New Plan for Freddie / Fannie

found this fantastic video by reading this post in Noah Rosenblatt’s Urban Diggs blog (great blog about NYC real estate that I read quite a bit). Bill Ackman is proposing a new plan to solve the Freddy / Fannie problem and bring liquidity back to the market. This solution is not via a government bailout, but rather proposes a balance sheet restructuring (basically converting their debt to equity, in order to affect the crazy D/E ratio – currently at 129:1 – Yikes!!!).  I am not going to rehash Noah’s post and the video – they both do a great job explaining it. Check it out!

Video: http://www.cnbc.com/id/15840232?video=793726867

Mortgage Mess and Real Estate Investing

I bet it would be impossible to find a real estate blog that didn’t post anything about the mortgage mess today / over the weekend. It’s not that the credit crunch / mortgage industry collapse hasn’t been on everyone’s mind since a year ago. But a new wave of panic is sweeping us today, after IndyMac failed on Friday, and Freddy and Fannie are so unstable (after a precipitous slide in their stock price) that they need to be propped up by the government. So naturally, I ponder what that means for the real estate investor.

First of all, let’s take a step back. Why did IndyMac fail? Well, because like other banks in a similar situation, a large portion of their business was subprime loans. If you make loans to people who can’t afford the house, as long as they say they can and state that they make enough money to buy it, which part of this approach is sound strategy, exactly? Unfortunately, the mortgage markets weren’t too concerned with the future.

So as the market started crumbling and the bottom fell out from under, why did the banks still refuse to do short sales?  (A short sale, for those who don’t know, is a deal that a buyer (retail buyer / investor / etc) negotiates with the bank, for a sale of the property for less than what’s owed on the property).  This was a very necessary step, in my opinion, as values had dipped under the amounts that were owed.  If only banks worked with these buyers to do these short sales, along with mortgage workouts, it would have largely mitigated the mess, and banks would be straddled with a lesser inventory of houses. And as we all know, banks need liquidity, not houses, to exist. The idiotic thing is that these same properties, if no one buys them, get foreclosed on (huge expense for the bank), get seized and get auctioned off for less money than the proposed short sale. If I have an outstanding loan of $10, wouldn’t I rather take $7 from a buyer today, than sell it for $5 tomorrow?  Duh! Instead the banks made it so difficult for an investor to do these short sales, with the process dragging on for months. With such an abundance of foreclosures and deals to be had, no wonder so many properties end up going to auction. From my personal interaction with real estate investors, the frustration with the banks’ loss mitigation departments (those who end up working out the short sale deals) has been palpable. I spent some time perusing blogs and blog comments written by investors, who lamented that IndyMac exhibited many of the same behaviors. IndyMac had a chance to recoup some of the money they ended up losing due to the bad paper, and they squandered it. I am not, in any way, suggesting that short sales are a cure-all. I believe that it was important to pursue all avenues, one of which is short sales, one is mortgage workouts / loan modifications, and other steps. Hopefully, the next bank straddled with foreclosing properties, will be a bit better at short sales.

So now that IndyMac failed, and other banks with similar patterns are likely to fail, for the same reasons as stated above, the credit problem is only going to get worse, and the panic is going to get out of control.  Which concerns me as an investor and as a technology entrepreneur building a web-based resource for investors. If there are no funds available for investors to buy investment properties, the investment industry is going to go the way of the mortgage industry.  But not so fast! Investors, the good ones at least, are extremely creative, nimble and entrepreneurial ; they find opportunities at times when everyone runs and screams that the sky is falling. The deals are abundant. And yes, prices will likely keep decreasing, especially as the mortgage mess shrinks demand (many homebuyers who were in the market for a house, now will have to go back to renting, because they can’t get a loan). However, an investor who is good at doing the short sales, and other such strategies, can max out the deal anyway by getting it at very low prices. To finance these properties, a creative investor will look to non-traditional avenues, such as seller financing and private money. As far as my business, MeetMOJ,O is concerned, we are going to do just fine, as we extend our matching model to private money lenders and other alternative sources of capital.

So next time someone asks me what I am doing, and I answer “I am building a web-based community for real estate investors”, and that person looks at me like I am insane, I am going to insist that this is a great time to be an investor. If you know what you are doing, of course.

Cram Down Loan Modification

Senate Democrats are attempting to push through a controversial plan to allow bankruptcy judges to modify the terms of troubled borrowers’ mortgages as part of a larger package of foreclosure prevention programs. Allowing judges to “cram down” loan modifications over the objections of lenders could raise interest rates on mortgage loans by 1.5 percent or more, industry groups fighting the proposed changes to the bankruptcy code say. If the bill caused interest rates to go up by 1.5 percent, payments on a $300,000 30-year fixed-rate loan would increase by $300 a month. The bill would also mean higher down payments for home purchases and increased equity requirements for refinancing existing home loans.

The above is certainly likely to make the real estate investing climate slightly worse off than conditions are now (low mortgage rates, depressed housing prices). On the flip side, there are some positive points that the new bill (S2636) is going to bring to the table, which hopefully can curb the foreclosure frenzy.

Some of these positive points include: $200 million for pre-foreclosure counseling, and giving the authority to the state housing finance authorities to issue $10 billion in additional mortgage revenue bonds to refinance subprime loans and provide mortgages for first-time home buyers.

Opponents of the plan say allowing bankruptcy judges to change the terms of mortgages after the fact will raise the cost of borrowing, in part because investors who purchase securities backed by mortgages will have less confidence in their ability to collect payments or foreclose on properties.

More on “Project Lifeline”

Well, project Lifeline was formally announced today by Treasury Department and the Department of Housing and Urban Development. As mentioned before, it halts for 30 days foreclosure proceedings for homeowners in default for over 90 days. The idea is to give homeowners and lenders some additional time to work out better loan terms.

It looks like so far it’s a pilot involving 6 of the largest players in the mortgage industry: Bank of America, Citigroup, Countrywide, JP Morgan, Washington Mutual and Wells Fargo. The hope here is that the rest of the lenders will follow suit. These 6 lenders have already been involved in the Hope Now alliance, an effort organized by the Bush administration, to keep subprime ARMs from resetting. The Hope Now alliance states that it helped 7.7% of 7.1 million subprime borrowers (or 545,000 borrowers) during the back half of 2007. This was done through permanent loan modifications (such as lower interest rates) and negotiation of repayment plans.

Unlike Hope Now, Project Lifeline addresses all mortgages, not only subprime. Project Lifeline does not apply to vacant properties, investment properties, or homeowners in bankruptcy proceedings or facing a foreclosure date within 30 days.

So the whole thing makes me wonder: If this actually a viable solution or is this a “photo op” for our politicians? After all, perception is everything, especially in this election season. And we are, after all, headed towards a recession… So it’s important to at least look like we are doing something.

Project Lifeline just may be a logistical nightmare for the lenders. How will they handle all these homeowners calling them over the next 30 days? And how will anything actually get resolved in 30 days? Borrowers and investors negotiating on their behalf have already been having a difficult time getting lenders to respond; short sales take “forever and a day” to negotiate. There are just too many foreclosures. And there will only be more.

And will homeowners actually take action? The real issue here is that there is limited incentive for those in foreclosure to do anything about it. Now that home values have plunged, many homeowners are “upside down” on their mortgages, owing more than their homes are worth, and having withdrawn all equity during the “boom times”. It’s becoming easier and more rewarding for the homeowner to just walk away. The proverbial ATM is empty.

As we all know, “what goes up, must come down”. By some accounts, home values are down for the first time since the Great Depression. Home values had skyrocketed over the past number of years, growing at a rate far exceeding average salary growth. So to afford the American Dream, citizens of America had to get into mortgages that overextended them, often getting into ARMs with low initial rates that were scheduled to reset, only delaying the inevitable. All for a chance at the American Dream! Can we blame them? And can we blame the lenders for trying to help (not saying that all lenders are selfless).

Even more disturbing is the natural propensity of our culture to use home equity as an ATM, forsaking all reason. It is not all lenders’ fault, even though it has become popular to point fingers at these “unscrupulous” bankers. These are just some of the reasons why we are in this mess. Call me cynical, but I really doubt that a 30-day time-out will do a whole lot.

The New Stimulus Plan: Cure or Rhetoric?

Last week, Congress changed the conforming loan limit to as high as $729,750, as part of its Stimulus plan. This was part of the economic stimulus package signed by Congress and passed on to President Bush for signature on 2.7.08. This change raises the limit from $417,000 on maximum size of mortgages that Fannie Mae and Freddie Mac can purchase and market as securities. Same increases apply to loans backed by the Federal Housing Administration, a government agency that insures loans to borrowers with poor credit. So some loans that were considered jumbo are now considered conforming, which means lower mortgage rates.

The spread between conforming and jumbo loans had reached as much as 1% in recent weeks, because jumbo loans are considered riskier. Due to increase in mortgage defaults and nationwide credit crunch, banks have become more hesitant to create loans that couldn’t be later sold to Fannie and Freddie. Thus, higher interest rates were extended for these loans.

This new law affects investors and homeowners in 2 ways:

1) Firstly, it is designed to sell homes easier in higher priced areas, by making the mortgages more attractive to buyers.

2) Secondly, the lower rate will save homeowners money on their mortgage payments. Owners of existing mortgages can now refinance to a lower rate. What does this mean for investors? An opportunity to make some monthly cash flow! If you have a property that was bought at a jumbo rate, this is the time to refinance and perhaps see some cash appear in your pocket.

According, to AP, “Fannie Mae CEO Daniel Mudd said last week that over the past few years home prices rose so high in parts of the Northeast and West Coast, hiking the loan limits became necessary.”

The new increased limits, however, are temporary and are set to expire at the end of the year. It also excludes Fannie and Freddie from buying loans over the $417,000 limit made before July 1, 2007. However, old loans that are refinanced are considered new loans and thus can be sold to Fannie and Freddie.

It remains to be seen what impact this new law will have on home sales, as it applies to only 20 of the 160 metro areas in the U.S. Expensive real estate areas like New York and California stand to benefit the most from this plan. I suspect that reducing conforming limits simply brings mortgage rates closer to reality, to coincide with property values that had grown for years before coming to a screeching halt in 2007. I don’t believe that it will be easier to sell a house in excess of $417,000 than to sell a house under that amount: there is no shortage of either type of property out on the market. This is most definitely NOT a seller’s market. However, I do believe that allowing owners and investors to refinance will provide somewhat of a relief, and perhaps even save a couple of folks from foreclosure. I would be curious to see if it produces any positive cash flow for investors in my network.