MHN Blog

Fed Leaves Rate As Is--For Now

After two days of debate, the Fed announced this afternoon that the federal funds rate will remain at 2 percent.

In its April 30 statement, the Federal Open Market Committee sidestepped the issue of whether it felt growth or inflation was the greater concern. And now we know: It's inflation.

After its 9 to 1 vote (according to BusinessWeek, Dallas Fed president Richard W. Fisher voted to increase  the target for the federal funds rate), the central bank said its focus had shifted to inflation, rather than economic expansion.

"Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased," the FOMC said.

The Fed also said it would continue to watch economic and financial developments and act accordingly, according to AFP.

To be fair, inflation is rising: Consumers anticipate average annual inflation of 3.4 percent over the next five years--the highest forecast since 1995, according to a Reuters/University of Michigan survey.

The decision was what most analysts expected--speculation this week suggested the Fed would not change the rate today. 

Stocks rose this afternoon just before and after the announcement, which seemed to calm some fears.

However, the likelihood of the Fed raising rates in the future is very real. The more the Fed expresses concern about inflation--which it again did today--the more likely the group is to kick rates up toward their old levels.

The Fed is in a tricky place--because our economy is, too. Rising fuel and food costs aren't helping inflation, but the economy is still struggling.

But the questionable effectiveness of all those previous rate cuts may be the biggest argument for raising rates.

The fed funds rate is 2 percent now, but just last September, it was 5.25.

The Fed has offered several cuts since then--and, although it's true the economy has not officially fallen into a recession yet, it's pretty darn slow.

And the housing market is still a mess. The government announced today that new single-family home sales fell 2.5 percent last month, and inventory rose.

Despite limited government intervention--including the Hope Now program, which has been widely criticized, and Fannie Mae and Freddie Mac's approval to enter the jumbo loan market, which according to Bloomberg, also has faltered because the companies are expected to purchase about half of the jumbo loans in 2008 as had been originally predicted--the housing slump has deepened in recent months.

Does it really look like those cuts gave the economy the shot-in-the-arm they were supposed to?

Not really. So could increasing rates really cause too much havoc? Probably not.

But how many cuts we need is anybody's guess.

At least one source--the Securities Industry and Financial Markets Association survey--is predicting growth for the U.S. in 2009. Released this week, the survey forecast a 2.2 percent growth rate next year--twice this year's projected pace, according to the International Herald Tribune.

If that's true, we may be about to climb out of this mess on our own--so let's not get crazy with the cuts, Federal Reserve.

Do you think a cut will come in September? Do you think it should? Tell us what you think by posting below.

 

The Fed Has Many Factors to Consider--And A Big Choice To Make

It's Federal Reserve meeting day--and the world is waiting to see how heavily inflation will weigh on the central bank's decisions.

Although the Fed won't release a statement until the end of the meeting on Wednesday, anticipation is building that the central bank will leave interest rates alone, according to Forbes.

The Fed also is likely to comment on the issues facing the U.S. economy--including inflation; some forecasts suggest the Fed will hold its main short-term lending rate at 2 percent for the months to come.

Few sources are predicting the Fed will again cut rates this week.

For almost a year, the Fed has offered aggressive cuts. But all the while, the board voiced their concerns about the need to closely monitor inflation.

Although the cuts had a questionable effect on housing--from April to September the cuts pulled adjustable mortgage rates down by just a half a percentage point, and banks remained nervous to lend to each other--they may have helped prevent the slowing economy from slipping into a recession.

• Federal income tax rebates, strong exports and the Fed rate cuts helped the economy exceed expectations this year, according to USA Today.

• But it may not have grown enough: Unemployment increased from 5 percent in April to 5.5 percent in May, and the overall economy only grew by an 0.9 percent annual rate in the first quarter.

The IRS tax rebates--which are still on their way to consumers--are expected to give growth a push; however, once they're spent, spending and business activity could slow down, USA Today says.

The Fed cuts also had a dark side. While the cuts gave the U.S. economy a shot in the arm, they also weakened the dollar. As imports grew more expensive, inflation grew, too.

And, it would seem, inflation has moved to the front of the concern line.

Inflation is increasing on a global level. Why? The dollar has less power--and the world is taking notice, according to The Wall Street Journal.

And let's not forget about one of our largest domestic issues: Housing. Last week, 30-year mortgage rates hit their highest level since September, according to Freddie Mac.

Recent reports outlining higher consumer and wholesale prices in May also helped escalate the general concern about inflation, said Frank Nothaft, chief economist at Freddie Mac.

As inflation worries grew, so did speculation that the Fed would lift rates in September, according to the San Francisco Chronicle.

Earlier this month, Fed Chairman Ben Bernanke said the economy had escaped a "substantial" decline--but also said inflation was becoming a bigger concern.

Wages aren't keeping up with higher food and gas costs; the overall economy may have fared well thus far, but many Americans haven't.

According to Moody's Economy.com chief economist Mark Zandi, the Fed has several pressing concerns--the unstable financial system, increasing job losses and inflation risks, USA Today says.

"In effect, they have three problems--but only one interest rate," Zandi said. "This makes for very tough policy decisions and leaves policymakers vulnerable to increasing criticism no matter what they do."

Well, the Fed's no stranger to criticism (remember that New York Times article from January that essentially said Bernanke was a pushover?).

But with the increasing inflation, financial market and unemployment concerns, it's hard to say exactly what the best course of action would be.

And it's hard to guess what the Fed will do. We didn't expect all those rate cuts at first, either.

Do you think the Fed will hold rates steady this week? Share your thoughts by posting below.

 

FBI Announces New Focus on Mortgage Fraud

The Chicago Tribune reported today that the Federal Bureau of Investigation has instructed more that two dozen field offices to cease financial crime investigations so agents can work on mortgage fraud probes.

That's a marked change from recent years, when agents have been instructed to focus on homeland security issues, according to the Trib.

Twenty-six offices in areas where mortgage crime is prevalent were told to focus on mortgage issues last week by Kenneth Kaiser, chief of the criminal investigative division.

The reason could be the number of suspicious activity reports filed in the 12 months ending Sept. 30--47,000, a 31 percent rise from 2007.

Because mortgage fraud can include everything from appraisal-inflating schemes to scams to "rescue" homeowners facing foreclosure, it can affect real estate agents, builders, appraisers, attorneys and mortgage bankers, the Trib said.

As the foreclosure rate rises--RealtyTrac said today that foreclosure filings are 50 percent higher than in May 2007, the New York Times reports--rescue scams are likely to become more of a concern.

Still, the FBI switching its focus from homeland security to mortgage fraud investigations is big news.

It shows that the FBI has a reason to be concerned about fraud increasing as the market works to repair itself.

It shows that another area of government--in addition to lawmakers proposing housing bills and Comptroller of the Currency John C. Dugan, who this week questioned the accuracy of the subprime borrower assistance and foreclosure information that banks and mortgage firms are offering--are concerned about housing market regulation.

And it shows that, although the housing slump is hopefully winding down, it's not over yet. But--with a new focus on mortgage fraud investigation--at least some of the corruption could be...

Unemployment Numbers Mean Trouble for Housing

Yesterday, we talked about how the housing decline was costing Hispanics construction jobs--but, according to today's unemployment report, the whole industry is suffering.

That's not to say that Hispanic workers are any better off than they were earlier this week, as evident by the number of articles that have popped up in the past few days about the issue, including:

• One in the Washington Post, which features Javier Amurrio, a 38-year-old immigrant from Argentina who was unemployed for 7 months in 2007 and became one of the Hispanic homeowners discussed in our earlier blog who lost his home as a result;

• And an article in the Chicago Tribune, that mentioned that African-Americans also have struggled with a 9 percent unemployment rate in the first quarter;

But it is today's government report, showing that the unemployment rate rose 5.5 percent in May--which is the biggest increase in two decades--that is particularly worrisome. We knew various sectors were sagging; now, it looks like unemployment is become a harsh reality and risk for almost everybody.

According to the Bureau of Labor Statistics, employers cut 49,000 jobs last month: 49,000 jobs.

We've been on a job losing streak all year. And, not surprisingly, construction is one of the hardest hit sectors because of a declined demand. Construction employment sunk by 34,000--its 11th consecutive drop--The Wall Street Journal said.

The financial industry dropped 1,000 jobs; retail lost 27,100, its sixth-straight decline.

One small good point of news: Average hourly wages increased by $0.05--0.3 percent--to $17.94, a 3.5 percent increase from 2007, which the Journal said suggests that wage costs are remaining manageable.

But that's only good news, of course, if you still have a job. And judging by today's numbers, many don't.

The continued unemployment rate growth--if it does in fact increase again in June--is likely to have a huge effect on the already struggling U.S. economy. How are Americans going to cope with less (or no) income when necessities like food and gas prices keep rising?

Well, consumer spending is going to take a hit. We've already seen a drop-off this year in big-ticket item sales. And we've seen a decline in demand for new homes.

The bottom line: If unemployment keeps rising, Americans are going to hold on to what money--and property--they have, and we can kiss any hope of the housing slump turning around by early next year good bye.

Even if people want to move into a new home during these trying times--which we hope they will, since the bloated housing inventory needs to decline before home prices and construction demand significantly pick up--it's going to be tough.

Financing is hard enough to get if you have good credit these days--but apply for a home loan without a job? Forget it.

The housing market should be concerned that unemployment is rising--and not just because it's hit the construction sector hard.

The question is: How do we begin to turn this messy, troubled economy around?

Will it take more jobs? Less expenses? Incentives for Americans to buy homes, like the National Association of Home Builders and Toll Brothers CEO have suggested?

What do you think?

 

Fannie Mae and Freddie Mac's Uncertain Future

Fannie Mae and Freddie Mac have been in the news often lately--and an interesting article in today's New York Times touches on some of the challenges the agencies face that could make headlines in the future.

The article illustrates why the mortgage market needs both companies, and discusses why it's in danger of potentially losing them. (Given today's announcement that Fannie Mae posted a more than $2 billion first quarter loss, that concern is more timely than ever.)

And although the government has relied on both companies to help bail out the mortgage market, its close ties to Fannie and Freddie certainly aren't making anyone feel very comfortable about the prospect of either collapsing.

As the article says, Fannie Mae and Freddie Mac have benefited from their government backing--both were allowed to borrow money at lower interest rates because of it, and their profits soared as a result. From 1990 to 2000, their stock increased more than 500 percent.

But since then, things haven't been as rosy:

• Top executives were replaced; Fannie and Freddie had to pay hundreds of millions in penalties, the Times said.

• Congress-determined affordable housing goals were met by purchasing large amounts of subprime and Alt-A mortgages; but when the housing market went bust, Freddie and Fannie had a $6 billion loss in the fourth quarter of last year.

• Executives were granted the right to increase their investment portfolios last year in exchange for their help stabilizing the market by buying subprime mortgages; in March, they both said they would raise more capital this year, and got an extra $200 billion in purchasing power.

• And in April, because they promised to further assist the housing market, Fannie Mae and Freddie Mac's mortgage cap was increased to $729,000. 

But Fannie Mae and Freddie Mac are dealing with serious issues. They've posted huge losses this year, and may still have as much as $19 billion in additional losses they haven't dealt with, according to analysts.

And, the Times says, they're banking on the housing market turning around in the next year and a half. If it doesn't, and home prices fall further, their losses could increase.

It doesn't sound like a hugely stable situation--yet we need Fannie Mae and Freddie Mac more than ever.

They are the biggest collective source propping up the ailing mortgage market: The agencies handled more than 80 percent of the mortgages investors purchased in the first quarter of this year, according to the Times.

Lose Fannie Mae and Freddie Mac, and the already rocky lending situation--just today, a Federal Reserve report said that the number of banks that had tightened lending requirements for corporate, commercial real estate, home mortgage, credit card and other consumer loans had risen close to historical highs--could go from bad to worse. Home prices could fall further; lending could become even harder to come by.

Which is why some lawmakers are concerned--but not willing to give up on the companies.

"I want these companies to help with affordable housing, to help low-income families get loans and to help clean up this subprime mess," Representative Barney Frank, a Massachusetts Democrat and the chairman of the House Financial Services Committee. "Otherwise, why should they exist?"

Good point ... but the more pressing question is, can they continue to exist?

Switching Gears From a Residential For-Sale Property to a Rental: Part Two

On Friday, we touched on why some new condos are transforming into rental buildings. Can single-family homes make a similar switch?

Yes--and no. If a new single-family home doesn't sell, turning it into a rental can be difficult. They're just not quite as versatile, for a number of reasons:

• It could be costly, thanks to extra fees. Single-family homeowners don't want a large number of rental properties on their street because rentals often aren't maintained as well as owned homes--which can drive property values down for an entire area.

Yet the foreclosure rate has caused that to happen in a number of U.S. neighborhoods.

Some cities are responding to the change. In February, Minneapolis instituted a $1,000 fee when a home is changed into a rental property, the Minneapolis Star-Tribune reports.

• And renters may not want to live in a single-family home. Phoenix, for example, is suffering from an oversupply of single-family homes, according to MSNBC; the city received roughly twice the amount of new homes it could accommodate between 2005 and 2007, many of which were bought as investment properties.

But home values in the area are down--and those homes aren't selling.

To cover the monthly mortgage payment, many owners are renting their investment properties out, a practice that has created a "shadow market" that is competing with the city's apartment rentals, MSNBC said.

Yet the costs for renting a single-family home or an apartment just don't match up.

Given today's 5.72 percent average 30-year fixed mortgage rate, for a buyer taking out a $165,000 loan, the monthly payments would be $959.75, Bankrate says.

Or more--the National Association of Realtors' March median single-family home price was $200,700. Depending on how much of a down payment the buyer put down, the monthly payments easily could be higher than $959.

Rents have risen, too--but they're still at more affordable levels.

Because of bankruptcies and other issues, U.S renter households grew by almost 1 million last year--four times the pace of renter growth from 2003 to 2006, according to a recent Harvard University's Joint Center for Housing study.

The higher demand has driven average U.S. rents up to $775 a month, the Wall Street Journal recently reported.

• Yet condos are a slightly different story. The median existing condo price in March was $219,400, according to NAR, making condo prices more competitive with luxury apartment prices, which in most markets will rent for more than the $775 average.
  
  Thus renting a brand-new condo--comparable in many cases to a luxury rental unit in terms of amenities and appearance--for $100 or $150 more than the average apartment rent isn't so unlikely. It may, in fact, actually be the same cost as renting a luxury apartment, depending on the area.
  

In the end, though, price may not even be the deciding factor.

The cost of renting a house in many areas will be higher than renting a condo or apartment; but in some markets where single-family home prices have fallen considerably and/or the market is really overloaded with inventory, the cost of renting a single-family home could possibly be close to the cost of renting a condo.

But that doesn't mean people will want to. Renters have different needs--and ones looking to live in an apartment may not want the responsibility of renting a home, which involves upkeep. (Getting more space is one thing; having to mow a lawn that isn't really yours is another.)

A condo, however, is likely to include general maintenance. It is also more likely than a house to provide a location closer to public transportation or an urban setting--which, for work or social needs, renters may prefer.

More units, more versatility: That could be one big reason for the Commerce Department's March multifamily permit increase.

What do you think? Is the multifamily market be benefiting from its various moneymaking opportunities--ones that extend beyond basic unit sales?

Rental Conversions, Condos and the Future of the Housing Market

As overall residential building declines, the multifamily and single-family housing markets are having two very separate experiences: Although both were down in March, they were down in varying amounts, and for different reasons.

And that's painting an interesting picture of how each may start to recover as we tentatively try to claw out of the housing slump.

Thursday's news showed that building in general has slowed considerably: Total housing starts fell 34.5 percent to 1.035 million in the first quarter.

They'll probably remain under 1 million until the middle of 2009, according to The Wall Street Journal.

But single-family starts fell 5.7 percent in March. Multifamily unit starts declined much more--24.6 percent.

Permits for single-family homes dropped 6.2 percent in the month; but multifamily permits only fell 5 percent, according to government data released in mid-April.

Why the difference?

Consider the new $20 million, 75-unit condo building in Charlotte, N.C.

Condo sales began in November; since home sales have slowed nationally and lending standards have become stricter, risk has risen--which caused the project's developers to radically alter their plans.

They've stopped selling units--and are officially becoming a rental property, according to the Charlotte Observer.

"We are returning deposits and releasing buyers from their contracts," Terrence Llewellyn, whose company is developing the project with Dean Kiriluk of Kirco, told the paper.

In some places, like Miami, luxury real estate helped keep the condo market going during the housing slump--at least for awhile.

As condo prices in the rest of the state fell 25 percent or more, Miami prices grew by 6 percent in 2007, according to the Florida Association of Realtors--but in January, the median condo price dropped by $32,000. Sales fell 30 percent.

That shift is causing some developers, like Llewellyn, to switch gears--and change their for-sale projects into rental ones.

Which may explain why multifamily starts would be down in March, but multifamily permits--indicative of future construction activity--would show an increase that the single-family home market did not.

More profitability options; more faith in the industry--and more funding.

But why? Is changing a multifamily unit into a rental property really more profitable than converting a single-family home into one?

Join us Monday for the answer--and part two of our look at how condos may be able to recover sooner, even if foreclosures continue to rise  ...

The Fed Rate Cut May Mark the End of An Era--But Will It Help?

The Fed announced a quarter percentage point reduction of its key interest rate today--which may be the last rate cut for awhile.

The federal funds rate is now 2 percent.

The Fed's statement mentioned--as previous ones had--that rate cuts were meant to invigorate the economy.

However, because the statement did not include the phrase "downside risks to growth remain," which had been present in previous statements, and also said that "uncertainty about the inflation outlook remains high," some sources, including CNNMoney.com, are forecasting the aggressive rate cut era is over.

And maybe that's best, since some sources, including Forbes, reported earlier that the Fed was expected to cut its target overnight interbank loan rate from 2.25 percent to 2 percent--but that more cuts may not be enough to heal the weakened economy.

Since September, the Fed has cut the federal funds target rate by three percentage points--it was 5.25 percent. But the effect has been questionable.

Just today, the Commerce Department said that we're facing a slowing economy.

The economy didn't stop in the first quarter--export sales and inventory helped offset housing and other issues and let the gross domestic product increase at a 0.6 percent annual rate. But concern about its future remains.

A few reasons analysts are questioning the rate cuts:

• Since the Federal Open Market Committee's March meeting, the cost of acquiring funds has risen by 0.33 percentage points. Banks remain nervous to lend to each other, Bloomberg says.

• Adjustable-rate mortgages--more tied to the federal funds rate than fixed-rate loans--have fallen just a half a percentage point since September; according to U.S. News and World Report, investors are still leery about buying into the foreclosure-plagued mortgage market, so rates needed to rise to attract buyers.

Higher rates don't help homeowners struggling to make their payments. But U.S. News and World Report says the Fed's cuts have had some influence.

"The truth is that if [the Fed] hadn't cut [the federal funds rate], adjustable rates would be even higher...and the problems would be much more severe," Gus Faucher, the director of macroeconomics at Moody's Economy.com, said in the article.

Maybe. Maybe not. Do you think that's true?

Tell us what you think by posting below...

New Head for HUD, But Questions Linger About Former Chief

The rumors were true: President Bush today nominated the head of the Small Business Administration, Steve Preston, to lead the Department of Housing and Urban Development.

And the media had a ton to say about it: The Associated Press, New York Times and Bloomberg all covered the news almost as soon as it broke.

John Kerry (D-Mass.), chairman of the Committee on Small Business and Entrepreneurship, also reacted quickly to the news.

"I've worked with Steven Preston as the SBA Administrator for almost two years now and I'll be sorry to see him go," Kerry said in a statement. "Mr. Preston inherited an agency in disarray, and he's worked hard to right its course and to improve relationships with Congress. We may have some differences on policy, but he's always been professional, responsive, and dedicated to the mission."

But what about former HUD chief Alphonso R. Jackson?

Jackson stepped down voluntarily in March amid allegations he had used favoritism in his position.

The New York Times reports that an Atlanta developer--whose company has paid Jackson more than $250,000 in fees since 2001 for work, which the company's lawyer says he did before joining the government--received a $127 million contract in 2007 as part of a joint venture to rebuild a New Orleans public housing project.

So Jackson is out; a new chief is in. But what's next?

Jackson is planning "a few months of rest and relaxation," according to a HUD spokesman. The federal government, on the other hand, is planning to investigate Jackson.

And we'll be watching to see what it finds. With the current state of housing--not good--it's more important than ever that answers to questions of possible deal-cutting and favoritism charges be found quickly.

HUD has taken on a bigger role as the slump continued--so we need it to be working up to its fullest potential. And we need it to keep doing more.

Let's hope Preston is up for the challenge...

Economic News Offers Little Hope

Two news items today indicate the economy is in real trouble--and may be approaching an even tougher time in the near future.

• The Fed's Beige Book indicates the economy is getting worse. The Fed said that "economic conditions have weakened since the last report." Nine districts reported a lesser economic pace; the other three said activity was "mixed or steady."

The culprit? Housing: According to Bloomberg, because of the "worst housing contraction in a quarter century," growth declined to a 0.6 annual pace from October to December--a reduction from a 4.9 percent pace during the three prior months.

• Merrill Lynch lost $1.96 billion in the first quarter. Cringe-worthy news from Merrill--one of the firms that has been hardest hit by housing issues--included it posting $1.5 billion in collateralized debt obligation-linked writedowns and $3.1 billion in Alt-A residential mortgage-related writedowns.

That brings Merrill's writedown total to $27.4 billion for three quarters in a row.

And it's causing Merrill to cut about 10 percent of its workforce--which fits right in with the Labor Department's announcement today that it appears unemployment is rising. In the week ended April 12, unemployment benefit claims rose by 17,000.

In all: Not a great snapshot of a healthy economy, is it?

Speculation still exists about whether or not the country is headed toward a recession--some say we're already in one--and things are not looking good.

If firms like Merrill Lynch aren't through with seeing mortgage-related writedowns, unemployment is rising and the overall economy is slowing in more areas than it isn't, can we still pull out of the tailspin to avoid a recession?

Those economic stimulus checks should be on their way soon ... will that provide enough of a burst to consumer spending to save the day?

Or are we doomed to stand by and watch while our economy contracts further--and further--until it is officially declared as being in a recession?

Share your opinion by posting below ...

U.S. Housing Disaster--Unfortunately--Likes to Travel

An article in today's New York Times discussed the impact that the U.S. housing crisis has had on the world--and it's not a good one.

In countries like the U.K. and Spain, housing is starting to suffer.

• Much has been written in recent months about British housing woes, and Ireland is experiencing a correction, as well.

Almost a year ago to the day, Bloomberg reported that residential real estate in Northern Ireland--after years or unrest--was finally catching up to the rest of the kingdom, with home prices increasing at one of the fastest rates in Europe.

Not so anymore. Britain's biggest mortgage lender, Halifax, said last week that home prices had dropped by the largest amount since the early 1990s, when Britain experience a property crash, according to the Times Online.

However, the correction isn't limited to Europe.

• China and India are also seeing lower housing prices after a period of steady increases: The Chinese market was growing so fast that the government had to institute lending curbs to cool it off. (That successfully brought home price increases down to 10.9 percent in February from 11.3 percent in January.)

But--as in the U.S.--those astronomical gains were to be followed by big drops. And now, fear is rising that several countries could be in for the same housing market decline as the U.S.--if not worse.

A string of housing market collapses could cause a number of problems. For one, we've seen how devastating a true housing market implosion can be on a country's individual economic growth. It reduces personal wealth, then hurts consumer spending, which in turn slows the economy and could (and may already have) cause a recession.

But a housing market ripple effect could hurt more than just individual economies--it also could damage general global economic growth.

Part of the reason areas like the U.K. and China are experiencing a correction is because prices got just too darn high; but they've also felt the effect of the U.S. housing decline via our financial markets. Other countries had invested in items tied to or backed by our mortgages; and we do the same.

And what about our building material companies? Strong growth overseas has helped them offset the impact of the U.S. housing slump--but that's another industry looking at some serious trouble if the U.K., Spain or other economies fall into housing disarray.

More housing market issues are likely to have a huge effect on all kinds of sectors--including private companies.

Just ask Ikea. The U.K. is its fourth biggest market. Its 17 U.K. stores accounted for almost 10 percent of the largest home-furnishings retailer's euros 19.8 billion of sales in 2007; on Wednesday Chief Executive Officer Anders Dahlvig said that the U.S. housing crisis had reduced Ikea's global growth "quite a lot."

Could it do the same for other economies around the world? We certainly hope not...

Multi-Housing Forum Gives Industry Members an In-Depth Look at Building Challenges, Financing Options

Multi-Housing News' parent company, Nielsen Business Media, sponsored an event in Chicago today called Multi-Housing Forum, featuring sessions on branding, debt and more.

I attended the forum's very compelling 2 p.m. session, "The 2008 Multifamily Debt Update," which was an interesting look at how GSEs are navigating the current market--a hot topic for the multifamily sector.

During the hour-long session, moderator Glenn Housman, Senior Vice President, Richard Ellis Inc., took questions and chatted about financing options and advice along with Freddie Mac Senior Producer Laura Cathlina and Jimmy Mayfield, managing director of Greystone Servicing Corp.

A few highlights:

• 125 on they way: Starting May 1, the new 125 percent regulation goes into effect at Fannie Mae--and Housman advised audience members looking at a refi to get their items in order "lickety-split." (Freddie Mac has yet to confirm its participation, Mayfield said.)

• Rate locks are working "very fast" these days, according to Cathlina. And with Freddie Mac, the deal is a deal when the lock is in place. "Once we rate lock, we're rate locked," she said. "If something comes up in the marketplace, we're not going to come back and change it."

• Price saver tip: Points are negotiable from lender to lender, as are processing fees and all other "nickle-and-dime issues," Housman said, pointing out that with a Freddie Mac loan, "Laura is controlling the deal--but not all costs."

• Shopping around: Housman advised participants to keep in mind that to an extent, you can get different quotes from different lenders. However, he reminded the crowd that there are limitations to that rule. "Once it's in Laura's system, you can't [cancel it] until you write a letter and say 'I want to switch,'" he said.
  

• Looking to get in and out of a deal in a few years? Consider Freddie Mac's ARM program, rolled out five years ago. "If you know you want to purchase a property and be out of it in five years, that's the best program for you," Housman said.

• Know your schedule. A 365 schedule compared to an actual 360 is not "apples to apples," Housman said. One is based on 365 days, the other--which is quoted more often--is based on 12 30-day months. A 360 will include more days, but usually offers a better interest rate, Housman said.

• Size limits? Call Fannie Mae, which is set up to handle them efficiently. "No deal is too big," Housman said. "A billion, $2 billion, they can do it." According to Mayfield, Fannie defines a small loans as "$3 million or less in most markets. In larger markets such as Chicago, $5 million or less."

Aside from helpful tips and GSE news, the session contained one other general theme: Fannie and Freddie are doing just what they're supposed to, according to Cathlina.

"Fannie Mae and Freddie Mac are both publicly held," she said. "Our first obligation is to our investors."

That said, they were formed to add liquidity to the market--and have. "In the past nine months, we have been doing just that," she said. "Exactly what we were created to do."

The agencies have both come under fire in recent month for various reasons--but they've also been given more lending power to help troubled homeowners. And their influence in the multifamily market can't be denied: Last year, both GSEs provided $60 billion collectively just to the apartment market, Housman said.

Their role will undoubtedly grow as the market increases--and lenders continue to tighten restrictions. Have you considered Fannie or Freddie financing options? It may be time to ...

Keeping Future Financial Issues Close to Home

Blame for the housing bust has been attributed to a number of factors and groups--but former Fed Chairman Alan Greenspan says the Fed isn't at fault.

So who is?

Well, according to the Financial Times, Greenspan points to a global "dramatic fall in real long term interest rates," which he thinks was prompted by abundant worldwide savings.

And he's confused about why the Fed is catching so much heat for its role in the housing crisis.

Greenspan does have a point: The Fed can't fix everything. And other global economies with central banks saw big housing price increases in recent years:

• London, for example, has seen skyrocketing prices in recent years; yet just last week, Bloomberg reported that luxury home prices in the world's most expensive city for prime real estate grew at the slowest rate in four months in March.

• And just recently, the International Monetary Fund said that Irish house prices still may be 30 percent too high.

Plus the U.S. isn't the only country who has had to help out its banks. Both Germany and the U.K. bailed out four U.S. subprime mortgage-crippled domestic banks,  including Northern Rock and IKB Deutsche Industriebank AG.

Looking at the housing situation that way, the U.S. and global perspective seems very similar--except for one big difference: We started the problem.

And then it spread. At least 34 European Union banks have posted more than $77 billion of losses and writedowns in connection with rising U.S. subprime mortgage defaults, according to Bloomberg.

So now, everyone's talking about reform--on a global level.

Bloomberg reported today that the EU approved a new accord to work together in financial crises; there was no decision about who would fund a rescue if a multinational bank needs one, but the accord came out of a general agreement that something was needed to contain massive financial situations before they spread internationally.

The U.K. Treasury already has said that it wants "concrete action" to improve financial market regulation after next week's Group of Seven finance ministers and central bankers meeting; to do its part, Britain has requested regulators meet more often and is encouraging its banks to disclose losses faster than before.

And the U.S. is working to prevent further economic plagues from spreading. According to the Chicago Tribune, the Fed and Treasury Department stepped in to help Bear Stearns from falling apart--an unusual move for the Fed--because its collapse could have hurt financial companies around the world.

The Bear Stearns bailout could be a good start to further methods of prevention--ones that, in moderation, Greenspan might even agree with. He says a lack of regulation isn't even really the issue--how much of the subprime mortgage fallout  we expected regulators to be able to ward off is.

"Doubtless each individual housing bubble has its own idiosyncratic characteristics, and some point to Fed monetary policy complicity in the U.S. bubble," he wrote in a response to the Times' Economists' Forum. "But the U.S. bubble was close to median world experience and the evidence of monetary policy adding to the bubble is statistically very fragile."

Do you agree?

 

Housing Bill Could Become a Reality Soon

The bipartisan housing bill is picking up steam in Congress--and it could be voted on this week, possibly as early as tomorrow.

That's amazingly fast, considering how long the housing slump has been going on--and it took just a few days to cobble this proposal together.

However, the bill may have been constructed quickly--but it's more thorough than you might think.

Some highlights of the proposal, courtesy of CNNMoney.com:

• Revamping the FHA. FHA loan limits could increased from 95 percent of an area's median home price to 110 percent, with a limit of $550,000 in high-cost areas. Down payment requirements may also go from 3 percent to 3.5 percent.

• Giving Builders a Boost. Builders would be allowed to extend the time homebuilders can post 2008 and 2009 losses to past tax bills from two to four years, which could help offset the impact of the housing bust.

• Giving Homebuyers a Break. The bill contains a number of provisions to help encourage homebuying, which could be good news for the market, including a $7,000 credit for homebuyers who buy foreclosed homes or homes in default and an additional property tax break.

• Helping out Refis. Homeowners looking to refinance would also get help via the bill, which suggests opening up $10 billion in tax-free municipal bonds, with proceeds going toward paying for mortgage refinancing for troubled subprime borrowers.

• Making the Lending Process Better. In addition to $100 million for homeowner counseling to prevent foreclosures, the bill calls for more mortgage application disclosure to ensure consumers better understand what loan terms they're agreeing to--and what exactly they will owe over time.

Builders are sure to benefit from the bill's allowances, and its tax and buying breaks could help invigorate home sales--a desperately needed change.

There is, of course, no guarantee all the bill's provisions will be accepted. The Bush administration has already focused in on the bill's suggestions to offer $4 billion in state and local government grants to buy and rework foreclosed properties and its suggestion to earmark $100 million for counseling, calling it a bailout for investors--a group which the government has said from the get-go won't be helped by any housing aid plan.

But the bill's attempt to attack multiple prongs of the housing crisis is admirable--the builders do need a break, as do buyers, as do communities with a high number of foreclosed properties.

Is the bipartisan bill the solution that the housing slump needs? Is it missing any necessary help--or does it contain any excessive measures? What do you think?

Tell us what you'd add or subtract from the bill by posting below.

 

Seeing the Need for Transparency--and Independence

In recent months, a number of individuals have called for increased regulation of Wall Street--and it looks like we might get it.

After the recent government bailout of Bear Stearns, it appeared regulation was more necessary than ever for the financial industry. And today, the government announced a new plan to do just that. Although it's been criticized for being too lax, it's at least a start.

News also broke today that the U.K. and U.S. are teaming up to better monitor the international banking system, according to the Financial Times.

But why stop there?

Mortgage Mayhem

According to the Times, one major reason for implementing such a group was the growing concern  that the ratings agencies didn't really consider the exposure of mortgage-based products or a housing drop-off.

That helped get us where we are today--in the midst of a financial crunch and a housing crisis, which both have fed off each other as both situations intensified.

Almost all the presidential candidates have called for greater transparency in the mortgage market; so has Treasury Secretary Henry Paulson.

The new financial industry plan proposes getting rid of overlapping state and federal regulators, according to BusinessWeek, and allowing the federal bank more liberties in looking at investment bank and brokerage firms' books.

And yet, as the housing crisis rages on, there is a clear need for regulation in that industry, as well.

Appraisals that Add Risk

Take, for instance, any of the lawsuits in the past year that involve home appraisals. One was just filed in the Los Angeles Superior Court against KB homes in February by Debbie Bolden, her husband and neighbors.

• According to the San Francisco Chronicle, the suit alleges that KB Home (Bolden's builder), Countrywide Financial Corp. (her lender) and affiliated businesses and two appraisers conspired to overstate home prices using fixed appraisals. The plaintiffs are seeking compensatory and punitive damages.

• Bolden feels she may have paid more than $60,000 over the home's market price. And the lawsuit could get much bigger--the plaintiffs are trying to get class-action status for all California KB Home buyers who used Countrywide to finance home purchases from Aug. 1, 2005 to July 31, 2006.

The truth is, buyers who agree to use internal appraisers, lenders and other parties are asking for trouble--and so are companies who offer to provide them. Even those working with the most legitimate appraisers and most well-meaning lenders are opening themselves up to criticism--and potential lawsuits--as the slump deepens.

Yet some still do. Buyers are losing home value as prices slide across the country, and they're not happy about it: Expect them to get more frustrated and more litigious until the market improves.

There have been some positive signs that the market is moving toward better practices--Fannie Mae and Freddie Mac, for instance, agreed earlier this month to only purchase mortgages from lenders that use independent appraisers.

Part of a deal with New York Attorney General Andrew M. Cuomo, the new rules--which go into effect next year--also prevent Fannie Mae and Freddie Mac-friendly mortgage brokers and real estate agents from choosing appraisers.

The agencies also will front $24 million to establish the Independent Valuation Protection Institute to register consumer and appraiser complaints and monitor enforcement of the new rules.

The new agency rules should help the industry--but regulating Fannie Mae and Freddie Mac alone won't fix everything. Maybe it's time for additional lenders, mortgage companies and others to become more independent; it's definitely time for them to employ appraisers with no connection to their business or its success. Even appearing to have influence over an appraisal is a dangerous position to be in these days.

After all, sketchy loans and predatory lenders helped get us into the current housing situation; ignore that problem, and we'll never fully get out of it. 

Multifamily Loan Delinquencies Rise in February

Multifamily property and hotel loans edged the overall commercial mortgage-backed securities delinquency rate up in February, according to Fitch Ratings--and the rise included a number of newly delinquent loans.

Commercial mortgage-backed securities may not have had as bad a year as anything connected to a residential mortgage had--but they've still had a hard time, according to Reuters.

And it's all connected to the housing market: The commercial-backed securities met with concern that less-than-secure underwriting practices in 2007 may have made sketchier loans that wouldn't be able to weather a U.S. recession. As the economy declined further, that fear increased.

And, as a result, $130 million in newly delinquent multifamily loans--which include apartment buildings--really influenced the increase in Fitch's delinquency index, according to Managing Director Susan Merrick.

"Multifamily delinquencies continue to be overrepresented in the index, now comprising 60 percent of all delinquent loans." (Despite the fact they only represent 14.6 percent of the Fitch-rated universe.)

A couple of things to compare that to:

• Office building-secured loans are 30.4 percent of all properties in the Fitch world and represented 11 percent of the overall delinquency index last month (even though office delinquencies were down by 1.1 percent last month).

• Retail loans made up 15.2 percent of the delinquency index.

Fitch's index measures loans that are at least 60 days delinquent in the $562 billion Fitch rated portfolio, a total of approximately 42,000 loans.

Delinquent multifamily loans reached $1 billion at the end of last month, a 14.5 percent increase from January 2008.

As this Las Vegas Review Journal article from two weeks ago illustrates, it's a situation renters are all too familiar with: Across the country, many are being kicked out of their homes with no notice because their landlords failed to keep up with their payments and went into foreclosure.

If that trend continues--more landlords and loans entering into delinquency--it could have a huge affect on the housing market. Could the need for rental multifamily units increase? And should the industry be preparing for that possibility now? Or could that spur home sales, which might offer suddenly displaced renters more security at what is becoming each month a more reasonable cost?

What do you think?

This Week's Housing Reports Offer Many Views, Even More Questions

On Monday, housing information from the National Association of Realtors offered hope that the housing situation might be turning around. Existing home sales, the organization said, had increased for the first time in seven months.

However, we're always cautiously optimistic at best--and given the housing data released today, that seems like a solid place to stand. The new data provided further insight, such as:

• Single-family home prices were down 11.4 percent in January from 2007 levels in 10 major metropolitan areas, according to the S&P/Case-Shiller home-price indexes released Tuesday by New York-based Standard & Poor's.

• The overall 20-city composite index dropped 10.7 percent from 2007 in January. The January-to-December decrease was 2.4 percent. Miami and Vegas--two areas hardest hit by the housing slump--had the biggest drops.

• The Office of Federal Housing Enterprise Oversight said today that home prices fell 3 percent in January from a year ago. Home prices dropped 1.1 percent from December to January; New England showed the most severe declines.

Both reports painted a fairly bleak picture. Home prices fell year-on-year, and home prices fell from the month prior.

The new information also showed that the problem is still widespread. Note that one source found the deepest declines in the Southwest and in southern Florida; the other found home price problems were biggest in the Northeast.

A number of news outlets today, such as the Chicago Tribune, noted the possibility--based on yesterday's National Association of Realtors data--that the housing slump might finally be turning around.(Although most were also quick to note it was too soon to tell.) Wall Street even got a boost from the news.

However, given today's reports, it doesn't seem like we should be celebrating just yet.

Because--in addition to the weak housing news--the Conference Board said today that the majority of the country doesn't feel very comfortable with the current economy. People also aren't too hopeful about its future. The board's Consumer Confidence Index dropped from a revised 76.4 in February to 64.5 in March.

And that news did not give the markets a boost. In fact, it brought the dollar to new daily lows against other currencies, CNNMoney.com reported this morning.

So we wonder: Did yesterday's news inspire you to hope the housing situation might be about to improve? Did today's news make you think it won't? Tell us what you think...

Is the Subprime Fallout Over?

Standard & Poor's recently said it thinks the worst of the subprime securities-related writedowns are over.

It's true, many banks and brokerage firms have already announced their year-end results for 2007. But are we really out of the woods?

S&P doesn't think so.

According to an article in BusinessWeek, large banks and investment banks in Europe and North America have so far declared $110 billion in writedowns of collateralized debt obligations (CDOs) of subprime asset-backed securities (ABS). S&P suggests insurers and banks in the Gulf region and Asia will add $40 billion to that amount.

Past, Present--and Future?

The future of subprime lending looks more positive--lenders are being more careful about issuing loans to subprime lenders; that's a big change from a year ago.

But many aren't yet through with subprime lending's past. ABC News reported that the FBI is currently investigating 17 companies in relation to the subprime collapse for mortgage lending practices. That's an increase from January, when it was reported 14 mortgage lenders were under investigation.

So it would appear we're not all quite convinced the subprime collapse is over and done with--or that we're totally safe from something similar happening again.

Plus some companies still appear to be feeling the subprime effect, such as Morgan Stanley, which this week reported a lower fiscal first-quarter net income than last year--$1.56 billion, or $1.45 a share, compared with $2.67 billion, or $2.51 in the year-earlier period. Net revenue fell 17 percent to $8.32 billion.

It's unlikely Morgan Stanley would agree that its industry was free and clear of future subprime issues; but its quarterly data did provide some hope: The company's first-quarter earnings dropped less than had been estimated because record equity sales and trading offset its subprime writedowns, according to the Chicago Tribune.

Home, Sweet, Hard-to-Afford Home

But the biggest argument for not declaring the subprime mess as over involves--surprise--the ongoing housing slump.

As home prices continue to drop, some economists feel it's hard to say that the subprime situation is over when we can't really say the same about the housing decline.

“Looking back on this, it will be difficult to say if the worst part of it is the real estate crisis, or whether it’s that effect in the credit markets," Charles Geisst, a Manhattan College finance professor who has written several books about Wall Street's history, told Fox Business. "It’s natural to ask where a bottom is in the real estate bit, but it’s fruitless."

That's because in financial markets, one bad day will "clear the smoke," according to Geisst, whereas housing  markets just don't work that way.

“This is the problem," says Geisst. "People are looking for a bottom that can’t actually come. People always look to an end for a crisis, but we are stuck in this for 2008.”

It probably doesn't help that while financial results come quarterly, housing reports from the National Association of Realtors, the Mortgage Bankers Association, the Commerce Department and other institutions are released more frequently--in some cases, monthly.

Those watching the housing market get a constant reminder of how bad things are; in the financial market, you at least have a couple of months off in between dour announcements.

But if we're not looking for one bad day to mark the bottom of the housing slump, what are we looking for? A slightly better month? A two-month consecutive rise in home sales? A certain percentage drop in the housing inventory?

It's hard to say--but one thing is certain: We're looking. What do you think would signify the end of the housing slump? What signs are you watching for? Tell us what you think.

Rating the Rate Cut: Was It What We Needed?

The Fed yesterday announced a large rate cut, bringing the rate down to 2.25 percent--and the backlash already has begun.

• From NPR: "Fed officials are hoping that by making money cheaper to borrow, they'll encourage investment and keep the economy from tipping into a recession — if it's not already there."

Yet, as NPR points out, that's easier said than done. In fact, economist Richard Yamarone of Argus Research believes the cuts are a mistake because making money cheaper isn't going to fix the mortgage losses that have crippled the economy, hurt confidence in lenders and reduced consumer spending.

Which would explain why the other cuts--at first lauded as a magical solution--didn't seem to have a huge effect on housing or the economy.

• The Los Angeles Times worries about the rate cut's impact on investments, noting that "as the housing market has crumbled and stock prices have slumped, many individuals and institutions have been hoarding trillions of dollars in safe, short-term accounts such as money market mutual funds and bank savings certificates."

Only the rate cuts just made those investments less profitable. Because the rate was cut from 3 percent to 2.25 percent, many savers will earn less than 2 percent on their accounts soon, according to the Times--the lowest return since 2005.

"Two percent is not going to make anyone very happy," Brian Gendreau, a market strategist at ING Investment Management in New York, told the paper.

However, the Fed's rate cut could possibly give Wall Street a kick, which it desperately needs. The cut could encourage investment into stocks and longer-term bonds--which could all eventually boost the general economy.

• And more criticism, from America's heartland: Wall Street may get a push, according to the Indianapolis Star, from the rate cut--but it could at the same time increase fuel and raw material prices as the dollar's value sinks overseas.

"There's sort of a two-edge sword when it comes to cutting interest rates,'' Patrick Kiely, head of the Indiana Manufacturers Association, told the Star. "Energy prices, natural gas prices and raw material prices have made some pretty astronomical jumps in the last 90 days, and they're driven by the degradation of the dollar based on interest rate cuts.''

That could cause serious problems in Indiana, which has the largest proportion of industrial jobs of any U.S. state.

Rate cuts have become almost standard in the past year; but are they really helping? The economy has sunk continuously in the past year. The housing market is still weak. And just Sunday, the government had to bail out Bear Stearns with a $30 billion credit line.

The problem: If the Fed tries to fix a given sector with a rate cut, that cut is likely to hurt another sector. There is no blanket solution for our current, many-pronged economic situation. One thing didn't cause the slowdown; one thing won't fix it.

So we wonder: Was the cut a good idea? What do you think?

Are the New Housing Predictions a Downer, or a Good Guess?

We keep hearing that the worst of the housing crisis may be over. But then again, signs are everywhere that it isn't--and we might actually have much more housing market mayhem to come.

• On Monday, shares of Bear Stearns, Fannie Mae, Freddie Mac and other housing funding sources fell drastically due to growing concerns about the U.S. mortgage market's health, the Financial Times.

• It didn't help that the Freddie Mac CEO also said this week that he thought the decline in home prices was only a third over.

• Countrywide Financial--the nation's No. 1 lender--also had a rough financial week because of a Wall Street Journal article that said the company is  under federal investigation involving what the company knew about its borrowers' income and assets.

True, some this week's news involves activities from years ago--Countrywide is being investigated for previous mortgages, and Freddie Mac and Fannie Mae have had a tough year in general: That's not new.

But (once upon a time), analysts were predicting that the housing slump wouldn't bleed into 2008. Then they said it wouldn't last much past mid-2008.

And now that we've sprung forward, it seems a whole new crop of naysayers are expressing dire forecasts--some of which are even more devoid of hope than the previous predictions. (Really? Have home prices only fallen a third of their total drop? Granted, they haven't fallen as much as they could have, given the slumping market, but that seems extreme.)

So now it's time to ask a question we haven't posed directly for awhile: When do you think the housing slump will end? Or even start to turnaround? Are the recent reports overwhelmingly negative, or realistic?

We want your expert opinion. So tell us all what you think, developers, real estate analysts, agents and other readers: When will the market improve?

Are We Hurting Homeowners, Or Are We Helping Them?

This week brought us a bunch of economic news--but none of it did much to calm fears that the U.S. may be sliding into a recession.

A brief recap:

• On Wednesday, the Federal Reserve's Beige Book showed that inflation and low consumer confidence are slowing the economy. Big item retail sales fell in the first two months of 2008. Regional banks gave out less loans.

• The number of homes entering into foreclosure reached the highest level on record in the fourth quarter, according to the Mortgage Bankers Association.

• And homeowners' share of home equity dropped to its lowest point since World War II.

However, this week also included some potentially good news--the Federal Housing Administration finally announcing the new regional loan limits that the economic stimulus plan allows.

As we discussed yesterday, the FHA early Thursday posted the new limits for the state of California; by the end of the day, its site included all the new limits for the U.S.

The new maximum is $729,750, which we knew; but we now know what areas--mostly metro areas and much of costly Southern California--will get the highest caps.

The move was made to reinvigorate the high-end housing market, allowing the FHA, Freddie Mac and Fannie Mae to back or buy bigger loans and hopefully spur home sales and refinancings in pricey markets.

The new limits are in effect until Dec. 31 of this year; talk has already begun about extending them longer. With pretty much no one predicting that the housing market is going to turn around until at least halfway through this year, that's not an impossible notion.

But is it a good one? On one hand, we need to get rid of some of the housing inventory, which means somehow making loans easier to get and avoiding more foreclosures, which would add new homes to the market.

So maybe jumbo loans--which are expensive and increasingly difficult to get--are a good place to start. In housing markets like Southern California, the previous FHA limit was too low to really do much for even moderate home buyers.

The Los Angeles-Long Beach-Santa Ana area median single-family home sales price was $593,000 in the fourth quarter of 2007, according to the National Association of Realtors--which is $230,210 greater than the previous FHA high-cost area $362,790 limit.

So a number of people buying average, everyday $593,000 homes in L.A. are likely to benefit from the FHA increase, which now allows the agency to back loans up to the $729,750 maximum.

But, then again, just because the median home price in an area is high, it doesn't mean local buyers can afford to buy a home at the typical price. In places like California, home prices swelled to unbelievable levels during the boom. Cashing out, trading up and taking out major loans kept the market rolling along--until the housing slump hit. Those options have all but disappeared.

Qualifying homeowners for pricey properties they maybe couldn't afford is a big part of what got us into this situation. As home prices swelled during the boom, people bought and borrowed from the equity in their costly homes--and many of them are now facing default or foreclosure.

So focusing on the high-end housing market maybe isn't the best place to first attack in our ongoing attempt to cut the amount of for-sale housing. It's possible the best option is to wait a bit longer for home prices to fall to more reasonable, affordable levels in high-cost areas like Southern California.

Or are troubled homeowners in overpriced markets--despite whether or not that market needs a correction--just getting a helping hand with these new loan limits?

What do you think? Talk to us--post your thoughts below ...

What Places Will Receive the Biggest Loan Limit Boost?

Many taxpayers are focused on the rebate check that will be sent this spring, courtesy of the Economic Stimulus Act--but the provision's cash-back policy isn't the biggest benefit for homeowners living in high-cost areas.

The act also raised loan limits until the end of the year for Freddie Mac, Fannie Mae and the Federal Housing Authority. Freddie Mac and Fannie Mae can now back loans of up to $729,750 until Dec. 31; the FHA can insure loans of up to 125% of an area’s median home price (up to $729,750.)

For places like Northern California--where homes way more expensive than the previous Freddie Mac and Fannie Mae $417,000 limit and the $362,790 FHA limit for high-cost areas--that's likely to make a big difference for homeowners looking to refinance and home shoppers looking to buy.

Which is, of course, what the entire housing market is hoping for--more refis to help save homes facing foreclosure and more sales to pull stock off the bloated housing inventory.

The loan limits will differ across the country; the Department of Housing and Urban Development is supposed to publish a list of median area home prices by March 14 so that the new FHA, Freddie Mac and Fannie Mae caps can be determined.

Yesterday, HUD announced the new regional loan limits for California. The other limits are expected to be announced soon.

Until we know the new limits, everyone is speculating what areas will be most affected. Forbes.com has put together a nifty list. Curious? According to Forbes, the following areas will see the biggest change:

• San Jose, Calif. With a median home price of $720,000, the San Jose limit is expected to rise to the $729,750 maximum. Forbes estimates more than half of the metro area homes will be eligible for the agency-backed loans.
  

• San Francisco. The city should get the highest new limit since its median home price is a whopping $680,000. About 44 percent of the homes will be affected, according to Forbes.

• Los Angeles. More than 32 percent of the homes in the LA area--with a median price of $560,000--should get a new limit of $700,000, which will be a bonus since the area has been subject to a large number of foreclosures.

• San Diego, Calif. About 18.4 percent of the San Diego-area homes should receive higher limits. The area cap should be around $587,000, Forbes says, which is more good news for the region, which saw home sale volume increase in December.

• New York City. The Manhattan market hasn't suffered as much as the rest of the country, but its high prices kept many homebuyers from meeting the FHA, Freddie Mac and Fannie Mae limits. Forbes estimates the new limit will be about $581,250, which should help out more than 17 percent of the area homes--especially in the condo market in the outlying boroughs, Long Island and New Jersey.

• Washington, D.C. D.C.-area homes have an average median price of $409,109; Forbes thinks the new limits will top $511,000 and affect almost 11 percent of the area properties.

• Sacramento, Calif. Just 3.1 percent of the homes in Sacramento will be affected by the new limits, which Forbes says will be about $450,000, because the lower limits weren't much of an issue--but foreclosure rates, excessive building and bad loans have been, which may make it hard to turn this market around.

• Seattle. With a median area home price of $354,950, Seattle may get limits as high of $443,688, affecting 2.6 percent of Seattle residential properties, Forbes says. Seattle sales are expected to still be slow, however, due to the high spikes in home prices in the past few years.

Is a New Group of Borrowers About to Fall Behind?

For months, we've watched the painful subprime loan fallout--and waited for it to end. However, the current mortgage market mayhem may be about to enter its second act.

We've discussed concerns about Alt-A loans before. They're given to borrowers with good credit, who are deemed less of a risk than the subprime set; but there's a bit of sketchiness to Alt-A loans, because they don't require the typical documentation to prove income and assets.

And lately, some Alt-A borrowers have been falling behind on payments, too. So CNNMoney.com is reporting that in the past month, mortgage securities comprised of Alt-A loans have become more worrisome. A few reasons for the growing concern:

• Recent reports indicate lenders are getting nervous about the Alt-A market. Dow Jones reported last week that Countrywide had said it would stop giving high-rise condo buyers its Fast & Easy and Alt-A mortgages. (The company said the next day that it would approve both types loans.)

• Slumping securities are not a good sign. In February, securities backed by Alt-A mortgages and other home loans to borrowers with decent credit declined in value, according to Bloomberg.

• Securities have been put on notice. Thomson Financial reported Monday that Standard & Poor's Ratings Services had placed its ratings on 1,887 classes of residential mortgage-backed securities--which are backed by U.S. Alt-A mortgage loans issued during 2006 and the first half of 2007--on CreditWatch with negative implications.

Because Alt-A loans are gathered into securities and sold to investors, a collapse in the Alt-A market could have a similar effect to the subprime disaster. Only it could be much worse because roughly $950 billion of Alt-A mortgage securities are outstanding; subprime securities only total about $650 billion.

We've all been panicked that upcoming rate resets are going to push more subprime borrowers into default or foreclosure; but the truth is, many subprime borrowers are defaulting before their rates even reset, CNNMoney.com reports.

Can we expect the same reaction from the Alt-A crowd?

 

Appraising the Appraisal Industry

Home appraisals have been a source of confusion and concern for the housing industry--they're important, but they're also fairly open to interpretation.

And lately, as the market continues to dip, accurate appraisals have become more important than ever. To sell, buy or refinance a home, you need to know its market value; but if the appraiser is employed by the company that's giving you a loan, there is always a chance that appraiser may not make a completely impartial judgment.

Sound like a conspiracy theory? Not to some people, who are taking their concerns to court:

• In early Feb., two couples California sued home builder KB Home and its joint venture with Countrywide Financial Corp, alleging they beefed up property appraisals after the local real estate market started to decline three years ago.

• An appraiser in California filed a lawsuit against Washington Mutual in January because she claims to have been let go after refusing to inflate area home prices, according to The Wall Street Journal.

Although a high home appraisal may make lenders suspicious, it won't necessarily keep them from lending. Just this morning, a friend who is in the process of refinancing called to tell me her home had appraised for more than $70,000 above the amount she'd bought it for three years ago--despite the fact her mortgage broker told her not to expect an increase.

He was shocked to hear how much the appraisal was--but he's still willing to move forward with the loan.

However, Fannie Mae and Freddie Mac are taking a stand to inspire new, tougher industry regulations. Both agencies said this week that they would only purchase mortgages from lenders that use independent appraisers, according to The New York Times. That includes any appraisal companies lenders own; mortgage brokers and real estate agents also can't pick the appraiser.

The decision is huge. Not only are the government-backed agencies coming out and saying, hey, the industry does need some regulation, they're putting up $24 million to do it by creating the Independent Valuation Protection Institute. And considering Fannie just announced fourth quarter losses of $3.56 billion, that's a significant investment.

Plus it's likely to be one that is felt throughout the industry. Many of the home loans issued now are being bought by Fannie Mae and Freddie Mac; that's likely to increase when the new higher loan limits for both agencies and the FHA kick in sometime after March 14 (which is HUD's deadline to establish median area home prices).

Because Fannie Mae and Freddie Mac are involved with so many of the mortgages being issued today, a change to their mortgage company and bank policy is likely to influence policies across the industry, according to the Times.

It won't take effect until sometime in 2009; but it's definitely a start. Do you think the new policy will have enough of an effect to curb unrealistic appraisals? Or will it hurt business in the lending, mortgage broker and real estate industries?

Sorry, Condos: Lenders Are Cracking Down on Loan Limits

Remember that list Wells Fargo was reportedly passing around--mentioned in Thursday's blog last week--of new area-specific lending limits? It seems some banks are taking the restrictions to a new level.

According to CNNMoney.com, some lenders are trying a new method to protect themselves against the subprime fallout: And it's bad news for residents in high-risk areas like South Florida and Las Vegas.

BankUnited--a unit of BankUnited Financial Corp.--and Vertice, a wholesale lending unit of Wachovia Corp., are among the lenders CNN.com reports are electing to not lend to certain areas, a decision that is forcing prices down even further in those regions.

Last week, Dow Jones reported that Countrywide also issued a memo saying it would cease giving high-rise condo buyers its Fast & Easy and Alt-A mortgages--which require no proof of income and are given to borrowers with good credit but little documentation, respectively. (However, the company allegedly said the next day that it would approve such loans.)

Why is the practice of issuing loans in certain high-risk areas so scary to lenders? Looking at Florida and Nevada, their fear becomes a bit more understandable:

• Florida fell hard once supply surpassed demand. Back in July, some sources were forecasting the high-rise condo market might fall victim to oversupply if sales slowed (condo sales dropped nearly 50 percent in May 2007, according to the Florida Association of Realtors) and building continued--Bloomberg reported it could cause prices to fall 30 percent.

• Las Vegas experienced a similar situation. When the market was good, it was great: Sin City experienced the most consecutive quarters in the nation of 40 and 50 percent appreciation in 2004; in 2005, it saw a 20 percent increase, which leveled off to 4 percent in 2006, according to the Las Vegas Review Journal. And then the foreclosures began. As a result of its meteoric rise, one county alone in Nevada houses the top seven zip codes with the biggest amount of foreclosed properties in the U.S., the Review Journal says.

In general, things are not looking good for the high-rise market--but not everyone thinks it's over.

Robert Glickman, CEO of Corus Bankshares--the sixth-largest Illinois bank--has given out $7.6 billion worth of commercial real estate loans for condo developments in places like Florida, California and Vegas; the investment paid off during the boom. However, during the bust, weak condo sales have dragged the company's profit further south than any of its Floridian condo investments.

Yet, even with a fourth quarter profit of just $1.9 million--a whopping 96 percent decline from a year ago--Corus is expected to lend up to $1 billion in the first quarter of 2008 to the condo market, which is half of the new loans the bank made last year, BusinessWeek said.

OK. It makes some sense. High-rise condos in retirement- and vacation-friendly areas like Vegas and South Florida are likely to pick up when the market does because, property values aside, they've retained their original market appeal. Even as the economy slumped in 2007, cutting into consumers' vacation budgets, more people visited Vegas than any other year in history, according to In Business Las Vegas.

Which makes you wonder: Is Glickman making a risky move, or is investing in the troubled high-rise condo industry a calculated way of playing the market?

Online Mortgage Company and Finance Ads Send a Message to Search Engine Sites

The recent Fed cuts increased business at mortgage companies like LendingTree.com--and decreased their need for advertising.

The day after the last rate cut, LendingTree.com had a record amount of traffic. As a result, its marketing team immediately reduced its search engine ad campaigns, according to The New York Times.

That may be good news for LendingTree.com, but it's certainly not good news for the search engine ad sector, which has reaped considerable profits from financial services clients over the years.

The Decline Goes Online

Although the housing slump began in 2007, its effects on online advertising are just beginning to surface.

• Financial ad spending usually rises by 30 to 50 percent each year; this year it is equal or down for some companies, according to Efficient Frontier, one of the largest buyers of paid search listings for marketers.

• From January 2006 to January 2007, credit and mortgage ad spending increased by 24 percent; this year, spending is up just 3 percent from last year.

The financial services sector spends up to $2.7 billion each year on online ads in the U.S.--one-third of that is mortgage-related, according to Oppenheimer.

No one is sure how the reduced spending will affect Google, Yahoo or other search engines (both of which did not comment in the Times story)--but it is likely the effect will be felt. Losing a financial services client means more to a search engine site than losing, say, a retail client because the financial client pays higher rates for its listings (an average cost-per-click price of $2.70, versus around $.36 for retailers, according to Efficient Frontier).

And Google's stock price dropped by about 8 percent this week because of concern that people weren't focusing as much on its search engine ads, according to the Times.

A Solution for Search Engines?

It's entirely possible another sector will suddenly increase advertising, softening the blow. After a moratorium against drug ads was lifted in 1985, pharmaceutical consumer magazine ad spending increased 77.4 percent to $123.5 million in 1993, according to Folio--providing an unexpected boost to magazine ad revenue that year.

Or search engines may just need to refocus their attention to actively find that new ad source. Print newspapers have been damaged by the housing decline--particularly in their classified sections. The McClatchy Co. newspaper chain just reported a 14.4 percent decline in January revenue this week.

But a recent Editor & Publisher article about how many small community newspapers last year thrived--some even had their best year ever--suggested cultivating smaller advertisers in the community and focusing on highly-targeted local news coverage can help offset hurdles like the housing decline. It's helped smaller papers survive.

It would seem, then, that part of staying on top of the ad game--for companies and for publications--involves really watching and reacting to the local market. For newspapers, that market is a community. For compan