What Will Boost Real Estate?

Never in my 30 years as a mortgage banker did I think I would see interest rates this low -- as low as during Harry Truman's presidency. Yet very few homeowners are able to take advantage of those rates, which have dropped more than 2 percent since 1997, the beginning of the market crash. And we know why, whether it was the loss of a job, health insurance, or equity in their home with housing values down as much as 50 percent in some states.

This is while the foreclosure backlog is so great it could take more than 60 years in some states to work through,according to New York Times reporter David Streitfeld. So when two presidents -- President Obama in his new jobs plan and former President Clinton on the Sunday TV talk shows touting his Clinton Global Initiative -- say that real estate has to recover for our economy to recover, it should take precedence in discussions on how to boost economy growth.

And there are concrete steps we can take now to cure much of the housing malaise of vacant homes and deteriorating neighborhoods. Obama's inclusion of $15 billion in his new jobs plan to rehabilitate depressed neighborhoods is one such. But much more can be done if he can convince Fannie Mae and Freddie Mac to cooperate in loosening some of their almost draconian qualification requirements for both purchase and refinance transactions made more restrictive after the housing crash.

Credit scores, for instance, do not have to be 680 or better, if there are other so-called compensating factors, such as long term employment, or good assets. Or, the almost set-in-stone 45 percent maximum overall debt-to-income ratio could be more flexible with good job security and assets.

And much more can also be done with HARP, the Housing Affordable Refinance Program that was touted to help millions of homeowners, but has helped just 838,000 to date. Hence President Obama's pronouncement that loan modifications would be allowed for "responsible applicants" can mean that compensating factors should be considered when qualifying borrowers.

But there is another restriction keeping many homeowners from refinancing or buying -- the declining equity in their current home. Whereas just 10 years ago average equity was 61 percent, it is now just 38.6 percent, according to the Federal Reserve's latest Flow of Funds report. If Fannie and Freddie would qualify someone with good credit and assets that is, say, 50 percent underwater, the case in many neighborhoods, then they should be allowed a haircut -- meaning a reduction in their principal balance -- that would enable them to refinance at today's record low rates with a new loan that brought it back to 100 percent of current value. The 30-year conforming fixed rate today is hovering at 4 percent.

What is holding Freddie and Fannie back from offering this now, which could in fact refinance an additional 2.9 million homes without significantly increasing tax payers' liability, according to a recent CBO report? Once again, it seems to be Republicans' opposition to any more government liabilities, and the fact that an independent agency, the Federal Housing Finance Authority is Fannie and Freddie's administrator, charged with limiting their losses now that they are government-owned.

But the CBO study showed that it could save homeowners about $7.4 billion in just the first year and help about 111,000 homeowners avoid default with just a net cost of $600 million. What's not to like about this program?

Harlan Green © 2011

A Troubled Housing Market

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New Obama refi plan could get help from Fed

Another Federal Reserve policymaker signaled Monday that the central bank may launch a new round of mortgage-bond purchases to boost the housing market.

The comments by New York Fed President Bill Dudley came on the same day that the Obama administration announced a major overhaul of its mortgage-refinancing program for loans owned or backed by Fannie Mae and Freddie Mac.

A new Fed program “would complement the goals of the administration in helping the housing market,” said Quincy Krosby, chief market strategist at Prudential Financial in Newark, N.J.

Dudley, speaking in New York on the economy, said that the continued weakness in housing was “a serious impediment to a stronger economic recovery. . . . Mortgage rates are at record lows and house prices no longer appear overvalued on affordability measures. But obstacles to refinancing and access to credit for home purchases are limiting the support provided by low rates to house prices and consumption.”

Noting that the Fed last month decided to shift more of its massive securities portfolio toward longer-term Treasury bonds to pull down long-term interest rates in general -- including mortgage rates -- Dudley said in response to audience questions that the Fed “potentially could move to do more in that direction.”

Recent market speculation has centered on the idea of the Fed printing money to buy another large chunk of mortgage-backed bonds. The idea would be try to push mortgage rates even lower, which could help spur home purchases and refinancings.

On Friday, Fed Vice Chairwoman Janet Yellen said that another large bond-buying program “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.”

The average 30-year mortgage rate fell to a generational low of 3.94% in the first week of October, but has since edged up a bit, to 4.11% last week, according to Freddie Mac.

Long-term Treasury bond yields have risen since late September as worries about another U.S. recession have faded, eroding some of the “haven” demand for government bonds. That has helped to put upward pressure on mortgage rates.

The Fed bought $1.25 trillion of mortgage-backed bonds in 2009 and 2010, but it has allowed that portfolio to decline to $860 billion as securities have matured.

Yellen and Dudley are allies of Fed Chairman Ben S. Bernanke. But they face opposition from some Fed officials who believe the central bank already has done enough to boost the economy.

- Tom Petruno

Home loan defaults jump by 26 percent in California

SAN DIEGO -- Banks sent nearly 26 percent more default notices to California homeowners in the third quarter compared with the previous three months, stepping up actions against those with delinquent loans in what may herald a new wave of foreclosures, a real estate information service reported Tuesday.

There were 71,275 first-time notices of default issued in the nation's most populous state in July, August and September, DataQuick reported. By comparison, there were 56,633 default notices issued in the second quarter of the fiscal year -- a three-year low.

"Obviously, some lenders and loan servicers have begun to plow through their backlogs of delinquent loans more aggressively," DataQuick President John Walsh said in a statement.

Most of the mortgages, home equity loans and lines of credit going into default are from 2005 to 2007, La Jolla-based DataQuick said.

Foreclosures weigh down home values and create uncertainty among would-be homebuyers who fret over prospects that prices may further decline as more foreclosures hit the market.

Default notices were filed against California homeowners who, using median figures, owed $19,198 on a primary mortgage of $331,333 and were eight months behind on payments, DataQuick said.

The median amount borrowers owed at the time the default notice was filed rose about 17 percent from the previous quarter and 27 percent from a year earlier.

"The gains likely stem from some lenders working faster last quarter to get caught up on their backlogs of long-delinquent loans," a DataQuick statement said.

On home equity loans and lines of credit in default, borrowers owed a median $4,576 on a median $70,055 credit line.

The foreclosure process can take nine months or more to complete.

Foreclosure activity began to slow nationwide last year after allegations that lenders were using abusive practices such as "robo-signing," or approving foreclosure paperwork without actually reading it.

The number of default notices in the third quarter of 2011 was down 14.4 percent from the third quarter of 2010 -- before most of the delays began.

Major banks and attorneys general in all 50 states have been working on a settlement of the allegations but California Attorney General Kamala Harris announced last month that she would not agree to a settlement.

Harris said the deal was inadequate in a state where more than 2.2 million residents owe more on their mortgages than their homes are worth.

Poorer neighborhoods had more defaults than richer ones in the third quarter. Areas where the median sale price of a home was below $200,000 had 11 defaults notices filed per 1,000 homes. That compared with 2.8 filings in areas with median prices above $800,000.

Statewide, there were 8.1 notices of default filed per 1,000 homes.

-Associated Press

It's Time to Buy That House

U.S. house prices have plunged by nearly a third since 2006, and homeownership rates are falling at the fastest pace since the Great Depression.

The good news? Two key measures now suggest it's an excellent time to buy a house, either to live in for the long term or for investment income (but not for a quick flip). First, the nation's ratio of house prices to yearly rents is nearly restored to its prebubble average. Second, when mortgage rates are taken into consideration, houses are the most affordable they have been in decades.

Two of the silliest mantras during the real-estate bubble were that a house is the best investment you will ever make and that a renter "throws money down the drain." Whether buying is a better deal than renting isn't a stagnant fact but a changing condition that depends on the relationship between prices and rents, the cost of financing and other factors.

But the math is turning in buyers' favor. Stock-oriented folks can think of a house's price/rent ratio as akin to a stock's price/earnings ratio, in that it compares the cost of an asset with the money the asset is capable of generating. For investors, a lower ratio suggests more income for the price. For prospective homeowners, a lower ratio makes owning more attractive than renting, all else equal.

Nationwide, the ratio of home prices to yearly rents is 11.3, down from 18.5 at the peak of the bubble, according to Moody's Analytics. The average from 1989 to 2003 was about 10, so valuations aren't quite back to normal.

But for most home buyers, mortgage rates are a key determinant of their total costs. Rates are so low now that houses in many markets look like bargains, even if price/rent ratios aren't hitting new lows. The 30-year mortgage rate rose to 4.12% this week from a record low of 3.94% last week, Freddie Mac said Thursday. (The rates assume 0.8% in prepaid interest, or "points.") The latest rate is still less than half the average since 1971.

As a result, house payments are more affordable than they have been in decades. The National Association of Realtors Housing Affordability Index hit 183.7 in August, near its record high in data going back to 1970. The index's historic average is roughly 120. A reading of 100 would mean that a median-income family with a 20% down payment can afford a mortgage on a median-price home. So today's buyers can afford handsome houses—but prudent ones might opt for moderate houses with skimpy payments.

For example, the median home in the greater Phoenix market, including houses, condos and co-ops, costs $121,700, according to Zillow.com. With a 20% down payment and a 4.12% mortgage rate, a buyer's monthly payment would be about $470. Rent for a comparable house would be more than $1,100 a month, according to data provided by Zillow.com.

Of course, all of this assumes mortgages are available—no given now that lending standards have tightened. But long-term data on down payments and credit scores suggest conditions are more normal than many buyers think, according to Stan Humphries, chief economist at Zillow. "If you have good credit, a job and a down payment, you can get a mortgage," Mr. Humphries says. "There's more paperwork and scrutiny than five years ago, but things are pretty much like they were in the '80s and '90s."

Not all housing markets are bargains. Mr. Humphries says Zillow has developed a new price/rent ratio that uses estimates for each individual property rather than city medians, to better reflect the choices facing typical buyers. A fresh look at the numbers suggests Detroit and Miami are plenty cheap for buyers, with price/rent ratios of 5.6 and 7.7, respectively. New York and San Francisco are more expensive, with ratios of 17.6 and 17.2, respectively. The median ratio for 169 markets is 10.7.

For investors seeking income, one back-of-the-envelope way of seeing how these numbers stack up against yields for other assets is to divide 1 by the price/rent ratio, resulting in a rent "yield." The median market's rent yield is 9.3% and Detroit's is 17.9%.

Investors would then subtract for taxes, insurance, upkeep and other expenses—costs that vary widely. But suppose total costs were 4% of the purchase price. That would still leave a 5.3% rent yield in the typical market. With the 10-year Treasury yield at 2.2% and the Standard & Poor's 500-stock index carrying a dividend yield of 2.1%, rents for residential housing in many markets look attractive.

A few caveats are in order. First, not all transactions are average ones. Even in low-priced markets, buyers should shop carefully. Second, prices could fall further. Celia Chen, a senior director at Moody's Analytics, expects prices to drop 3% before bottoming early next year and rising slowly thereafter. "If the economy slips back into recession, however, we could easily see a 10% drop," Ms. Chen says.

And property "flipping" can be dangerous even when prices are rising. That is because, absent a real-estate boom, house price gains simply aren't that exciting. Research by Yale economist Robert Shiller suggests houses more or less track the rate of inflation over long time periods. Houses aren't the magic wealth creators they were made out to be during the bubble. But when prices are low, loans are cheap and plump investment yields are scarce, buyers should jump.


—Jack Hough is a columnist at SmartMoney.com. Email: jack.hough@dowjones.com

New Mortgage Plan Floated

Underwater Borrowers Current on Payments Would Get Help

By RUTH SIMON, NICK TIMIRAOS and DAN FITZPATRICK

State and federal officials are pushing a plan that could help some "underwater" borrowers get refinancing assistance in the latest government bid to break a legal impasse with big banks over alleged foreclosure abuses and ease problems in the housing market.

State and federal officials are pushing a plan that could help some "underwater" borrowers get refinancing assistance in the latest government bid to break a legal impasse with big banks over alleged foreclosure abuses and ease problems in the housing market.

The proposal was raised in a meeting last week between government negotiators and giant lenders as part of an effort to settle allegations of questionable foreclosure practices. Discussions are still fluid and any final outcome is uncertain. Talks between government officials and the banks are expected to continue this week.

The plan under consideration would make refinancing available to some borrowers whose houses are worth less than their loans, so long as they are current on mortgage payments, according to people familiar with the matter. Such borrowers typically aren't able to refinance because they lack equity in their homes. The plan would apply only to mortgages owned by the banks. It isn't clear how many of those borrowers would qualify for help. Around 20% of all U.S. mortgages are owned by U.S.-chartered commercial banks; the majority are held by investors in mortgage-backed securities.

Federal officials have been trying to broker a settlement with the five largest mortgage servicers—Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co.

The plan is designed to win the support of California Attorney General Kamala D. Harris, who bolted from talks between the banks, states attorneys general and federal officials a few weeks ago. She had called a prior version of the deal "inadequate." Without California's participation, it will be difficult for the government to reach a settlement of $20 billion to $25 billion that some state and federal officials have been seeking.

As for the new plan, a spokesman for Ms. Harris said "we haven't seen any such proposal."

Administration officials have viewed the broader foreclosure settlement as an opportunity to increase the number of financially troubled borrowers who receive principal reductions, which until now banks have granted only on a limited basis, and to provide those at risk of foreclosure with other assistance.

Home prices have fallen by nearly a third over the past five years, leaving many homeowners owing far more than their home is worth, a problem that threatens economic growth for years to come.

Three-quarters of all borrowers who are underwater, amounting to around eight million homeowners, have "above market" rates and could reduce their mortgage rate by at least one percentage point if they were able to refinance, according to CoreLogic.
Housing and Urban Development Secretary Shaun Donovan joined two days of discussions last week, the highest-profile Obama administration official to participate in the talks, which also include state attorneys general and the Justice Department.

While Mr. Donovan's involvement initially led banks to believe that final decisions could be reached with state and federal officials, several bank executives grew frustrated with what they saw as last-minute efforts to change technical but important details that they believed had already been settled, people familiar with the matter said.

Friday's discussions became very heated at times, people close to the negotiations say. Government negotiators "have no idea how frustrated the banks are," said one person close to the banks.

An administration official conceded that the discussions have grown more "intense" as banks and the government attempt to narrow remaining differences, but characterized banks' concerns as part of the normal course of finalizing a difficult negotiation.

Supporters of the refinance proposal say it would provide a boost to the economy and benefit borrowers who have worked hard to stay current on their loans, even though they owe more than their home is worth.

The refinance program would be particularly costly for banks because they would be forced to give up expected interest income on loans for which borrowers are current on their loan payments and, given their payment histories, unlikely to default. Banks can't reduce rates on loans they don't own because the result would be a net loss to the investor.

"Nine months ago this would have been inconceivable," said one person familiar with the banks' thinking.

Representatives of Ally, Bank of America, Citigroup, J.P. Morgan and Wells Fargo declined to comment on the negotiations.

In a speech to the Mortgage Bankers Association last week, Mr. Donovan said a settlement would help banks avoid "hundreds of different lawsuits with varying degrees of success," while benefitting "struggling homeowners now, not sometime in the future."

The administration's efforts to revive the housing market and aid distressed borrowers have been overwhelmed by a sluggish economy and stubbornly high unemployment. The government's loan-modification and refinance initiatives have reached fewer borrowers than expected.

Under the new proposal, banks would refinance certain borrowers who are current on their loan payments, but can't qualify for a traditional refinance because they owe more than their homes are worth.

Many key details remain to be sorted out. It's not clear, for instance, whether borrowers would receive a permanent rate cut or whether their rates would be lowered for several years, then move higher.

Allowing more underwater borrowers to refinance could have an outsize impact in California, which has more than two million underwater borrowers, more than any other state, according to CoreLogic data. It's not clear how many underwater borrowers are current on their loan payments or how many of their loans are held in bank portfolios.

The new proposal has complicated discussions because the banks want a broader release from additional legal claims in exchange for accepting the refinance proposal, sources familiar with the negotiations say.

The two sides have differing opinions as to whether adding the refinance component would increase the price tag for the deal, these people add.

The refinancing discussion is separate from a parallel effort by the Obama administration to expand an existing federal program that allows homeowners to refinance if they have little or no equity and their loans are backed by Fannie Mae and Freddie Mac, the government-controlled housing giants.

The administration and federal regulators are preparing to unveil changes to that program as soon as this month to remove technical barriers that have blocked many eligible borrowers from participating.

Santa Barbara County Sales for September

CARPINTERIA

$186,000 5935 HICKORY ST 2
$355,000 4692 CARPINTERIA AVE 30
$399,000 4816 SAWYER AVE
$510,000 4234 CARPINTERIA AVE 1
$600,000 1484 NAMOUNA ST
$625,000 6955 GOBERNADOR CYN RD
(REO) $727,000 5384 STAR PINE RD

$486,000 Avg Price 
$510,000 Median Price 
7 Sales

SUMMERLAND

(REO)$800,500 2289 SHELBY ST 

$5,900,000 3555 1/2 PADARO LN

$3,350,250 Ave/Median Price
2 Sales

MONTECITO

$533,000 1932 JAMESON LN D
$535,000 1028 THE FAIRWAY
$535,500 1940 JAMESON LN A
$950,000 1126 HILL RD
$980,000 633 TABOR LN  

(REO)$1,106,000 2803 EAST VALLEY RD
$1,662,000 840 RIVEN ROCK RD
$1,757,500 175 TIBURON BAY LN 

(REO) $1,825,000 2024 SANDY PLACE RD
$2,550,000 920 CAMINO VIEJO RD
$2,775,000 145 BUTTERFLY LN
$2,975,000 965 PARK LN
$3,134,500 807 PARK HILL LN
$3,300,000 780 ROMERO CYN RD
$3,600,000 897 PARK LN
$4,700,000 202 OLIVE MILL RD
$4,850,000 449 COURT PL 

$2,221,676 Avg Price 
$1,825,000 Median 
17 Sales

SANTA BARBARA

$212,500 492 N LA CUMBRE RD
$234,500 350 CHAPALA ST #203
$234,500 4538 OAK GLEN DR F
$250,000 21 W ISLAY ST
(REO) $310,000 315 S CANADA ST A

315,000   732 BOND AVE
$320,000 721 W VALERIO ST
$325,000 34 W CONSTANCE AVE 2
$329,000 618 SAN PASCUAL ST
$329,000 618 SAN PASCUAL ST
$329,000 618 SAN PASCUAL ST
$330,000 711 W ORTEGA ST 11
$377,500 358 OLIVER RD
$380,000 535 E MONTECITO ST
$390,000 101 S SALINAS ST
$410,000 128 W ALAMAR AVE 3
$417,000 1078 MIRAMONTE DR 7
$417,500 416 POR LA MAR CIR
$437,000 407 W PEDREGOSA ST 21
$445,000 355 POR LA MAR CIR
$450,000 539 E MONTECITO ST
$450,000 46 BARRANCA AVE 2
$470,000 1717 THOMAS AVE
$474,000 716 EUCALYPTUS AVE
(REO)  $310,000 29 LA CUMBRE CIR
(REO)  $450,000 1411 CLIFTON ST 

$500,000 1440 W VALERIO ST
$500,000 3039 LUCINDA LN
$505,000 1311 W VALERIO ST
$512,000 830 KENTIA AVE
$520,000 2229 DE LA VINA ST 

$536,000 920 CHELTENHAM RD
$540,000 1085 VERONICA SPRINGS
$550,000 616 MULBERRY AVE
$550,000 LA CORONILLA
$550,000 421 VERANO DR

$570,000 328 LOMA VISTA AVE
$580,000 931 WELDON RD
$600,000 318 W DE LA GUERRA ST B
$604,000 4004 VIA LUCERO UNIT 7
$612,000 1518 LAGUNA ST B
$631,000 535 E MONTECITO ST
$635,000 4004 VIA LUCERO UNIT 9
$649,000 824 CHELTENHAM RD
$655,000 1818 PAMPAS AVE
$660,000 2829 PUESTA DEL SOL
$665,000 1835 CHAPALA ST
$667,000 26 E VALERIO ST
$689,500 535 E MONTECITO ST
$716,500 1902 EL CAMINO DE LA LU
$720,000 3934 CAMELLIA LN
$735,000 3742 BRENNER DR
$740,000 2122 RED ROSE WAY
$746,500 2915 VALENCIA DR
$755,000 1153 PALOMINO RD
$790,000 221 GROVE LN
$810,000 3210 CALLE MARIPOSA
$880,000 627 SURF VIEW DR
$891,000 3992 PRIMAVERA RD
$930,000 407 E FIGUEROA ST
$959,000 2229 STATE ST
$969,000 501 CALLE ALAMO

$975,000 4538 VIA MARIA
$1,025,000 220 E JUNIPERO ST
$1,112,500 211 BATH ST
$1,112,500 614 KENTIA AVE
$1,125,000 588 VIA RUEDA
$1,145,000 209 BATH ST
$1,150,000 2150 FOOTHILL LN
$1,195,000 1266 SAN MIGUEL AVE
$1,296,000 229 N ARBOLEDA RD
$1,300,000 2928 ARRIBA WAY
$1,337,500 407 NORTHRIDGE RD
$1,350,000 259 SAN RAFAEL AVE
$1,465,000 1915 SANTA BARBARA ST
$1,495,000 2817 EXETER PL
$1,550,000 4663 VINTAGE RANCH LN
$1,550,000 2465 CALLE ALMONTE
$1,570,000x 4175 PALOMA DR
$1,574,500 1608 LAS CANOAS RD
$1,595,000 637 E MICHELTORENA
$1,685,000 1717 MIRA VISTA AVE
$1,890,000 501 E GUTIERREZ ST
$1,985,000 734 ARBOLADO RD
$1,997,000 531 CHAPALA #D
$2,255,000 209 E PEDREGOSA ST
$4,000,000 4484 VIA ESPERANZA

$832,575 Avg Price 
649000 Median Price 
87 Sales

HOPE RANCH

$1,200,000  777 VIA AIROSA 

$4,850,000  4010 BITHYNIA RD

$3,025,000 Avg/Median Price

2 Sales 

GOLETA

$175,000 29 DEARBORN PL 19
(REO) $180,000 7560 CATHEDRAL OAKS 4
$220,000 7610 HOLLISTER AVE 315
$285,000 5740 ENCINA RD 2
$335,000 7606 HOLLISTER AVE 307
$365,000 7620 HOLLISTER AVE 219
$372,000 5020 BIRCHWOOD RD
$380,000 137 ATLANTIC LANE
$400,000 255 MORETON BAY LN 2
$425,000 413 CANNON GREEN DR G

(REO) $430,000 4983 SAN MARCOS CT
$445,000 558 POPPYFIELD PL
$455,000 547 POPPYFIELD PL
$460,000 7262 DEL NORTE DR
$480,000 4913 RHOADS AVE
(REO) $489,000 559 PINTURA DR
$495,000 637 AVENIDA PEQUENA
$525,000 314 CINDERELLA LN
$530,000 4844 WINDING WAY
(REO) $540,000 4824 PAYTON ST
$540,000 373 N KELLOGG AVE
(REO) $541,000 184 SALISBURY AVE
$555,000 7592 HEMPSTEAD AVE
(REO) $566,500 7244 FORDHAM PL
$600,000 104 ATLANTIC LANE
$608,000 7618 NEWPORT DR
$612,500 523 S SAN MARCOS RD
$620,000 101 ATLANTIC LANE
$663,000 5051 WALNUT PARK DR
$703,000 5635 PEMBROKE CT
$769,000 265 CINDERELLA LN
$800,000 421 PEPPERDINE CT
$830,000 935 DENA WAY
$1,300,000 7772 HERON CT
$1,450,000 1025 OCEAN VISTA LN

$546,971 Avg Price
$525,000 Median Price
35 Sales

ISLA VISTA

$820,000  6730 SABADO TARDE RD
$925,000  6603 TRIGO RD

$872,500 Avg/Median Price 
2 Sales