Shift Happens

I wrote an article for BHB regarding a new commercial listing and the effects the slowdown in the residential market is having on some commercial businesses:

But, what we don’t hear is that one of Northern California’s most successful and prolific ancillary housing suppliers (having been in business 20+ years) is facing the business equivalent of Russian Roulette in 2008 and asking me take inventory of their value in the market. As it stands for their specific “wares”, the Home Depots, Wal-Mart’s and Lowe’s of the world have decided to adjust their inventory allocation systems to “pay by scan”, meaning that the item is never sold to the vendor but consigned to the store. The item sits on the shelf until it is scanned at “point of sale”. Once sold, the supplier will be credited for each item purchased on a piecemeal basis paid weekly, bi-weekly, or monthly as agreed per vendor. Long gone will be the days of vendor meetings at Vegas strip clubs pushing the contract line of supplier “garb”. New online industries will emerge as old purchasing habits may soon be replaced by the online “dot com’er” bidding up shelf space to the highest bidder at Home Depot #6620 in Sacramento, CA.

What Is A Poor Boy To Do?

I was asked today at a luncheon about the current state of affairs in the residential lending market and the attitude of the lenders towards homeowners with 'troubled times' ahead. By coincidence, I ran across the following article from Marketwatch this evening about the lender's attitude towards forebearance:

Lenders have several workout options up their sleeves:

• Partial reinstatement. Under this plan, the borrower would agree to begin making regular payments and make up what is owed in, say, 12 monthly installments over the next year.

• Short-term forbearance. Here, the lender will suspend your payments for, say, three months or reduce your payment for six months, and then you'd make up the difference in some kind of repayment plan as described above.

• Long-term forbearance. Payments might be suspended for anywhere from four to 12 months, with a corresponding repay plan to follow.

• Loan modification. This would be a permanent change in one or more of your loan's original terms. The rate might be cut, the payment period extended or both so that the payment once again becomes affordable.

So my advice is to get on the horn right now with your lender. Make sure you talk to the workout department, though, not the collections folks. Though many lenders are training their repo staff to spot people who need a break and hand them off to the right people, most are bill collectors, short and simple. If the person you speak with has no idea what you are talking about, ask to be transferred to the chairman's or the president's office. You can bet they'll know whom to transfer you to.

You don't need anybody to speak for you, either. So stay away from the growing group of charlatans who are preying on financially distressed homeowners by offering -- for a fee, of course -- to act as a go-between between you and your lender. They don't have any more of an inside track than you do.

If you honestly feel you need to have someone holding your hand, contact a local credit or homeownership counseling agency. These nonprofits don't charge a thing. In fact, in some cases, lenders are paying them to go out into their communities to persuade troubled borrowers to contact their lenders.

The Department of Housing and Urban Development has a list of government-sanctioned counselors on its Web site, www.hud.gov. Also try the National Foundation of Credit Counselors, www.nfcc.org, or the Homeownership Preservation Foundation, www.995hope.org (888-995-HOPE).

From One Pickup Truck Driver to Another

It is with great sadness that I have to write these words about my recollections of my grandfather and the time we spent together over the years, but even more disheartening, given the timing, that I can’t be there in person to convey them. I trust that my brother can deliver our deepest sympathies to Terry, Jim, Paul, my mother, our family and friends on this day, as we honor the life of Robert “Bob” Comstock, my grandfather.

Think back almost thirty years ago, before PlayStation 3, XBox, iPhones, YouTube and the internet when all that a teenager could dream about was getting his driver’s license. During that time, my immediate problem was that every able-bodied driving instructor in my family was too busy. There was no one available, or willing to volunteer, to teach an anxious teenager the finer points of driving a 4-ton pickup truck with a 2-ton lift gate on the back. No one, that is, except my grandfather.

It was Bob’s responsibility to drive the truck, nicknamed “big blue”, around the neighborhoods taking care of the rentals, which was always a full time job (and still is). It was some of my fondest memories being there next to him. During those summer months, I had two choices; one, either hang out in the front of the office with Doris (and if you knew my grandmother you’re probably waiting to hear the second option), or two, jump in “big blue” for a “roadie” with Bob around “the Park”, eagerly waiting for my opportunity to get behind the wheel.

For me (and many of you), the choice was simple. And without fail, every time we went out on “a call”, I got my chance to hone my driving skills, while Grandpa sat patiently, calmly next to me. Don’t get me wrong, we had work to do and Bob made sure that I earned “my keep”. There were numerous refrigerators, stoves, or old furniture that needed hauling to the dump, but those were minor details to a 14 year old Jeff Gordon in training.

We’d spend an hour or so loading the truck (Grandpa would always do the heavy lifting), then he’d throw me the keys and tell me to get behind the wheel. With “big blue loaded to the hilt” with our responsibilities, Bob would coach me out of the driveway, around the block and down 66th Street to the dump, making sure that I didn’t take out a mailbox or parked car along the way. He used to love seeing the expression on the guys’ faces when I’d pull into dump with another load. Bob would wave to the guys showing his approval, and I’m sure a little satisfaction that we made it there in one piece, again and again. Then, he’d make it a point to drive us back down Park Blvd himself, slowing in front of the office, so no one would suspect a thing, including Doris.

During those drives in the truck, we would talk mostly about baseball and his beloved Cubs. After college, I remember getting my share of grief for signing with the Yankees. But, I know that he was just as proud and eager to hear stories of my time in the minors, as I was to hear his stories of the late night dances with the ladies, bad knees and all.

Last week after I received word that his health had taken a turn for the worse, I called Bob from my pickup truck. Knowing his condition from my mother’s report, I anticipated a brief, unresponsive conversation, but was surprised to hear the cheerful, appreciative sound of his voice. It took me back to those times in “big blue” and made me appreciate him even more. I will miss him dearly, and regret that I am not there to honor his life, with our family, in person.

Need To Qualify For The Mortgage Freeze Program?

Want to qualify for the new government mortgage freeze program? You can apply online here. But don't worry about your FICO score. In fact, you may need to skip some payments in order to qualify:

To qualify for the fast-track program, borrowers must have a FICO score of less than 660 and it can't have increased by more than 10% since they took out their original subprime mortgage.

Because income isn't checked, some experts worry that borrowers who might otherwise be able to afford higher payments will try to lower their FICO score to qualify for a rate freeze.

"The message here is to get your FICO score down," Mark Adelson, a structured finance expert, said. "Don't pay some bills, but keep up with mortgage payments."

"They're skipping over the part where they actually evaluate whether people can really afford to pay after resets," he added.

Other experts agree.

"There's certainly a lot of potential for gaming this system," said Andy Chow, portfolio manager at SCM Advisors LLC, a $14 billion San Francisco-based investment firm specializing in fixed-income and structured-finance markets.

"The five-year freeze on rates is the most troubling part of the proposal," said Joseph Mason, associate professor of finance at Drexel University. "That will create great uncertainty, hurting investors and mortgage-backed security valuations in the secondary market."

A lot of home loans are packaged up into mortgage-backed securities and sold to institutional investors around the world. The value of these bonds is based on future cash flows from interest payments on the underlying loans.

For investors in subprime home loans that may be frozen under the new plan, there's a delicate balance to consider. If resets are allowed to happen, they will get higher cash flows, but there could be more defaults. If resets are frozen, cash flows will fall, but fewer defaults may occur.

Real Estate Journal

OFHEO STATEMENT

Sent: Thursday, December 06, 2007 12:04 PM
To: OFHEO-NEWS@LISTS.OFHEO.GOV
Subject: OFHEO STATEMENT

Contact Corinne Russell (202) 414-6921 Stefanie Mullin (202) 414-6376
For Immediate Release December 06, 2007
	STATEMENT OF OFHEO DIRECTOR JAMES B. LOCKHART
“As Director of OFHEO, the regulator of Fannie Mae and Freddie Mac, I believe that the foreclosure prevention initiative announced by President Bush is a major step forward. I thank Secretary Paulson and Jackson and everybody from the private-sector involved. Fannie and Freddie are the largest investors in AAA subprime mortgage backed securities. They hold $160 billion of these securities and they are the major buyers of the refinanced subprime mortgages. This plan is a win-win for homeowners, neighborhoods, investors and the markets. But more has to be done. Fannie Mae and Freddie Mac have played an extremely important role in supporting the mortgage market as all the problems erupted this summer. Since then, they have been buying and securitizing almost $100 billion a month in mortgages. Their market share of all new mortgages has grown from 38 percent last year to over 60 percent. We need to make sure that they will continue supporting the mortgage markets. That is why we need now, as President Bush and the Secretaries have just said, GSE reform to strengthen the regulator of Fannie Mae, Freddie Mac and the Federal Home Loan Banks. For the last six years Congress has been considering GSE reform legislation. Given the problems faced by Fannie Mae and Freddie Mac and the current market conditions, it is time to act to ensure that they will be here to support the mortgage market, especially affordable mortgages for lower income families, now and in the future.” ###
OFHEO's mission is to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae and Freddie Mac.

The Black Hole On The West Coast

California Association of Realtors (CAR) came out with the most recent sales numbers for the 3Q of 2007 and in case you didn't hear (or notice), sales are off 40% from a year ago. The media might portray a downturn of 5-7% as a big deal, but try 40% from last October. Most developers and public builders (in this market) are scrambling for anyone to qualify, and then they'll see which house they can afford to lose the least on, with the 'one buyer in tow'.

LOS ANGELES (Nov. 28) – Home sales decreased 40.2 percent in October in California compared with the same period a year ago, while the median price of an existing home fell 9.9 percent, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) reported today.

“Financing issues have dogged entry-level buyers since early 2007, but they spilled over into the middle and upper-tier markets in the last few months,” said C.A.R. President William E. Brown. “The decline in sales at the upper end of the market contributed to a significant decline in the statewide median price as even well-qualified borrowers had difficulty securing financing.”

Closed escrow sales of existing, single-family detached homes in California totaled 265,030 in October at a seasonally adjusted annualized rate, according to information collected by C.A.R. from more than 90 local REALTOR® associations statewide. Statewide home resale activity decreased 40.2 percent from the 443,320 sales pace recorded in October 2006.

The statewide sales figure represents what the total number of homes sold during 2007 would be if sales maintained the October pace throughout the year. It is adjusted to account for seasonal factors that typically influence home sales.

The median price of an existing, single-family detached home in California during October 2007 was $497,110, a 9.9 percent decrease from the revised $552,020 median for October 2006, C.A.R. reported. The October 2007 median price fell 6.4 percent compared with September’s $530,830 median price.

“We expect further weakness in sales over the next few months as the liquidity crisis plays out,” said C.A.R. Vice President and Chief Economist Leslie Appleton-Young. “Both the state and national economies remain fundamentally sound at this time, despite recent developments in the housing market. While there have been mixed signals in recent months, economic growth is expected to continue into 2008.”

Highlights of C.A.R.’s resale housing figures for October 2007:

• C.A.R.’s Unsold Inventory Index for existing, single-family detached homes in October 2007 was 16.3 months, compared with 6.4 months (revised) for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.
• Thirty-year fixed-mortgage interest rates averaged 6.38 percent during October 2007, compared with 6.36 percent in October 2006, according to Freddie Mac. Adjustable-mortgage interest rates averaged 5.68 percent in October 2007 compared with 5.56 percent in October 2006.
• The median number of days it took to sell a single-family home was 59.3 days in October 2007, compared with 56.5 days for the same period a year ago.

Regional MLS sales and price information is contained in the tables that accompany this press release. Regional sales data are not adjusted to account for seasonal factors that can influence home sales. The MLS median price and sales data for detached homes are generated from a survey of more than 90 associations of REALTORS® throughout the state. MLS median price and sales data for condominiums are based on a survey of more than 60 associations. The median price for both detached homes and condominiums represents closed escrow sales.

In a separate report covering more localized statistics generated by C.A.R. and DataQuick Information Systems, 13.9 percent, or 41 out of 296 cities and communities, showed an increase in their respective median home prices from a year ago. DataQuick statistics are based on county records data rather than MLS information. DataQuick Information Systems is a subsidiary of Vancouver-based MacDonald Dettwiler and Associates. (The top 10 lists are generated for incorporated cities with a minimum of 30 recorded sales in the month.)

Note: Large changes in local median home prices typically indicate both local home price appreciation, and often, large shifts in the composition of housing market activity. Some of the variations in median home prices for October may be exaggerated due to compositional changes in housing demand. The DataQuick tables listing median home prices in California cities and counties are accessible through C.A.R. Online .

• Statewide, the 10 cities and communities with the highest median home prices in California during October 2007 were: Newport Beach, $1,575,000; Santa Barbara, $1,275,000; Cupertino, $1,033,000; Danville, $1,017,500; Los Gatos, $1,005,000; San Carlos, $927,500; Redwood City, $912,000; San Ramon, $835,000; San Clemente, $832,500; and San Mateo, $829,500.
• Statewide, the 10 cities and communities with the greatest median home price increases in October 2007 compared with the same period a year ago were: Santa Barbara, 24.4 percent; Arcadia, 21.3 percent; Redwood City, 20.6 percent; Newport Beach, 18.4 percent; San Ramon, 14.4 percent; Cupertino, 11.7 percent; San Carlos, 9.5 percent; Redlands, 8.8 percent; Redondo Beach, 8.7 percent; and Sunnyvale, 7.6 percent.

Leading the way...® in California real estate for more than 100 years, the CALIFORNIA ASSOCIATION OF REALTORS® (www.car.org) is one of the largest state trade organizations in the United States, with about 200,000 members dedicated to the advancement of professionalism in real estate. C.A.R. is headquartered in Los Angeles.

October 2007 Regional Sales and Price Activity*
Regional and Condo Sales Data Not Seasonally Adjusted

October-07	Median Price	Percent Change in Price from Prior Month	Percent Change in Price from Prior Year	Percent Change in Sales from Prior Month	Percent Change in Sales from Prior Year
	Oct-07	Sep-07	Oct-06	Sep-07	Oct-06
Statewide
Calif. (sf)	$497,110	-6.4%	-9.9%	-2.4%	-40.2%
Calif. (condo)	$416,210	2.7%	-2.1%	-4.6%	-31.9%
Region
Central Valley	NA	NA	NA	NA	NA
High Desert	$265,880	-2.2%	-19.1%	1.9%	-56.9%
Los Angeles	$533,070	-6.4%	-8.6%	-20.0%	-42.0%
Monterey Region	$714,550	-1.1%	1.7%	15.6%	-35.1%
Monterey County	$620,000	-10.1%	-5.3%	7.7%	-43.7%
Santa Cruz County	$735,000	3.2%	-2.5%	23.9%	-24.8%
Northern California	$373,790	-2.5%	-3.6%	20.5%	-16.8%
Northern Wine Country	$532,900	-3.4%	-9.4%	8.0%	-37.8%
Orange County	$673,770	0.0%	-1.1%	-11.3%	-41.7%
Palm Springs/Lower Desert	$323,440	-6.5%	-5.1%	16.4%	-30.1%
Riverside/San Bernardino	$344,370	-3.4%	-15.6%	15.6%	-34.4%
Sacramento	$309,360	-5.0%	-15.7%	9.1%	-30.5%
San Diego	$539,060	-3.9%	-6.2%	0.8%	-37.1%
San Francisco Bay	$810,490	3.3%	8.9%	9.0%	-41.5%
San Luis Obispo	$548,610	5.6%	-2.2%	-6.1%	1.6%
Santa Barbara County	$742,190	9.4%	-12.4%	1.0%	-29.5%
Santa Barbara South Coast	$1,325,000	-15.3%	18.8%	22.0%	-33.0%
North Santa Barbara County	$360,870	-1.9%	-18.5%	-22.2%	-23.6%
Santa Clara	$860,500	1.4%	11.0%	7.6%	-35.1%
Ventura	$650,570	-4.6%	-3.1%	-3.5%	-52.6%

na – not available

*Based on closed escrow sales of single‑family, detached homes only (no condos). Reported month‑to‑month changes in sales activity in October overstate actual changes because of the small size of individual regional samples. Movements in sales prices should not be interpreted as measuring changes in the cost of a standard home. Prices are influenced by changes in cost and changes in the characteristics and size of homes actually sold.

sf = single‑family, detached home
Source: CALIFORNIA ASSOCIATION OF REALTORS®

Median Prices By Region – Current Month vs. Year Ago

	Oct-07	Sep-07		Oct-06
Statewide
Calif. (sf)	$497,110	$530,830		$552,020	r
Calif. (condo)	$416,210	$405,360		$425,180	r
Region
Central Valley	NA	NA		$345,070	r
High Desert	$265,880	$271,940		$328,650
Los Angeles	$533,070	$569,390		$583,160
Monterey Region	$714,550	$722,500		$702,680
Monterey County	$620,000	$690,000		$655,000
Santa Cruz County	$735,000	$712,500		$754,000
Northern California	$373,790	$383,330		$387,560
Northern Wine Country	$532,900	$551,680		$588,330
Orange County	$673,770	$673,770		$681,340
Palm Springs/Lower Desert	$323,440	$346,080		$340,830
Riverside/San Bernardino	$344,370	$356,510		$408,170
Sacramento	$309,360	$325,550		$366,940	r
San Diego	$539,060	$560,840		$574,530
San Francisco Bay	$810,490	$784,220	r	$744,300	r
San Luis Obispo	$548,610	$519,740		$560,980
Santa Barbara County	$742,190	$678,570		$847,220	r
Santa Barbara South Coast	$1,325,000	$1,564,000	r	$1,115,000
North Santa Barbara County	$360,870	$367,860		$442,590
Santa Clara	$860,500	$848,950		$775,000
Ventura	$650,570	$681,820		$671,330

na - not available
r - revised
Source: CALIFORNIA ASSOCIATION OF REALTORS®

8 Interesting News Stories

It's Thanksgiving 2007 and before the rush of the day, I sat down to catch up on some articles that I've archived over the past week. Here is the list of several interesting news articles I've been saving to review and comment on, given the busy last two weeks with clients:

1. Millionarie Household chart - per country (US is 5.5x over #2);
2. SIV Superfund has picked a top flight manager to handle the $75B fund;
3. Gov. Schwarzenegger works with Lenders to Help California Homeowner;
4. NAR releases 3Q housing results - As defaults increase, lenders pull back;
5. Liberty Dollars seized by FBI;
6. Preview for the Top 5 gadgets from CES 2008 - via Popular Mechanics;
7. Fannie Mae and Freddie Mac Crash - charts;
8. Six brilliant marketing campaigns - with videos;
   

Commercial Real Estate Values Fall 2.5%

For the 3Q of 2007, there was a decrease in the TBI of 2.5%. Since the 3Q of 2003, the TBI (The MIT/CRE CREDL Initiative has developed a Transactions-Based Index (TBI) of Institutional Commercial Property Investment Performance) has been steadily increasing for the past 4 years.

The MIT Real Estate Center analysis shows that
the drop may not only indicate the end of commercial real estate price increases which effectively doubled in the past 4 years, but it also may signal that weakness in the housing market is spilling over into commercial real estate. The last time we saw this large of a price decrease occurred when prices fell 3.9 percent following the terrorist attacks of 9/11, says the MIT center.

Commenting on the index for the third quarter of 2007, MIT center director David Geltner said in a statement, "The fall in our index is the first solid, quantitative evidence that the subprime mortgage debacle, which hit the broader capital markets in August, may be spreading to the commercial property markets."

They Own Nothing

Apparently, Judge Christopher A. Boyko of the Eastern Ohio United States District Court, on October 31, 2007 dismissed 14 Deutsche Bank-filed foreclosures. The original article can be viewed here. In the post, it states that the ruling was based on lack of standing for not owning/holding the mortgage loan at the time the lawsuits were filed.

[..]The Court's amended General Order No. 2006-16 requires Plaintiff (Deutsche Bank) to submit an affidavit along with the complaint, which identifies Plaintiff as the original mortgage holder, or as an assignee, trustee or successor-interest.

Apparently Deutsche bank submitted several affidavits that claim that Deutsche was in fact the owner of the mortgage note, but none of these affidavits mention assignment or trust or successor interest.

Thus, the Judge ruled that in every instance, these submissions create a "conflict" and they "do not satisfy" the burden of demonstrating at the time of filing the complaint, that Deutsche Bank was in fact the "legal" note holder. [..]

The other items in the post, that will take some further investigation and dissemination of the facts, include the revelation that Deutsche Bank was not the originator of the notes, only the assignee under its securitization agreement, and is attempting to foreclose on these assigned notes without taking possession or proving factual assignment. Thus, these MBS or CDO pool holders own nothing. It's worth further investigation to confirm.

[..]Jacksonville Area Legal Aid Attorney, April Charney, broke this news to us via email and made these comments in regards to the Ohio Federal Court ruling (emphasis ours):

This court order is what I have been saying in my cases. This is rampant fraud on every court in America or nonjudicial foreclosure fraud where the securitized trusts are filing foreclosures when they never own/hold the mortgage loan at the commencement of the foreclosure.

That means that the loans are clearly in default at the time of any eventual transfer of the ownership of the mortgage loans to the trusts. This means that the loans are being held by the originating lenders after the alleged "sale" to the trust despite what it says per the pooling and servicing agreements and despite what the securities laws require.

This also means that many securitized trusts don't really, legally own these bad loans.

In my cases, many of the trusts try to argue equitable assignment that predates the filing of the foreclosure, but a securitized trust cannot take an equitable assignment of a mortgage loan. It also means that the securitized trusts own nothing.[..]

Level 3 Assets Are Surging

The FASB 157 rule is set to take effect on the brokerage houses, banks and financial institutions, in case you haven't noticed the latest 5 day drop in the Dow, S&P and Nasdaq. In today's Bloomberg article:

...Under the rule, Level 1 assets are those for which market prices are readily available. Level 2 holdings are valued based on ``observable inputs,'' or prices of similar assets traded in the market. Assets fall into the Level 3 category when there aren't even any observable inputs, and the firm has to rely on in-house models to calculate potential gains or losses... While those typically fall into the Level 3 category, assets such as leveraged loan commitments shift from one level to another depending on market conditions...

The Rule is specific about unobservable inputs (Level 3 category) and their intended use (FAS 157):

...The notion of unobservable inputs is intended to allow for situations in which there is little, if any, market activity for the asset or liability at the measurement date. In those situations, the reporting entity need not undertake all possible efforts to obtain information about market participant assumptions. However, the reporting entity must not ignore information about market participant assumptions that is reasonably available without undue cost and effort.

This Statement clarifies that market participant assumptions include assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or the risk inherent in the inputs to the valuation technique. A fair value measurement should include an adjustment for risk if market participants would include one in pricing the related asset or liability, even if the adjustment is difficult to determine. Therefore, a measurement (for example, a “mark-to-model” measurement) that does not include an adjustment for risk would not represent a fair value measurement if market participants would include one in pricing the related asset or liability...

As these real estate assets are lumped into the Level 3 category on the financial institutions' books, the value of the write-downs are going to become larger as we've been seeing in the past week (Bloomberg):

...Goldman's Level 3 assets, for which market prices are so scarce that companies use internal models to gauge their value, accounted for 6.9 percent of the New York-based firm's $1.05 trillion total at the end of August, according to a filing with the U.S. Securities and Exchange Commission. Citigroup classified 5.7 percent of its assets as Level 3 on Sept. 30 and Merrill reported 2.5 percent.

Investors have grown wary of banks and brokerages with difficult-to-sell securities on their books, after profits at Citigroup and Merrill were crippled by at least $19 billion of writedowns, mostly from bonds backed by home loans to borrowers with poor credit histories. While Goldman officials say the firm won't report an ``extraordinary'' drop in its subprime holdings, investors remained skeptical, pushing its shares down 15 percent this month through yesterday in New York Stock Exchange composite trading.

``It's hard to believe Goldman is perfect,'' said Jon Fisher, who helps oversee $22 billion at Minneapolis-based Fifth Third Asset Management and sold his Goldman, Merrill and Morgan Stanley shares in the past 12 months. ``Their losses might be smaller than others, but that doesn't mean they don't have a problem.''...

It's the Fed's next move to determine if they're going to drop interest rates to curb these expanding portfolio losses on the Street, or keep interest rates in check with commodities to curb inflation on Main Street. In last week's post, Level 3 Assets Broken Down:

If we look at the major institutions and divide their Level III assets by their equity capital base, we arrive at the following calculations:

• Citigroup: Equity base: $128 billion, Level III: $135 billion. Ratio: 105%
• Goldman: $39 billion, Level III: $72 billion. Ratio: 185%.
• Morgan Stanley: $35 billion. Level III: $88 billion. Ratio: 251%.
• Bear Stearns: $13 billion. Level III: $20 billion. Ratio: 154%.
• Merrill Lynch: $42 billion. Level III: $16 billion. Ratio: 38%.

Again, whether this "matters" remains to be seen. What I will offer, with some degree of certainty, is that Hank, Ben and the rest of the den are fully aware of this dynamic. That's likely why we saw such aggressive actions from global central banks and, to that end, why the Treasury is pushing the super-conduit emergency bailout plan.

OFHEO Response Letter to NY AG - Cuomo

Yesterday's 300+ pt loss in the Dow was partially a response to New York Attorney General's demand from the OFHEO to investigate Fannie Mae and Freddie Mac and the loans with Washington Mutual..

Second, as part of a wider probe of the mortgage industry, the New York Attorney General Andrew Cuomo demanded that Fannie Mae (Charts) and Freddie Mac (Charts, Fortune 500) examine whether mortgages sold to them by Washington Mutual were for homes that had been appraised at an artificially high price.

The fear is that Fannie and Freddie might cut back on purchases and guarantees of loans from WaMu (Charts, Fortune 500). That would be a crippling blow for the bank, because the market for loans that Fannie and Freddie buy is the only part of the mortgage market that has substantial volume.

Today, I received the email link for the response letter from James Lockhart with the OFHEO:

...OFHEO shares your concerns about fraudelent appraisals and their impact on the mortgage markets and homeownership. Additionally, we have a core interest in the safety and soundness of the Enterprises (GSEs). These allegations of appraisal fraud are a serious matter to the Enterprises and OFHEO and require vigilant attention by all relevant government agencies. Active and early consultation is appropriate in such circumstances.

After reviewing these materials, I feel that you and your staff may not fully understand the differences between the mortgage-backed securities (MBS) issued by the GSEs and those issued by other entites. In particular, unlike the issuers of private label MBS, when Fannie Mae or Freddie Mac issues an MBS, they retain the credit risk on the underlying mortgages by guaranteeing repayment to MBS holders...

Video: Iraqi IED explosion from 9/2/07

I'm watching the market recap today (listening to GM's woes, the credit crunch and the Chinese deciding not to purchase anymore greenbacks) and was sent this email from my attorney - if anyone is offended, I'll be glad to provide his name and number - :-)

If we ever need a reminder of how lucky we are that we don't have to worry about this type of reality, here it is.. and don't forget that there are those Americans (albeit teenagers) that are serving this country dealing with this on a daily basis.. they're doing this so we don't have to watch another 747 slam into Lower Manhattan.. enough said..

Notice the slow moving truck (on the left) that pulls over while the Humvees come up from the rear, and the truck on the other side of the street that is pulled over with civilians outside of the vehicle..

What The Fed Didn't Tell You?

As expected the Fed cut rates by 1/4 of 1%, or 25 basis points, but behind the headlines, the WSJ reported that the Fed pumped in more money into the financial system since the "credit crisis" took hold in August. This injection suggests that lending institutions are still wary to lend as the short-term debt markets are still sluggish (mortgage apps may be up in the past few weeks, but funding sources have dried up, even in commercial where Greenstreet Commercial (8th largest commercial lender) closed operations this past week).

NEW YORK -- The Federal Reserve pumped a total $41 billion to the U.S. financial system in three separate operations Thursday, amounting to the largest injection of funds since the liquidity crisis took hold this summer.

The size of the injection may come as a surprise, coming just a day after the central bank delivered its second consecutive rate cut. Wednesday's 25 basis point cut -- which brings the target rate to 4.5% -- follows a half percentage-point drop in September, which was intended in part to help ease stubbornly high lending rates in the interbank market.

The New York Federal Reserve's Web site announced a one-day repurchase of $12 billion, alongside a $21 billion seven-day, and a $8 billion 14-day operation. The total exceeds the $38 billion injection back in August that marked the largest contribution to the market in a single day since the World Trade Center attacks in 2001.

"This morning's combined RP package of $41 billion is significantly larger than we had expected based on our tentative reserve projections," said Lou Crandall, chief economist with Wrightson ICAP.

CCIM Call to Action

I posted the newest Call to Action from the Legislative Liaison for the CCIM on the BHB site. It looks like Dem's are trying to raise taxes on Real Estate Partnerships from 15% to 35%, which would have an immediate impact on commercial real estate.

Housing Is Taking Down Department Stores

I posted an article in September regarding Commercial CAP rates were (or would be) on the rise as a result of the slow down in the housing market and ensuing "credit crunch". The New York Times has an article yesterday showing the effects of the home builder problems and the correlation with the decline in department store value, which translates to slower consumer spending.

Since April, when investors voiced optimism that the housing slide had been contained, shares of the country’s biggest department store chains have fallen by about 30 percent.

With the sagging prices, investors have rendered a harsh judgment on the coming holiday shopping season, predicting that consumers will severely cut back on spending.

The gloom since April 20 has been spread evenly across the big chains: shares of J. C. Penney are down 33 percent, Macy’s by 27 percent, Kohl’s by 28 percent and Sears by 28 percent.

Robert J. Barbera, the chief economist of the Investment Technology Group, said, “The conventional wisdom of a year ago was that we would have a soft landing in housing.” But today, he said, “the stock market message is a hard landing for housing, with clear damage to consumer discretionary spending.”

Understanding The 2007 Federal Deficit Numbers

One of the more interesting articles today that made me step-back from all of the "doom and gloom" was from economist, Jeff Thredgold, and his weekly assessment of the economy. What was interesting was the fact that the 2007 federal budget deficit, ending September 30th, was $163 billion. So what? Well.. That number represents 1.2% of the GDP for the US, which is HALF the average deficit for the past 40 years. Jeff argues that the tax cuts have increased revenues (a point of contention for any Dem vs. Rep) into the Federal Gov't and significantly decreasing our budget deficit relative to the GDP:

Progress continues to be made in reducing the U.S. government’s income versus spending imbalance, commonly known as the annual budget deficit. Additional progress from this point, however, may be more difficult to come by.

The federal budget deficit for fiscal year 2007, which ended on September 30, registered $163 billion. The number resulted from government spending of a mind-boggling $2.73 trillion ($2,730,000,000,000) versus revenue of $2.57 trillion ($2,570,000,000,000).

One would think that having more than $2.5 trillion to spend over 12 months might be enough…

…not the case

Still, good news saw the deficit decline by 34% versus the $248 billion shortfall of the prior year, and down more sharply versus deficits of $318 billion and $413 billion of the two prior years.

More relevant is the deficit as it relates to the size of the U.S. economy. The $163 billion deficit represented 1.2% of GDP, roughly half the average deficit of the past 40 years.

One would also like to think that recent budget deficits have been declining because members of Congress and the Administration have taken a more responsible approach as to how they spend our money…

…also not the case

American voters removed Republicans from Congressional control last November because they saw too many spending excesses…too many pork barrel spending projects…too much waste.

Democrats took control with promises of greater spending (and pork) transparency…

…what a disappointment!

.. I argue that when you cut tax rates, especially on incomes, capital gains and on dividends, you simply generate more tax revenue. When you boost tax rates, you simply generate less revenue. History is replete with one example after another.

People are intelligent. They make rational decisions as to their investments. For example, they elect to recognize capital gains when tax rates are lower, and sit on possible capital gains when tax rates are higher. The government has never figured this out.

Overall tax revenues climbed by $785 billion since tax rates were cut in 2003, the largest four-year revenue gain ever. Individual tax receipts have jumped more than 46% over the past four years, with the wealthy paying most of the additional taxes.

Important Reminder for Mobile Professionals

I received this video from a family member in Florida. I thought it was a good idea to post as a reminder to mobile professionals (male and female) to protect you're personal identity when we're on the go and filling up at the gas station (albeit @ $3.10/gal).

CDO's Shutting Off Cash Payments to Investors

Some housing news from the New York Times that I thought was interesting given that the markets have rallied today:

“For all the pain in the mortgage market, investors who hold bonds backed by risky home loans have continued to receive their monthly interest payments — until now. Collateralized debt obligations — made up of bonds backed by thousands of subprime home loans — are starting to shut off cash payments to investors in lower-rated bonds as credit-rating agencies downgrade the securities they own, according to analysts and industry executives.”

“‘At this point, it’s fair to say that everybody expects this shoe will drop,’ said Mark Adelson, an independent mortgage securities consultant and analyst. ‘It’s a foregone conclusion. But when it happens, there will be a market reaction to it.’”

“Investment banks issued some $486 billion in debt obligations linked to mortgages in 2006 and the first half of 2007. In the last two weeks, leading investment banks have written down about $20 billion, much of it in collateralized debt obligations and mortgage-related securities.”

“Most mortgage securities have not yet had significant losses, which are only recorded when homes are foreclosed and sold. Up to two years can pass between a borrower’s falling behind on payments and an auction.”

“‘As far as the security is concerned, it’s only once the property is effectively sold that a loss is recorded,’ said Nicholas Weill, chief credit officer at Moody’s. ‘The process of foreclosure is a long process. It doesn’t just happen overnight.’”

Deflationary Abundance

I wrote an article for the BHB and discussed the four stages of any viable technology. I also posed the question as to its relevancy with real estate and the Redfin model. Here's the quote:

Stage One: Critical Price

The price of any new technology is stratospheric at first (the first DVD player was priced over $1,200 at first). Then, as the production increases and the acceptance from consumers takes hold, the price begins to decline to a “critical price” that opens the “flood gates” of demand. This critical price coincides with the efficiencies in production to meet the spike in demand for the product.

Stage Two: Critical Mass

The product was initially very costly to produce, but the increased demand has driven the production costs down to take advantage of economies of scale. The “critical mass” coincides with more efficient production avenues that help drive market share for the product.

Stage Three: Displacement

The product was originally conceived as an alternative to something else (something else that was too costly, too inefficient, too cumbersome, etc.) and that something else is losing market share to the new technology (product). The loss in market share will reach a point where the new product will “displace” the older, inefficient product in the minds (and hearts) of the consumer (i.e.: the DVD vs. the VHS).

Stage Four: Deflationary abundance

The product has displaced an older, inefficient product and its appeal has become ubiquitous throughout the market. The final stage of this “new” technology (product) is its mass appeal and the availability of cheap, mass production. The availability of the product will cause “deflationary abundance” and our $1,200 DVD player is now essentially a throw-away from WalMart @ $69.99.

Real Estate Journal: Be Careful What You Wish For

Real Estate Journal: Be Careful What You Wish For

Links for a couple of questions on LinkedIn and the article written - Is Barack Obama in your network?

OFHEO NEWS RELEASE

FOR IMMEDIATE RELEASE

October 16, 2007

NO DECLINE IN 2008 CONFORMING LOAN LIMIT

Additional Comments Sought on a Revised Loan Limit Guidance

New Mortgage Market Note on Historical Trends in

Conforming Loan Limit

Washington, DC – The Office of Federal Housing Enterprise Oversight (OFHEO) announced today three actions regarding the calculation of the conforming loan limit, which establishes the maximum mortgage loan value eligible for purchase by Fannie Mae and Freddie Mac.

OFHEO Director James Lockhart announced that, based on provisions in the proposed guidance, the current conforming loan limit will not be reduced for 2008. If the index used to calculate the maximum loan level should increase, the amount of the increase in 2008 would be reduced by the decline calculated in 2006 of 0.16%. Under no circumstance, however, would the maximum loan level for 2008 drop below the 2006 and 2007 limit of $417,000.

OFHEO Director Lockhart also announced that OFHEO has transmitted to the Federal Register a revised Examination Guidance for procedures relating to the calculation of the conforming loan limit and implementation of increases or decreases in the limit. A proposed guidance was subject to public comment earlier this year and OFHEO has made changes to the proposed guidance in several areas. OFHEO is seeking additional comment on the revised guidance within 30 days of its publication in the Federal Register.

Key provisions of the revised Examination Guidance entitled Conforming Loan Limit Calculations proposed for public comment are the following:

-- As previously proposed, any decreases in the limit would be deferred one year.

-- Decreases would have to total cumulatively more than three percent before a decrease would be implemented, a change from the proposed one percent de minimis amount.

-- As proposed and clarified, if a loan is conforming at the time of origination, it remains conforming regardless of declines in the conforming loan limit, providing greater certainty for markets and asset securitization.

-- As proposed, for simplification, the conforming loan limit will be rounded down to the nearest $100.

The Guidance, as transmitted to the Federal Register for publication, may be found on OFHEO’s website at www.ofheo.gov/media/guidance/CLL101607FR.pdf. The notice for the Federal Register contains a summary of the proposed and final guidances, the revised guidance as well as an Appendix setting forth various scenarios relating to possible loan limit decreases.

OFHEO also announced the publication of a new Mortgage Market Note on the conforming loan limit. The Note provides background information on the history of the conforming loan limit. It traces the growth in the loan limit relative to other key economic variables, such as household income. The Note also describes how the national loan limit has changed as compared with regional and state-level measurements of home price appreciation. The Mortgage Market Note is available on OFHEO’s website at www.ofheo.gov/media/mmnotes/MMNOTE072.pdf.

###

Link to PR: http://www.ofheo.gov/newsroom.aspx?ID=392&q1=1&q2=None

OFHEO's mission is to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae and Freddie Mac.

Fashon Valley Mall v. NLRB

One of the more interesting articles that I found this weekend is the ongoing legal struggle between property owners (more specifically large shopping mall owners) and the advocates for ‘free speech’. There is a current case in front of the California Supreme Court that attempts to limit the private property rights of owners that their ability to control business practices on their properties. The tenants (and we’re talking about tenants like Target, Macy’s, etc.) have a right to conduct business on the properties that they lease from large shopping center owners. When someone attempts to pass out a flyer on private property or protest an "unfair" trade practice, the landlords argue that they (and their tenants) have a right to conduct business on private property.

This latest case, Fashion Valley Mall v. NLRB, stems from a 1998 incident in which a Teamsters Union affiliate involved in a dispute with the San Diego Union-Tribune newspaper was distributing leaflets outside a Robinsons-May store, urging shoppers to telephone the paper's owner. But the store was a Union-Tribune advertiser. The mall ejected the union representatives, saying that they had failed to complete a permit application agreeing to abide by mall rules — one of which forbids advocating boycotts. The case is now before California's Supreme Court, which last week heard amicus curiae testimony on behalf of ICSC and the California Business Properties Association delivered by Thomas Leanse, of the Chicago-based Katten Muchin Rosenman law firm. Leanse argued that shopping centers are private property and shopping center owners should be allowed to protect their business interests.

“This isn't Speaker's Corner in Hyde Park, it's not Pershing Square in Los Angeles,” said Leanse. “These are privately owned shopping centers and the protestors directly interfere with business.” The court is scheduled to deliver its verdict within 90 days. What makes the case important, Leanse says, is a 1979 ruling in California, Robins v. PruneYard Shopping Center, in which the court extended the right of free expression to large shopping centers, likening them to town squares. Leanse says there is a chance that this ruling will be overturned, though it is a small one. “It is unlikely the 1979 precedent will be overturned,” he said. “But we argue that the shopping center has rules, and they are rules we can enforce, like the no-boycott rule.”

Be Careful What You Wish For

A funny thing happened on the way to writing this entry over the weekend. I received a blast email from the President of Rice University to all alumni about the status of new construction plans on campus (and a request for continued Alumni financial support). So, I decided to write back. As I replied to the president, I commented about the absence of a group affiliation with the university on the LinkedIn professional social networking site. Then I received an email from the President and the Alumni Director asking me to take it upon myself to get this “ball rolling”. So I did. One of the best features of LinkedIn is the ‘grab’ button in the Outlook Toolbar (see my article in the Real Estate Journal). Over the last five days we’re over 200+ alumnus in the group.

Want To See Where The Delinquencies Are?

I must say that the Wall Street Journal has done a great job in allowing us spectators (and participants, whatever the case may be) to visually see the progression of the subprime delinquencies around the country. The interactive map allows you to scroll over a county and see the delinquency rate for that quarter. The map will go back in time to Q1 2005 until Q2 2007.

One interesting note is the "light" shaded areas on the West Coast (delinquencies from 0% - 1%) in 2005 will then turn more shaded thru 2007, while the Central Valley turns to a bright shade of crimson (I'll let you figure out what that one means - affectionately coined as "blood alley") during the same time period.

The map really shows the extent of the problem as it permeates across the nation.