Commissioner Donovan, or Should I Call you Mr. Secretary?

Wow! New York City Housing Preservation and Development Commissioner, Shaun Donovan has been pegged to head up HUD (I don’t know about other folks, but he was always on my list.)?! I tell ya’, I almost did a dance this morning. No, not because I am Mr. Donovan’s number one fan (because I am not-I am still a little pissed off about the implementation of the inclusionary zoning provision-which is not inclusionary at all.), but because it’s about time someone with some significant housing experience, respect within the community development community, and some proven ability to manage large scale housing initiatives was appointed to run what is probably the most beleaguered agency in the Fed (i.e., the poster child for the red-headed step-kid).  

The history of HUD over the past 27 years has been checkered, to put it much too kindly. And it seems the Obama transition team recognizes that HUD cannot be a second-tier partner, if revitalizing our urban infrastructure and stemming the foreclosure tide is an integral part in turning around the economic outlook of the country-and of his domestic agenda.

 

It is quite refreshing to see an incoming administration that believes HUD can and should be fixed-not left to die like a rotting corpse or driven into the ground by cronyism.  Unlike the past 3 administrations (okay, two, the Clinton’s gave it the old college try with Cisneros and Cuomo), the transition team has gone 180 degrees away from crooks like Jackson, housing know-nothings Martinez, or  conniving “Uncle” crooks like Mr. Pierce and his former cocktail waitressing henchlady, Deborah Gore Dean.

 

As a matter of fact, the last promising HUD secretary, was not even appointed during a Democratic administration as you might suspect, it was G.W.H. Bush, who unwittingly gave HUD a fighting chance. And guess what? When it became apparent that he might actually want to do “something” to fix the scandal-ridden department, the administration practically ran poor Mr. Kemp out of town with a shotgun for bothering. (And when I say do something, I am mostly referring to the fact that he was not trying to dismantle it.)

 

I guess, G.W, was sent up for clean-up bat on that one with Martinez and then Mr. Jackson?

 

These consistently uninterested and largely unqualified leaders have left behind a badly beaten agency, with abysmal working conditions (have you ever seen the HUD building in DC-Gawd save them all!!), and terrible morale.  It is an agency that has stumbled badly and for lack of a good plan has become purely reactionary.  You might as well take the Urban out of HUD, as urban policy issues as the urban core has not been of interest in decades.  Summarily, the agency has a cacophony of programs that don’t work well together (with mere band-aid solutions to try to fix them), and has been so loathed on the hill that it has next to no influence on the low-income housing tax credit (key word: Housing), arguably the largest funding source for rental housing development for low and moderate income folks. As a matter of fact, the program is housed in the Treasury (whether this a good idea or not-don’t know).

 

In a nutshell, HUD desperately needs a successful housing manager who can wrap his arms around the whole mess (and of course it helps that he was also briefly an assistant secretary in the agency during the Clinton years.) and just possibly take a big enough bite out of the nut to make some traction. It seems Mr. Donovan might just have the gall to do it. After all, taking 30,000 vacant units and turning them into viable housing was no picnic-and definitely no easy feat.  As a matter of fact, he might have a better chance at turning HUD into a viable, productive agency than most.

 

Provided Mr. Donovan recognizes NYC is the exception not the rule, life for housing folk might get rosier.  But in the end, from where HUD sits in the heart and minds of many today, things can only look up! 

Bringing the Pain and Sharing the Consequences

by Guest Blogger: Kenneth Stewart

If it is true that the housing bubble was the root cause of the financial crisis, it seems an obvious solution would be to delay an immediate devaluation of housing stock, based on the premise that home values could recover nicely over time if corrective housing policies are put into place.  Financial institutions are being hit by the double-whammy of mortgage foreclosures, and expectations that future foreclosure rates will be even worse, which devalues a wide range of real estate-related assets.  As the foreclosure scenario plays out, home values take another hit, and a vicious cycle is perpetuated.  The answer to the question of how to halt this vicious cycle may lie in a commonly used tool in the affordable housing field: low-interest rate, deferred second mortgages. 

 

The mortgage program would work as follows.  A homeowner with a mortgage they can no longer afford would go to their lender with a proposal: refinance my loan at a principle balance and interest rate I can afford, and I will get a second mortgage from my local government/nonprofit program administrator such that the combined refinancing proceeds will equal 90% of the current outstanding balance.  In other words, take a 10% loss and convert your asset from a non-performing loan to a well-underwritten conventional mortgage.  Localities have already been granted funding in the recently enacted Housing Bill that can be used to fund second mortgages.  The Treasury Department would be well-advised to dump a significant portion of the Wall Street bailout package ($250 billion would be helpful) into this kind of initiative. The government would be directly investing in citizens and communities, as opposed to risky, complex securities, and banks and financial institutions would be clear indirect beneficiaries by limiting the loss of loan principal. 

 

The program would have to be limited to homeowners who could afford a conventional first mortgage of at least 60 percent of their current balance.  If they are unable to afford that minimum, it means they could never afford the home in the first place.  The government should not attempt to provide a stop-loss for such poor decision making, and possible fraud, on the part of the parties involved. Where the program is applied, lenders would still face a write-down in various residential assets–albeit smaller at 10% write down — plus the loss of any prepayment penalties that would compensate them for the loss of future up-ward adjusting interest rates.    If we couple this with some type of moratorium on the amount of commission that can be earned by realtors and appraisers involved  in the sale of foreclosed properties, then the parties who came together to create the mess will have to share in the pain of correcting their mistakes.    A salary cap for the executive leadership of participating financial institutions would complete the circle.

 

As tempting as it may be to  leave those responsible for the housing bubble at the mercy of the market, the best approach would be a program that targets the root cause of the current crisis, through direct investments in the hardest-hit communities. A well-structured nationwide second mortgage program could achieve many important results.  Banks would benefit from having hundreds of thousands of loans refinanced with the lowest possible loss of principle, cities would stabilize neighborhoods and protect their tax base by keeping homeowners in place and avoiding foreclosure sales that would drive market values down even further, homeowners would benefit by keeping their home and getting some protection as related to their equity position, and local housing agencies and their nonprofit partners would benefit from having a role in closing and servicing second mortgages that would give them a new source of revenue, as well as a vested interest in getting home values back up to maximize recovery of  funds invested for the second mortgages.   Such a program would still require billions of dollars in federal outlays, but it would be through a mechanism that allocates the pain as well as the benefits as broadly as possible, while focusing efforts on stabilizing home values – which is the root cause of the problem.

 

Mr. Stewart currently underwrites equity investments in affordable housing projects for Enterprise Community Investments in Columbia, MD.  Prior to going to Enterprise, he was with the Prince George’s County Department of Housing and Community Development (DHCD), serving first as Deputy Director for Capital Markets, and later as the Deputy Director of the Redevelopment Authority, where he had primary responsibility for the tax-exempt bond,, homeownership, and the federal HOME block grant programs.  Prior to his appointment at PG-DHCD, Mr. Stewart served as Director of Public Finance for the D.C. Housing Finance Agency, where he was responsible for processing, underwriting, structuring and closing transactions involving the issuance of over $300 million in tax-exempt bonds. He holds a B.A. from the University of Denver, (Denver, Colorado), and a Master of Arts in Public Administration from Howard University, (Washington, D.C.).

 

 

 

 

 

The Not So Impervious New York Market

There has been a lot of weeping and nashing of the teeth about the current state of capital markets–rightfully so. And as we know, a lot of the blame can be spread around, lenders, investors, underwriters, brokers, and consumers all got a little to euphoric over the belief that the while the market might plateau, fall it would not. Of course, not the case.

District of Columbia. HOT! market from 2002-2007 now has significant condo inventory not moving and one of the highest declines in home values in the nation.

Same can be said for Miami.

San Diego

Los Angeles

But supposedly not for New York.

Ah, let me be one of those folks getting in line to say, yes New York too. Now don’t get me wrong NY by no means has the same level of problem as so many other markets in the US. Decline in NY is nominal. But any decline at all is telling of what means it ain’t getting better.  

Anecdotally, looking at apartment listing on Craigslist made me wonder if the New York market was springing a slow leak. I noticed words like “Negotiable” in lots of ads. Negotiable brokers fees, negotiable lease terms, even negotiable rent. A couple of people were even giving “$100 off” rent concessions. Never in my adult lifetime have I ever seen anything like that. So many times I have gone to look at a “cozy one bedroom” to find out it was a studio with an extra wall and then watched the apartment get snapped up while I am standing there trying to decide if I can live in a cave with a toaster oven next to a crack house for the low low price of $1200+.  Now, I am a smart saavy NY girl with technology in the palm of my hand, and I was surprised to see that many of these places were in fairly decent to nice neighborhoods.

What is really going on?

But statistically, the number of multi-family buildings and condominiums compared to second quarter 2007 has declined steadily because of capital market constraints. That means lots of folks are out of the market–even in New York where it seems like no matter what the cost, someone is always in.

And then, of course, there is the unsettling up tick in the number of foreclosures in Manhattan. (which will probably be saved by quick sell…of course)

Now, this might simply be a blip on the radar screen, but after the dismal mid-year meeting I just sat in, the news for some of the biggest banks continue to worsen. And as Mayor Bloomberg often says, New York is way to dependent on the presence of Wall Street.

Nothing Going On But the Rent

When I first moved to Baltimore, I decided to rent a place to decide if I wanted to stay. As the months have passed the idea of buying became ever more prevalent in my mind–especially as prices started to decline.

But, alas, I have decided to remain a renter. And it has nothing to do with the fact that bad roofing is making it rain in the supposedly newly renovated home in which I currently reside (but let me tell you it did get the idea rolling).

While I am a strong proponent of homeownership, I think that this market is best if you are planning to stay for a long time. If you are a prospective homebuyer looking to do it the “old school way”–buy a home to raise a family and pass it down from generation to generation, by all means do so. But if you still think that you can buy something and in the near term realize appreciation, I think you are in for a world of hurt.

Despite what oh-so many rosie -colored-glasses-wearing financial “guru’s” say, the bottom is not close by.  I more closely agree with others that we have a ways to go–maybe not $215k for many houses to $70k, but definitely below the current median price of $200k. I think it’s going to have to go back below $200k before we may have hit the end of it—perhaps 170k. (of course, some relatively impervious markets like NYC will add a bit of cushion to the decline.)

Plus, despite what all those “why rent?” commercials say, renting can be very appropriate. Often the maintenance costs and usually the tax costs are passed on to the homeowner–while your rent may subsidize these costs, by in large you are not paying for them. And it is great for a rolling stone like me–who knows I might finally decide to live in Brooklyn or move off to New Orleans. Unloading a house in a market like this is a fool’s errand. Plus, if you have better things to do with your cash (not including buying a big screen TV) in an era where it will probably cost you at least 20% down to buy (not including FHA) then no time like the present time to do it.

In the meantime, I’m sure I can figure out how to grow a vegetable garden wherever I rent just like I could if I bought something. 

 

Necessity is a Mother (and other interesting midweek tidbits)

2008 has been incredibly interesting, challenging, and down right frustrating in many rhelms. We are on the verge of a historical presidential election. The 8 year sentence is almost up. And, well, the economy, is…well sputtering along even if you didn’t use your stimulus check to go buy a big flat screen TV. 

But all of these challenges, might actually be a blessing in disguise for those in real estate–especially for those in affordable housing development, advocacy, or policy. It’s requires a moment of pause, reflection, and an evaluation of the direction the real estate boom/bust has taken all of us–market rate or not. 

And it seems between scrambling to save face, averting another financial “crisis”, or trying to figure out how to get deals done in one of the most challenging environments ever–well the actions have been interesting to save the least. 

Let’s take a looksee, shall we? 

 

• The DC Metro area had one of the highest appreciation rates in the country–and now has one of the highest depreciation area. That goes for the rapidly expanding (to the point of massive congestion) and rapidly unaffordable Prince William County, VA. In response? The county government has enacted a loan program to address the rate of foreclosure as well as to address homeownership affordability–at least for one group. 

           They get an A for effort–but its not that original. Many places have been there, done that, and failed to accomplish the end goal. Let’s hope they look at other programs to identify successes and failures…then again this is government.

• Regardless of whether you agree with some sort of assistance for homeowners who have been “caught out there” with the sub-prime/Alt-A mortgage mess, I would hope we all agree that there is a significant procedural issue in identifying who actually holds the note–especially if you are a homeowner who wishes to contact you lender to negotiate some sort of repayment option if you are behind. That’s why I think, on face value, this works. And could be a model for other states. 

Now, if only this Governor guy could get it.

• While not innovative, its about time. Baltimore gets it together to create a land bank for all those vacants they talked about on The Wire. 

Guess the new mayor has the political will to do something about it–rather than use B’more as a stepping stone to the Governor’s mansion (watch the last season of the wire–uncannily true about a former mayor I will not mention.) Of course, the proof will be in the figgy pudding. 

• And lastly, as homebuilders scramble to get rid of inventory, keep building, and keep their stock from taking that long walk off the short pier to bankruptcy, the incentives just keep a coming

1. Bozzutto Homes has a “make us an offer” sale
2. Get a free mortgage payment in Florida.    

Isn’t this how some of them got into trouble in the first place??

What responses to the “real estate” decline have you read about or implemented that is interesting, innovative, or just down right dumb? Please share.                                         

Fannie Mae Caves…

Great news coming out of the housing policy world. It seems housing policy advocates have one a victory regarding Fannie Mae’s changes to the declining market policy.

And this is fabulous news for low and moderate income home buyers and others who might be looking to buy a home in markets that might have been percieved as declining…

Sort of.

Upside Down Does Not= Walking Away (Necessarily)

I have argued this point professionally, in my own research, and sitting around the dinner table.

Owner-Occupants are not necessarily walking away from their homes because they are upside down, i.e negative equity ( Thanks Tom). Just like they have not in the past.

If they have the means, they are staying put.

After all, before the bubble, most folks who were purchasing homes to live in them saw them as long term investments.

Or places to raise families, have children, and do never ending yard work.

To Pay Rent or Eat? That is the Question? (And other interesting midweek tidbits)

• It seems that 1 in 3 New Yorkers is paying more than 50% of their take home pay in rent. If you’ve ever looked at the Real Estate section in a New York paper or been faced with the unfortunate task all NY’ers dread–looking for a no-fee apartment that isn’t rat infested, this is not a surprise.  I bet if we did a national study most people are paying more than the 30% standard applied in measuring housing affordability.

Sorry, NYC, we know how you like to be the exception to the rule. This time you simply prove the fallacy of the rule

 

• If you think the US Housing market is the worst in the world, try the UK on for size.

 

• Tomorrow, the House votes on the bill meant to help stimulate housing and stem foreclosures. Of course, after it passed the Senate, it pretty much wasted paper.  Don’t worry, I will be posting on what I think about it verrrrrry soon.

 

• Hmmm, who knew that the foreclosure crisis would adversely effect renters?  I wonder what types of renters those would be?

 

Well, I gotta go pay the man for the roof over my head and by some more Ramen.  Anybody got any positive housing news? Please share.

Redlining? Or Prudent Lending?

Last December, Fannie Mae and Freddie Mac announced the reinstatement of its Declining Market policy to go, presumably in light of the fallout within the mortgage and mortgage -backed securities market.  In a nutshell, this announcement reinstates a policy to reduce the maximum loan-to-value (LTV) ratio in markets Fannie deems to be “declining” by 5%.  What does that mean? Well, if you were applying for a loan with a maximum LTV of 100%, it means that your maximum LTV would be 95%. You would need to put 5% down.  As of June 1, the policy goes into full effect.

Seems like a reasonable and prudent idea, right? After all, it is well established by a number of lenders in both consumer lending and mortgage that “skin in the game”  keeps borrowers more attached, even if things go haywire.     “Skin in the game” might keep the borrower from having an upside down asset and 5% is a nice little cushion  The policy also encourage appraisers to deem a market declining  if it believes it to be so based on comparables through out the community, rather than succumb to the pressure of a lender client to label it stable.  Lastly, from the lender’s perspective, who wants to have a lien on an asset that is 100% financed, losing value, and worse yet, ends up foreclosed and added to a growing number of REO properties in the portfolio?

And perhaps I would agree, if it were simply, “you want to live in a declining market, you’ll need an extra 5% to protect us and you against value loss”, but it is not.  It’s, albeit unintended, redlining reconstituted.   If, for Fannie the issue at hand is the over-valuing of real estate and subsequent “over-lending” to borrowers, this policy doesn’t cut it.

First things first. As research from the Federal Reserve of Boston indicates, the borrowers most sensitive to price declination are borrowers with “Alt-A” loans; those with credit scores within 620-740 with low document/no document loans, ARMS, and interest-only loans—not sub-prime borrowers who don’t have as much savings.  These Alt-A loans are often most closely tied to a continued increase in appreciation. When the appreciation is not realized, foreclosure is on the horizon.  Those borrowers with homes that have lost value are 14 times more likely to default than those with an increase of same size. While sub-prime borrowers are more likely to default then prime borrowers, there is no loan level data that lends this default back to the primary mortgage because most loan level data shows a greater prevalence of sub-prime loans at the refinance level.  Alt-A borrowers tend to have much higher mortgage notes than a sub-prime borrower—approximately $299k to $181k comparatively. Add on the fact that nearly 30% of Alt-A loans are non-home owner occupied compared to 8% amongst sub-prime borrowers, and it seems to me that this is where the problem lies.

Furthermore, the biggest problems will be areas where the rate of appreciation was so steep that an adjustment for those at the top of the market is significant and trickling downward. .   For example, in San Diego, where the median home price went from $300k in 2000 to more than $500k in 2005, the fall has been a dramatic 30% decline in price. The rate of foreclosure has increased 200-fold.  Yet, Cleveland which is not a declining market, per se, could be labeled as such if one were to simply look at zip codes and census tract numbers and compare to an appraisal on one block versus another.  Yes, there are homes that were placed on the market in Cleveland that were above what the market would pay and they are sitting on the market and the prices have fallen. But existing homes have not seen much depreciation. As a matter of fact, the price of the average existing has generally stayed in line with inflation, and long term homeowners simply pay there mortgage down to get value. In these places, it is much less the overvaluing of real estate that is increasing foreclosures and more a decline in industry and an increase in unemployment.

Add on to this the fact that the policy inadvertently gives additional rise to the discrimination among borrowers through the cost of money. If a neighborhood is labeled declining, not only will an additional 5% down be required, but the lender can charge a greater interest spread for loans made in declining markets through Fannie’s risk-based pricing model.  This will most notably affect low-income borrowers–particularly minority borrowers who historically have paid 75 to 175 basis points more than a non-minority borrower-and are more likely to be first-time homebuyers in markets that through zip code, census tract, and MSA analysis might be labeled as declining.

Fannie is understandably attempting to be prudent and protect itself from future messes in mortgage lending and packaging of securities, but this policy, seems to go against its mandate. It does not target the borrowers who will more than likely be upside down in a property first—small investors and speculators—and instead may lead to the targeting of the first-time homebuyer who simply wants to keep a roof overhead. The policy may very well lead to disinvestment which in turn may leave this  in a neighborhood near you.