mortgage, the agency will pay it.

Seeking Approval

At least nine Manhattan condo developments south of 96th Street have sought approval for FHA backing since the agency loosened its financing rules in December, according to a database of applications maintained by the U.S. Department of Housing and Urban Development. The change allows the FHA to insure loans in new projects where only 30 percent of units are in contract, down from at least 50 percent. About 1,900 apartments in New York’s most expensive neighborhoods would be covered by the applications.

The agency also offers insurance to half of all mortgages in a single building after previously setting a limit at 30 percent, according to the new standards, which expire in December. The entire property must be approved for a buyer to get backing. Most of those that applied in Manhattan are buildings converted to condos or built since 2007.

The FHA is filling a void left after mortgage-finance agency Fannie Mae tightened its condo lending standards last year. The Washington-based company won’t back loans made in new buildings where fewer than 51 percent of the units are in contract, sometimes setting a requirement as high as 70 percent.

That in turn makes mortgage lenders hesitant to make loans at developments under those thresholds, said Orest Tomaselli, chief executive officer of White Plains, New York-based National Condo Advisors LLC, which advises condominiums on how to adhere to Fannie Mae and FHA standards.

‘Not an Accident’

“It’s not an accident that the FHA is offering this -- not private lenders,” said Christopher Mayer, senior vice dean at Columbia Business School’s Paul Milstein Center for Real Estate in New York. “An unfilled condominium complex is not the kind of thing that a bank looking to rebuild its balance sheet on real estate is looking to do.”

In New York City, the priciest urban U.S. housing market, the FHA insures loans of as much as $729,750, and permits buyers to borrow up to 96.5 percent of the price.

No buildings in Manhattan applied for FHA recognition between 1998 and 2008 -- though in those years the program didn’t require an entire property be approved and condo buyers could seek FHA-insured loans on their own, Tomaselli said.

New development in Manhattan represented 23 percent of the sales market in the second quarter, compared with 35 percent two years earlier, according to New York appraiser Miller Samuel Inc. About 8,700 new apartments in the borough were empty as of June, partly because of a lack of available financing for buyers, said Jonathan Miller, president of the firm.

‘Ironic’ Move

“Something has to happen for this product to be marketable,” Miller said. “I just find the whole thing ironic that FHA is providing financing for luxury housing.”

The FHA loosened the condo rules because of “market conditions,” according to Lemar Wooley, an agency spokesman.

“We are certainly cognizant of falling sales prices, limited availability of liquidity, etc., so we wanted to be flexible,” Wooley wrote in an e-mail. “The risk was considered before issuance of the temporary guidance.”

The new rules are a “game changer,” said Ryan Serhant, vice president at Nest Seekers International, a brokerage with offices in New York and Florida. He’s marketing 99 John Deco Lofts, a 442-unit conversion project in downtown Manhattan that features a “zen” flower garden and Brooklyn Bridge views.

Regaining Support

The development, where sales began more than two years ago, had 10 units go into contract with FHA backing since approval in March. The FHA suspended its support for the building Aug. 3, according to the agency website. The property is working to have it reinstated, Serhant said.

Angela Ferrara, who markets the Sheffield condos on West 57th Street, checks every day whether the 597-unit property, which applied to the FHA in May, has won approval. Ferrara, vice president of sales for New York-based the Marketing Directors Inc., says she is eager to start touting the FHA backing to potential buyers. That’s a reversal from the past, when government loan programs weren’t necessary -- or advertised.

“People would get the wrong idea, and think it was a different type of government-subsidized product,” Ferrara said. “It was almost regarded as a negative, particularly in the luxury properties.”

Now, she said, “It’s actually became a widely accepted marketing tool.”

Lincoln Center, Tiffany

The Sheffield promotes amenities such as concierge service, a pet spa and massage rooms, according to the project’s website. A neighborhood guide on the site lists chef Thomas Keller’s four-star restaurant Per Se as a nearby attraction, along with Lincoln Center, Carnegie Hall and Tiffany & Co.’s flagship Fifth Avenue store.

The Sheffield’s owner, New York-based Fortress Investment Group LLC, took over the condo conversion project in foreclosure last August after the original developer, Kent Swig, defaulted on a loan. With 56 percent of the converted units sold or in contract, the building has about 230 units left to sell, Ferrara estimates.

FHA is “definitely is a great solution right now,” said Tomaselli of National Condo Advisors, which prepared the FHA applications for Tempo and Sheffield.

“The savvy developers did it first,” Tomaselli said. “But everybody else is catching up.”

Brooklyn Sales

In the borough of Brooklyn, FHA support accounted for half of the 29 units sold at the 111 Monroe condos in Clinton Hill and a quarter of apartments in Williamsburg’s NV building, which is sold out after two years on the market, said David Behin, executive vice president at the Developers Group, a New York brokerage for new buildings.

The FHA’s effectiveness will be limited in Manhattan because apartment prices are higher than in Brooklyn and the insured loan is capped at $729,750, Behin said. The median price of a Manhattan apartment in a new development was $1.4 million in the second quarter, according to Miller Samuel and Prudential Douglas Elliman.

“With apartments over $1 million, FHA isn’t going to help you,” Behin said. “You’d have to put down 30 percent to get the loan of $729,000. And if you have 30 percent to put down, a bank will loan to you without FHA.”

Borrowers backed by FHA are essentially buying mortgage insurance, said Debra Shultz, managing director at Manhattan Mortgage Company Inc. in New York. Buyers pay an upfront premium of 2.25 percent of their loan value, and a monthly fee equal to about 0.5 percent of the loan amount for at least five years, she said.

21% of Mortgages

Nationwide, the FHA insured 21 percent of all mortgages made in the second quarter, or $71.4 billion worth of loans, according to Geremy Bass, publisher of the Inside FHA Lending newsletter. That’s close to the $79.5 billion total value of all FHA-backed loans in 2007.

The agency’s backing of luxury condos “doesn’t look good,” said Andrew Caplin, a professor of economics at New York University who co-wrote a paper titled “Reassessing FHA Risk.”

“Manhattan wealthy people -- is this really who the FHA was set up to support?” he said in an interview.

Caplin testified before Congress in March, arguing that FHA may need a taxpayer bailout because the agency relies on overly optimistic assumptions on unemployment, home prices and loan performance to predict losses.

Rising Defaults

Nine percent of all FHA-insured loans were 90 days or more past due or in the process of foreclosure in the first quarter, compared with 7.4 percent a year earlier, data from the Washington-based Mortgage Bankers Association show.

The agency doesn’t require a minimum credit score for the mortgage insurance, though many lenders who fund the loans insist on a rating of at least 580, said Shultz.

The FHA is considering a minimum required score of 500, according to a notice the agency filed in the Federal Register on July 15. A person with a 500 rating is in the lowest one percentile of credit scores nationally and was likely delinquent on several accounts in the last year, said John Ulzheimer, president of consumer education for Credit.com, a consumer and credit education company based in San Francisco.

Taking on Risk

“The government is taking on more risk,” said Guy Cecala, publisher of Inside Mortgage Finance. “That’s the bottom line. They really can’t say no, because that’s their purpose. It’s to support the housing market when there’s no other funding.”

Until they heard about FHA, Asha Willis and her boyfriend, Cesar Rivera, didn’t think they would buy a place for at least five years -- enough time to save a 20 percent down payment, she said. The couple reasoned that they earned enough to make monthly mortgage payments, and began an apartment search in February, limiting their hunt to buildings with agency backing.

Willis, an attending physician at Maimonides Medical Center in Brooklyn; and Rivera, a sales associate at Chelsea Piers in Manhattan, toured several glass and steel high rises and decided on a one-bedroom at Toll Brothers Inc.’s Two Northside Piers in Williamsburg, Brooklyn. It didn’t have FHA approval at the time, but developers promised it was on its way, Willis said.

“Our contract had a contingency that if they weren’t FHA approved we could get out of the contract,” said Willis, currently a renter at Manhattan’s Stuyvesant Town.

Prices at the building range from the “high $300,000s” to more than $2 million, according to Adam Gottlieb, project manager for Northside Piers. The property, which began sales in October 2008, received FHA approval in June.

‘Breaking Through’

Shultz, whose Manhattan Mortgage has sourced FHA loans for buyers in Brooklyn, the borough of Queens and on New York’s Long Island, said the last month brought a sudden surge of calls from would-be buyers seeking FHA insurance for Manhattan purchases.

“It’s definitely breaking through to the Manhattan market,” she said.

1 Rector Park, a Battery Park City rental building converted to 174 condos, got FHA backing in July and re-opened its sales office Aug. 5, a year after it was shuttered with no sales recorded, said Tricia Hayes Cole, executive managing director of Corcoran Sunshine Marketing Group. Her agency was hired to sell the units by the project’s lender, IStar Financial Inc., after it took possession of the property in November, she said.

Cutting Prices

In a second try to sell the units, IStar lowered the prices by an average of 30 percent, bringing the range from $290,000 for a 550-square-foot studio to $2.85 million for a three- bedroom unit with views of the Hudson River and Statue of Liberty, according to Cole. Two-thirds of the building is now priced at a point that could be covered by the FHA, she said.

“It didn’t seem unnatural for us to open this up to our buyers,” Cole said of FHA.

At Tempo, which is still under construction, developers are hoping that FHA approval will appeal to buyers of lower-priced units and inch the number of contracts signed to the 51 percent that conventional mortgage lenders require, Gollinger said. About 15 percent of the 98 units are under contract.

The developers plan to tout FHA support in e-mails and other promotions in a sales push next month as the building nears completion, Gollinger said.

“I never even dealt with this,” she said. “All of a sudden it became an absolute must.”

13 August 2010

Diverse Coalition Targets Home Transfer Fees

Washington Post

Can you name a housing controversy that pulls Iraq and Afghanistan veterans, consumer advocates, labor unions representing transport workers and government employees, the title insurance industry, the National Council of La Raza, libertarian and property rights groups, and the National Association of Realtors together into a protest coalition demanding quick action from the Obama administration?

A more unlikely collection of real estate bedfellows is hard to imagine. Yet at the end of last month, 11 groups with widely divergent agendas and memberships formed the Coalition to Stop Wall Street Home Resale Fees.

The target of their protest: Private transfer fees being attached as liens on homes and requiring successions of property owners to pay a fee every time the house or lot resells during the coming 99 years. Although proponents say the concept helps real estate developers raise capital for projects by bringing in Wall Street investors, critics contend the liens amount to a perpetual money machine that lowers equity values for unsuspecting consumers and complicates real estate sales.

Here's how the plan works: Say you buy a $300,000 house in a subdivision where the developer is participating in a private transfer-fee program and has recorded liens on every lot. What the developer might not have disclosed to you, however, is that when you sell the property, you will be required to pay 1 percent of the price you receive. The money must be disbursed out of the closing proceeds and sent to a trustee representing investors. Those investors fronted cash to the developer in exchange for the right to receive streams of payments for decades as individual houses sell and resell.

To illustrate: If you buy a house this year for $300,000 and resell it for $325,000 a few years from now, you will owe $3,250 at closing. Even if the house drops in value, you will still owe the 1 percent fee. And if you refuse to pay it, the deal will not close because a lien has been recorded that runs with the title to the property and mandates that every seller pay.

Your purchaser might not like the fee requirement, either, and might demand a lower price as compensation. When your purchaser later goes to sell, the same rules will kick in. And so on, through successions of sales until 2109, when the covenant recorded in 2010 disappears. Along the way, assuming modest appreciation in real estate values, investors and their estates stand to reap huge amounts of cash.

"It's a pretty slick way to make money, but it's bad public policy and bad for consumers," says Kurt Pfotenhauer, chief executive of the American Land Title Association. Pfotenhauer's group and the National Association of Realtors have spearheaded drives directed at state legislatures to ban or restrict private transfer fees. But now the focus has shifted to the federal level, where the 11-member coalition wants the Obama administration to prohibit transfer fees on all mortgages purchased or backed by Fannie Mae, Freddie Mac and the Federal Housing Administration.

The FHA has indicated that the fees violate its rules, said the coalition in a July 29 letter to Treasury Secretary Timothy F. Geithner. If Fannie Mae and Freddie Mac, which operate under federal conservatorship, follow suit, the mortgage-financing fuel powering transfer-fee programs will effectively be shut off. With the FHA, Fannie and Freddie account for about 95 percent of mortgage financings.

The principal advocate for the private transfer fee concept, Freehold Capital Partners of New York, did not respond to repeated requests to comment for this column. In an e-mail sent to me this year, Curtis Campbell, a spokesman for Freehold, said that "private transfer fees represent an adaptation in how to pay for development costs" incurred by builders "at a time when funding is not available" to them on "reasonable terms."

On its Web site, Freehold says that major real estate development firms controlling "hundreds of billions of dollars in real estate projects nationwide," including some of the "largest, most well respected," have participated in the program. However, the company has declined to identify any of them.

Members of the anti-fee coalition said they have specific reasons for joining. For example, Jon Soltz, co-founder and chairman of VoteVets.org, said military families generally move every three years and have been disproportionately hard hit by the real estate bust. Because of their frequent moves, "these fees hurt the military more than anyone," he said, and "take advantage of unsuspecting home owners and buyers."

12 August 2010

Thousands Gather in Atlanta for Federally Susidized Housing

Atlanta Journal-Constitution

Thirty thousand people turned out in East Point on Wednesday seeking applications for government-subsidized housing, and their confusion and frustration, combined with the summer heat, led to a chaotic mob scene that left 62 people injured.

At the Tri-Cities Plaza Shopping Center, emergency vehicles passed each other, transporting 20 people to hospitals. Medical and police command posts were set up on scene. East Point police wore riot gear. Officers from four other agencies supported them. Yet no arrests were made.

All of this resulted from people attempting to obtain Section 8 housing applications and, against long odds, later securing vouchers for affordable residences. Some waited in line for two days for the applications.

Renee Gray, a single mother holding her one-year-old daughter, Marion, came looking for a housing break and nearly got trampled, forcing her to run from the crowd and into the street.

"It could have been better organized," said Gray, a customer service employee. "A lot of adults lost focus.”

Jacquelyn Cuffie, 50, of Duluth, used a walker to cross the parking lot and navigate the huge gathering, determined to improve her living situation. It didn't matter how hot or crowded it got.

“It’s difficult to pay [the rent] with a disability check,” Cuffie said.

Offering applications for the first time since 2002, East Point Housing Authority officials had triple the crowd they anticipated, and one that was three-fourths of the 40,000 population of the south Fulton city. Things got out of hand when people started cutting into lines and authorities attempted to move groups to different areas.

Sgt. Cliff Chandler, East Point Police Department spokesman, said one flash point occurred early on. Authorities originally had lined up people to come into the front entrance of the Central Station Sports Cafe and receive the applications. However, when they saw the sheer number of people, the officials set up kiosks around the parking lot to hand out the applications, Chandler said.

Felecia McGhee, who came in search of her own Section 8 assistance, saw two small children trampled when people rushed the building that held the applications. When a group of people who had been waiting hours in a line were told to move to another line, people started pushing, shoving and cursing, witnesses said.

People collapsed in the heat. Emergency personnel drove up in a pickup truck and handed out bottled water. People were carried off on stretchers. A baby went into a seizure and was taken to a hospital.

Thaddeus Brookins of Atlanta dropped off his mother, Betty, a part-time furniture store employee, into the middle of the shopping center mayhem. He didn't like what he saw.

“It was terrible,” Thaddeus Brookins said. “Lot of people. People pushing people, knocking people over. People getting hurt.”

Wednesday's deluge of people seeking low-income vouchers in East Point demonstrated just how desperate the need for affordable housing has become in metro Atlanta, officials said. Some 15,000 Georgians currently are accommodated with Section 8 housing, with thousands more on waiting lists. Housing openings have been difficult to find anywhere, including rural areas.

"East Point, to me, is indicative of the problem," said Dennis Williams, a Georgia Department of Community affairs assistant commissioner. "It just goes to show you the situation is pretty dire."

At the same time the recession has pushed many middle-class families out of their homes, the closure of several large public housing projects -- Grady, Bowen and Capital Homes -- during the last decade has left many lower-income families with few housing options as well, elevating vouchers to something akin to lottery winnings. The demand has overwhelmed many municipalities and public entities that administer the Section 8 programs.

A check of the 16 metro Atlanta housing authorities that administer Section 8 programs found the overwhelming majority had closed their waiting lists. In one instance, the waiting list at Marietta Housing Authority has been closed since September 2008.

"There's more people demanding units at a lower-income level. The demands coming in from people who are losing their jobs and potentially having to leave their homes whether they move all the way to Section 8 or not, it's going to create demand, " said Jim Skinner, a planner in the research division of the Atlanta Regional Commission. "That's just the bottom line and that perhaps explains what happened in East Point."

When the crowd thinned out at the Tri-Cities Plaza Shopping Center, the parking lot was a sprawling mess of discarded water bottles, crushed soda cans and cigarette packs.

At an ensuing news conference, East Point officials tried to describe the day as a success, an assessment that was roundly challenged by those who had witnessed or been involved in the unruly scene.

Kim Lemish, East Point Housing Authority executive director, said the Section 8 housing applications were made available by the city for the first time in eight years because a waiting list had been depleted.

There was concern a similar overcrowded scene could occur Thursday morning when East Point began accepting the completed applications.

No one, however, was lining up at the housing authority in advance, by design. Late Wednesday, police had barricaded the housing authority and erected signs that declared "no loitering."

Home Mortgage Foreclosure Aid grows by $3 Billion

USA Today

The Obama administration will direct an additional $3 billion in assistance to homeowners facing foreclosure due to lost income, an effort to help some of the more than 14 million Americans counted as unemployed.

The assistance plan announced Wednesday will provide:

•$2 billion more for existing programs. Money under the government's Hardest Hit Fund will go to Housing Finance Agency programs in 17 states and the District of Columbia that aid homeowners struggling to pay their mortgages because of unemployment. Those states and the district all had unemployment rates at or above the national average the past 12 months.

Each state will use the funds to temporarily help people pay their mortgages while they seek jobs, seek additional employment or receive job training.

States may provide various kinds of help, including mortgage modifications, assistance with short sales (when a home is sold, with the lender's blessing, for less than is owed) or pay financial institutions incentives to write down a portion of a borrower's principal balance.

The Hardest Hit Fund provided $2.1 billion to the state programs in two earlier rounds of funding.

•$1 billion for a new federal emergency loan program. The Department of Housing and Urban Development will provide help, for up to 24 months, to homeowners at risk of foreclosure because their income has been substantially cut due to involuntary unemployment, underemployment or a medical condition.

The loans would be distributed through state agencies or non-profits in states or cities that have high unemployment; those areas are still to be determined.

Eligible borrowers could receive up to $50,000 in emergency loans.

To qualify, homeowners would have to be at least three months delinquent in their payments and show a reasonable likelihood of being able to resume repayment of their mortgages and related housing expenses within two years.

Wednesday's announcement comes as new data on foreclosures and home sales paint a mixed picture of the housing market.

RealtyTrac says in a report out today that lenders repossessed 92,858 properties in July, the second-highest monthly total since RealtyTrac began tracking foreclosure activity in April 2005 and behind only May's record of 93,777. Bank repossessions were up 6% from a year ago.

But overall foreclosure filings — which also include notices of default and scheduled auctions — fell almost 10% from a year ago. They were up nearly 4% in July from June, according to RealtyTrac.

"The banks are processing loans that have been in foreclosure for a long time," says RealtyTrac's Rick Sharga.

Separately, the National Association of Realtors reported Wednesday that existing-home sales rose and prices strengthened in the second quarter, both propelled by the government's home-buying tax credit that expired April 30.

The national median existing single-family price was $176,900 in the second quarter, up about 2% from $174,200 in the same period of 2009.

Sales of existing homes rose 9% to a seasonally adjusted annual rate of 5.61 million in the second quarter from 5.14 million in the first quarter. They were 17% higher than in 2009's second quarter.

"The third quarter will be measurably lower," says Lawrence Yun, chief economist at NAR. "The fourth quarter is a big question mark."