Up next in the housing crisis: Strategic default

Thanks to Mark Miller at http://retirementrevised.com

Mark Miller

Syndicated newspaper columnist, blogger atRetirementRevised.com

Posted: January 4, 2010 12:59 PM

In phase one of the foreclosure crisis, policy-makers and news media have focused mainly on homeowners who lose their homes because they can't afford to make mortgage payments.

The next big issue is "strategic default" -- homeowners who can afford their payments but walk away from mortgages and accept foreclosure because they're facing financial stress, and/or their homes are worth less than the loan amounts.

There's an especially large concentration of these underwater mortgages among older Americans. Many pre-retirement baby boomers took on higher mortgage debt in the years running up to the real estate crash; a study this year by the Center for Economic and Policy Research found that 30% of Americans age 45 to 54 are underwater.

That means they'd need to bring cash to a closing in the case of a sale -- say, when it comes time to make a retirement- or health-related move. And mortgages are a key component in retirement planning, since debt reduction is one of the best ways to improve retirement security.

University of Arizona law professor Brent T. White generated a flurry of attention last month when he suggested in a research paper that the rational economic move for some underwater homeowners would be to default on their loans and give their homes back to the bank.

Since then, news media coverage of strategic default has been growing. The Wall Street Journal last month profiled California homeowners who opted to default in order to get out from high mortgage payments, instead renting similar properties in their neighborhoods for a fraction of the monthly cost.

This past weekend, the New York Times wrote that the Obama Administration's Making Home Affordable loan modification program may only be postponing the inevitable day of reckoning for millions of homeowners who will never be able to afford their mortgages and ultimately will face foreclosure.

Economist Mark Zandi argues in a Times piece that underwater loans are a much more important piece of the puzzle than forced foreclosures:

Mr. Zandi argues that the administration needs a new initiative that attacks a primary source of foreclosures: the roughly 15 million American homeowners who are underwater, meaning they owe the bank more than their home is worth.

Increasingly, such borrowers are inclined to walk away and accept foreclosure, rather than continuing to make payments on properties in which they own no equity. A paper by researchers at the Amherst Securities Group suggests that being underwater "is a far more important predictor of defaults than unemployment."

Strategic default poses serious moral and legal issues. Some experts argue that consumers should look at their homes as housing, not an investment and honor the contractual promises made when they took out their loans.

And, despite media coverage of the increasing number of strategic defaults, the percentage of those who do walk away from mortgages is relatively low. White's analysis shows that only 25 percent of mortgage defaults are strategic; the percentage isn't higher, he argues, due to homeowners' perceived shame and guilt of foreclosure, and fear of the consequences.

White further argues that that the emotional constraints are actively cultivated by the government and "social control agents" to encourage homeowners to follow social and moral norms related to the honoring of financial obligations. At same time, homeowners are encouraged to ignore market and legal norms under which strategic default might be viable and the smartest financial decision.

White's definition of "social control agents" include the media and an array of financial counseling services. Although the latter often are non-profit organizations presenting themselves as community-based organizations, many receive funds from government and financial services companies, which have a vested interest in discouraging defaults.

Counseling services that receive HUD certification cannot advise their clients to default. White told me in a recent interview of his conversation with a counselor at one industry-funded agency that counseled 3,000 people in 2008 on how to avoid foreclosure. That agency did an assessment at the end of the year of whether any of these would have been better off with strategic default; the assessment concluded that 53 percent would have been better off due to an unsustainable debt-to-incomer ratio. But, the agency couldn't tell clients that, due to its industry funding.

Credit scores loom large in all of this. White argues that homeowners fear falling scores, yet, most people can recover a good score within two to three years if they stay current on other payments. Walking away from a mortgage frees up cash to do that, he says, and the sky will not fall in during the interim.

White also argues that our current system is set up to remedy the housing crash on the backs of consumers, who are encouraged to keep making payments on real estate where they will never see a return; in the meantime, banks get billions in bailout funds, and are allowed to drag their feet on loan modifications.

All that aside, White took pains during our interview to make clear that he isn't advising homeowners to default. "This is an academic piece that makes the observation that it would be in the best [economic] interest of many consumers to walk away, but that they don' do so due to a double standard -- one for Main Street, the other for lenders and banks. This results in distributional inequality, and propping up market on the backs of the middle class."

White also notes that the wisdom of a strategic default depends heavily on state laws. Some states have non-recourse laws that prevent banks from going after the personal assets of homeowners who default; others don't offer consumers this protection (Click here for more information on non-recourse states).

Other important variables, White says, include how far underwater the loan has become and the prospects for a real estate recovery in a given market. "People need to consult with an attorney and and a financial adviser before making any decision. But I don't believe guilt and shame are good reasons to stay in a house."

The Future of Foreclosures

The Perfect Storm...again?

Greg and I have been speaking publicly for the last few months about a few factors affecting the near future of the housing market. Today, MSNBC picked up an AP story which I linked to below.

Based on our experiences, observations, many anecdotal stories and a recent informal and off-the-record conversation with a Senior Vice President of a major national bank (which received significant TARP funds), we began putting together our vision of what to expect next.

Almost everyone we have spoken to either is in the midst of or knows someone who is trying to get their mortgage modified. We have met only one person who has successfully received a "permanent" loan modification. Of the over half-million modification applications in process at the major mortgage lender mentioned earlier, the bank has "permanently" modified only 98 loans. NINETY EIGHT....nationwide, only 98 loans. Tens of thousands have been granted a "trial period" of between three to six months, but these are not permanent. In order for them to become permanent, the borrower must complete the trial period with all payments made on time, then, at the end of the trial period, RE-APPLY for the modification based on updated and current borrower information. At that point, most applicants cannot qualify. The loan is then immediately declared in default and the foreclosure proceedings begin. Our source at this particular bank admitted to us that the bank has no intention of modifying any more loans than is absolutely necessary in order to keep the Feds off their back and that by using the "Trial Period", the bank can at least get some payments on the account and delay moving the asset into the "bad asset" pile.

We have spoken to hundreds of people who have looked at the current market, the forecasts, what has happened in their neighborhood and the values of the surrounding homes and have made a complete business decision to walk away from the property. Each has cited the same set of factors in their decision: Their lenders unwillingness to modify their loan, the drastic drop in values in their neighborhood, the strictly financial outlook of owing more than double what their neighbor owes and what that will mean for years to come for re-sale and, in many cases, what the lower home prices have done to their neighborhood in terms of appearance and overall enjoyability. These borrowers made a decision that a foreclosure on their credit record and possible bankruptcy, depending upon their circumstances, would be less devastating than staying, even though they could afford the monthly payments. This has recently been dubbed "Strategic Default".

"Shadow Inventory" was a term Greg coined over a year ago and has since been picked up by almost everyone. The term was originally meant to describe the tens or hundreds of thousands of residential properties which had been abandoned or had borrowers who had not made a payment for months or even over a year but were not yet foreclosed upon. Again, we thank our source at that bank mentioned above for validating what we had already assumed: by not foreclosing, or an many cases not even filing a notice default, the bank can keep the number of bad assets "reported" lower than the "real" number should they foreclose on every property meeting the requirements. This artificially inflates the books, artificially lowers the foreclosure rate and allows then bank to boast big gains when, in the real world, they would still be posting record-shattering losses. We can now add the tens of thousands of foreclosed and bank-owned properties which are not yet listed and on the market. Again, this simply keeps available, "for sale" inventory artificially low, competition between their own assets artificially low and keeps the sales numbers artificially high.

Finally, the fantastic government incentives for buyers has helped increase home sales. This worked as it was meant to. First time home buyers have been able to finally get into a home of their own. With exceptionally tight underwriting standards for these loans, these home owners should be in a good position to actually be able to afford the home they just bought.

Now, we can add in a factor that began only a few months ago: higher income borrowers in higher priced homes running out of the savings that has kept them going for the last year or so. These otherwise well-qualified, former grade AA borrowers are making the same business decisions others are making and walking away from their second or vacation homes or sizing down to a smaller home, and, unable to sell their larger and much more expensive home, deciding to walk away from that loan. This has moved the price point of the foreclosures up significantly and is leading to a new round of foreclosures previously not anticipated.

Bottom line: Unwillingness by banks to modify existing loans, strategic default by borrowers, shadow inventory, foreclosures creeping in to higher-income borrowers and the uncertainty of the future of government incentives for home buyers have all factored together for another inevitable perfect storm - another dip, another round of foreclosures, possibly even broader and deeper than what we have already seen.

What does this mean for a potential buyer? Keep your eyes open, stay aware and be ready with as much cash as possible to pounce on the home you want when it finally becomes available.

Look for our next quick article on how to structure your offer on a bank-owned property to make it as attractive as possible to the seller.

Housing may be headed for double dip

MSNBC.com

Data adds to worries industry is mostly propped up by government stimulus

The Associated Press

updated 12:36 p.m. PT, Tues., Jan. 5, 2010

WASHINGTON - The number of people preparing to buy a home in November fell sharply in the latest sign that the housing market, which had been rebounding strongly, may be headed for a "double-dip" downturn over the winter.

Consumers are taking their time following the extension of a tax credit deadline, and that is draining momentum from the summer's recovery, according to data Tuesday from the National Association of Realtors. The figures echoed what homebuilders saw in November and showed how dependent the housing market is on government programs to lower interest rates and lure buyers with tax credits. If those programs expire as planned early this year, the housing market will have to stand on its own.

But outside of housing, there are other signs the economy is climbing out of the recession. Orders to U.S. factories posted a big gain in November, the Commerce Department said Tuesday. That data was the latest evidence of a strong turnaround in manufacturing as industries from China to Europe flash recovery signs.

Taken together, the reports show that, while housing remains vulnerable, makers of steel, computers and chemicals are mounting a surprisingly robust rebound.

"We expect housing to just limp along even as the rest of the economy is growing fairly strongly," said Nomura Securities economist Zach Pandl.

The stock market, meanwhile, zigzagged after the reports gave mixed signals about the economy.

The National Association of Realtors said its seasonally adjusted index of sales agreements fell 16 percent from October to a November reading of 96. It was the first decline following nine straight months of gains and the lowest reading since June.

The drop was far larger than the 2 percent expected from economists surveyed by Thomson Reuters, and analysts were surprised.

"This was bound to happen at some point, although not by this much," wrote a startled Jennifer Lee, senior economist with BMO Capital Markets. "Gulp," she added.

"It will be at least early spring before we see notable gains in sales activity as homebuyers respond to the recently extended and expanded tax credit," Lawrence Yun, the Realtors' chief economist, said in a statement.

Typically there is a one- to two-month lag between a contract and a done deal, so the index is a barometer of future sales. Pending sales were down 26 percent from October in the Northeast and Midwest, 15 percent in the South and 3 percent in the West.

The housing market had been rebounding from the worst downturn in decades, aided by aggressive federal intervention to lower mortgage rates and bring more buyers into the market. Sales of existing homes surged in November to the highest level in nearly three years, but analysts expect December sales to show a big drop.

And concerns remain that the market recovery will stall as the federal programs are phased out.

"This sudden drop risks the stability housing markets have enjoyed in recent months," wrote Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

The nation's factories, however, are faring much better. The Commerce Department orders rose by 1.1 percent in November, more than double the 0.5 percent increase economists had forecast. The increases were widespread with the exception of autos and aircraft, which posted declines.

The Institute of Supply Management had reported Monday that its key gauge of U.S. factory activity showed manufacturing was expanding in December at the fastest pace in more than three years.

Economists are hoping that the fortunes of the manufacturing sector are beginning to rebound as the economy struggles to emerge from the worst recession since the 1930s.

“Shadow Housing Inventory” Put At 1.7 Million in 3Q

“Shadow Housing Inventory” Put At 1.7 Million in 3Q According to First American CoreLogic
Summary:
• As of September 2009, First American CoreLogic estimated there was a 1.7‐million‐unit pending supply of residential housing inventory, up from 1.1 million a year earlier. Pending supply, sometimes referred to as “shadow” inventory, estimates real estate owned (REO) by banks and mortgage companies, as a result of foreclosures and other actions, such as deeds in lieu, as well as real estate that is at least 90 days delinquent. Normally shadow inventory would not be included in the official measures of unsold inventory. At the current sales rate, the pending supply is 3.3 months, up from 2.4 months a year ago. The months’ supply measures how quickly the inventory will run off given the current sales rate.

• The visible supply of unsold inventory was 3.8 million units in September 2009, down from 4.7 million a year earlier. The visible inventory measures the unsold inventory of new and existing homes that are currently on the market. The visible months’ supply fell to 7.8 months in September 2009, down from 10.1 months a year earlier.

• The total unsold inventory (which combines the visible and pending supply) was 5.5 million units in September 2009, down from 5.7 million a year ago. The total months’ supply was 11.1 months, down from 12.7 a year earlier. This indicates that while the visible months’ supply has decreased and is beginning to approach more normal levels, adding in the pending supply reveals there is still quite a bit of inventory that will impact the housing market for the next few years, especially in the context of the current increase in home sales, which is in part due to artificially low interest rates and the homebuyer tax credit.

Number of escrows on rise in Palm Springs Valley

Increase shows 'we're inching in the right direction,' top Realtor says

Erica Solvig
The Desert Sun

Monthly sales may be down, but the number of escrows is slowly rising in the Coachella Valley.

With the exception of a slight dip during traditionally slow December, the upward trend started in September.

Unlike housing sales figures - which show what's been happening month to month - experts use escrow data to indicate what's coming in the market.

The numbers, released this week by the California Desert Association of Realtors, show January's pending sales still lag the escrow figures seen in early 2007.

Still, officials say the increasing number of pending sales means that other market indicators - mainly the closely watched sales tallies - also should start showing an upswing.

"It's going to be a while before these numbers all start to turn positive," said Greg Berkemer, executive vice president of the California Desert Association of Realtors.

"We're inching in the right direction."

January saw 549 pending sales, down about 7 percent from a year ago and up 11.4 percent from December, according to association figures.

February figures have yet to be released.

But if One Brokerage with 400 desert agents are any indication, the upward trend is continuing.

With a few days to go in February, their agents earlier this week reported 206 pending sales - versus the 150 seen in January - said regional vice president Ron Gerlich.

"Normally, around this time of the year, sales do start to increase," he said. "To have this many openings so far in February, this is the best month we've had in six or seven months.

"Its an indication. There are people out here buying."

Villain or Hero?

Greg Thomas and Gary Drake are realtors with Windermere Real Estate in the Coachella Valley representing sellers and buyers in the cities of Palm Springs, Palm Desert, Indian Wells, Rancho Mirage, Cathedral City, Indio and Desert Hot Springs.

I remember just two years ago being the good guy by finding buyers great homes and getting top price on properties for the sellers we represented. Gary and I worked with a handful of first time buyers back then and talked most of them out of the teaser loans they were being offered at that time, explaining what would happen if the market slowed down and prices dropped. Yes, we did lose some higher commissions by selling homes that our buyers could actually afford with a loan where the payments remained steady rather than jumping $600.00 a month or more in three years. Today we are heroes to those families and they will be our clients for life.

What I find interesting is that Realtors® were heroes a few years back when we were hustling to find homes to fit clients’ needs in a very low inventory market. Now the media paints a picture of greedy, misleading agents who sold people homes with crazy loans just to get higher commissions. I know there were some unscrupulous agents who did that, but, quite frankly, I am not sure if most of them have been able to survive this current market; I have a feeling they were in it for a quick buck.

To survive long-term in any business, my belief is to put the client first and be honest and you will make out in the long run and be able to sleep at night (it’s not rocket science).

Palm Springs area real estate is blessed in many ways since it is a vacation destination for people around the world during the season. We also have many baby boomers flocking here to retire and to enjoy the easy living the desert offers, not to mention the second home owners and full-time families who now live here year-round.

Gary Drake and I have had three escrows in January and we represented the sellers on all of these transactions. If homes are priced right and fairly they do sell. Two of the buyers were from Canada and the others were baby boomers who bought a home on the golf course for under $400,000 near Mission Lakes in the newer side of Desert Hot Springs.

I know I am one of those damn Realtors® who no one wants to listen to now compared to three years ago when I was a hero because everyone was making double-digit appreciation on their homes. There are some really great buys right now in the Coachella Valley prices are down. You see, now it’s your turn to take advantage of the greedy people who bought new homes as commodities, waiting to flip them and make a quick $75,000 or more. Some of the greedy ones are now in trouble and are either losing the property they never lived in or selling them at hugely discounted prices!

So in the long run who wins?

Just make sure you get all the facts that you possibly can and have a true professional help you navigate the market they specialize in. Chances are that you will be calling that person a hero in a few years because it is my opinion that at some of the prices I see now, you can’t lose in the long run.

Greg Thomas
The Thomas and Drake Group
www.ThomasAndDrake.com

Waiting for the Bottom: You Could Be Left Just Waiting

In recent weeks, several of our buyers have found a great property at a great price, then they tell us "We are going to wait for prices to come down even further."My advice to buyers who are sitting on the fence: "Get off the fence. You're in danger of getting a picket stuck in a very uncomfortable place."

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Palm Springs Valley home sales jump 16.4% in October

Palm Springs (Coachella Valley) monthly home sales jumped 16.4 percent in October from September, a positive sign for the dragging real estate market but not enough to indicate the slump is over. Though officials are optimistic, the valley's home sales are 30.1percent lower than this point last year. But that's better than the statewide sales figures, which have dropped 40.2 percent compared to October 2006.The exact number of homes sold in October was not available late Tuesday, according to the monthly information released by the California Association of Realtors."You can't call it a trend, but if it's moving, it's moving in the right direction," said Greg Berkemer, executive vice president of the California Desert Association of Realtors."That's the most encouraging news."The Realtors association's October data also show:The median price of a Coachella Valley home is $323,440 - a 6.5 percent drop since September and a 5.1 percent decline since this time last year.While the median price is used as a benchmark for tracking homes, it can be misleading when several high-end, multimillion-dollar homes sell in a single month.The Coachella Valley continues to be affordable by California's standards, where the statewide median price is $497,110.While roughly 24 percent of Californians can afford the median priced home in their communities, 33 percent of valley residents can afford homes here.At the "height of the market," the local figure was as low as 11percent, Berkemer said.Nearly 9,200 Coachella Valley homes were on the market in October and 9,593 were on the market last month, according to the local figures.That's about a 1,000 more homes than were for sale in November 2006.A typical home on the market - three bedrooms, two baths, spanning 1,766 square feet - is listed at $379,000 and has been on the market 81 days."This market is not fully recovered," Berkemer said."September was a poor sales month. We're moving into our season. Hopefully that will help."

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Inventory is High. Does that mean nothing is selling?

Several of our readers and clients have commented about or questioned the high number of homes currently available in the Coachella Valley.

When most buyers new to the area think of Palm Springs, they think of only the City of Palm Springs. Our real estate market and our Multiple Listing Service (MLS) include a HUGE geographical area, extending from 29 Palms/Joshua Tree to Idyllwild to La Quinta and all the way down the valley to the Salton Sea and Coachella.

There are some other factors to consider when looking at the unsold inventory.
The 5 major contributors to the increased inventory:

1. The market slowdown itself causes homes to remain listed on the MLS longer;
2. Developers are now listing their remaining unsold inventory in the MLS;
3. Homeowners who previously were trying to sell their own homes are now listed with Realtors and at prices adjusted to reflect the current market and now back in the MLS;
4. Homes built or purchased for speculation (not to live in by the 1st owner) are now listed by Realtors and listed in the MLS;
5. Homeowners with loans that they can no longer afford and who are unable to refinance have listed their homes with Realtors and now in the MLS.


Here are some of the positive signs for the desert:
· Sales in October rose by 16.4% over last month – strongest gain in So. Calif.
· Year over year drop in sales was 30.1% -- smallest drop is So. Calif.
· Year over year price drop was 5.1% -- statewide the price drop was 9.9%
. Current affordability rate for desert is 33% -- at the height of the market it was 11- 13% range

Although these signs are encouraging, some Sellers still remain in a market where only the serious minded belong; successful seller’s homes must show well, and be priced to reflect their neighborhood – not necessarily the median price reduction.

For Buyers, when you find the home and area you want, this may be the best time to act.

** Although we know now when the market began to change there was so much activity in the pipeline that we were into 2006 before it revealed itself. Accordingly, we will be out of this current market as well before it is documented.

Waiting for the Bottom: You Could Be Left Just Waiting

In recent weeks, several of our buyers have found a great property at a great price, then, after talking to their brother-in-law or their son who works at Best buy, they tell us "We are going to wait for prices to come down even further."

The next week, that same great home at a great price has sold. Our client insists that there will be others at even better prices.

Other, more realistic clients see that prices have come down significantly here in the Coachella Valley and realize that the Real Estate market is cyclical. They know that even if prices do come down a little more, they will eventually come back up. They are not trying to make a quick buck, they are looking for either a primary or second home that they can live in and enjoy for more than three or four years. They know that the tax advantages of owning a home for those three or four years will still be significant.

They know what we know: Whatever you buy today will be a GREAT deal in three to five years.

Those who sit on the sidelines and wait for the bottom of the market may be left just waiting.

The problem with waiting for the bottom is that we only know where the bottom was in hindsight. We never know in real-time that we have hit the bottom of the market.

Greed is what got us into this mess. Greed will keep otherwise good buyers out of the market while they wait for a chance to be greedy and "steal" a property.

The Coachella Valley is a market significantly different from others in the state and country. We have a HUGE resort property market. A greater percentage of the homes here are second homes owned by relatively high-income and financially stable owners. These are people who are in a position to wait out any downturn in the real estate market and not at any risk of foreclosure.

The appreciation in the area has been not only due to the overall housing boom seen throughout the country, but also driven greatly by the tremendous growth we see occurring here. The population in the Coachella Valley is expected to DOUBLE its 2006 number by 2012.

Buyers who can afford to pay cash now or who qualify for a conventional fixed-rate mortgage or 30 year fixed with a ten year interest only period are in a good position to buy a great home at a great price.

My advice to buyers who are sitting on the fence: "Get off the fence. You're in danger of getting a picket stuck in a very uncomfortable place."

Gary Drake
The Thomas and Drake Group

Valley home sales jump 16.4% in October

December 5, 2007 The Desert Sun
Valley Realtors cheer progress of slumping market
Erica Solvig

Coachella Valley monthly home sales jumped 16.4 percent in October from September, a positive sign for the dragging real estate market but not enough to indicate the slump is over. Though officials are optimistic, the valley's home sales are 30.1percent lower than this point last year. But that's better than the statewide sales figures, which have dropped 40.2 percent compared to October 2006.

The exact number of homes sold in October was not available late Tuesday, according to the monthly information released by the California Association of Realtors.

"You can't call it a trend, but if it's moving, it's moving in the right direction," said Greg Berkemer, executive vice president of the California Desert Association of Realtors.

"That's the most encouraging news."

The Realtors association's October data also show:
The median price of a Coachella Valley home is $323,440 - a 6.5 percent drop since September and a 5.1 percent decline since this time last year.

While the median price is used as a benchmark for tracking homes, it can be misleading when several high-end, multimillion-dollar homes sell in a single month.

The Coachella Valley continues to be affordable by California's standards, where the statewide median price is $497,110.

While roughly 24 percent of Californians can afford the median priced home in their communities, 33 percent of valley residents can afford homes here.

At the "height of the market," the local figure was as low as 11percent, Berkemer said.
Nearly 9,200 Coachella Valley homes were on the market in October and 9,593 were on the market last month, according to the local figures.

That's about a 1,000 more homes than were for sale in November 2006.

A typical home on the market - three bedrooms, two baths, spanning 1,766 square feet - is listed at $379,000 and has been on the market 81 days.

"This market is not fully recovered," Berkemer said.

"September was a poor sales month. We're moving into our season. Hopefully that will help."

Banks, U.S. near deal on mortgages

MSNBC

NEW YORK - The Bush administration is working behind the scenes with industry on a plan to extend lower, introductory interest rates on home loans before they reset at higher levels amid hints by Fed Chairman Ben Bernanke of another cut in a key interest rate to keep the economy from falling into recession.

Treasury Secretary Henry C. Paulson and other top regulators met Thursday with loan servicing companies — firms that collect and distribute loan payments — and other industry executives. No formal agreement was announced, but an accord on this issue could be be revealed in the next week or two.

“We’ve all agreed that there should be some sort of standardized approach to reaching more homeowners faster,” Treasury Department spokeswoman Jennifer Zuccarelli, who declined to name those at the meeting, said in response to questions.

A story published Thursday by American Banker named Washington Mutual Inc., Countrywide Financial Corp., Wells Fargo & Co. and JPMorgan Chase & Co. as companies participating in the briefing.

The mortgage industry and federal regulators have been under intense pressure from activists, lawmakers and consumer groups to help borrowers stave off foreclosure, particularly as adjustable-rate mortgages begin to reset, meaning much higher payments.

Last week, California officials announced a deal with four major loan servicing companies. That agreement with Gov. Arnold Schwarzenegger includes Countrywide, GMAC Financial Services, Litton Loan Serving and HomEq Servicing.

Meantime, Bernanke, in a speech Thursday night to business executives meeting in Charlotte, N.C., suggested that another general rate cut might be needed to bolster the economy. The worsening credit crunch, a deepening housing slump and rising energy prices probably will create some “headwinds for the consumer in the months ahead,” he said.

Bernanke said he expects consumer spending will continue to grow and suggested the country can withstand the current problems without falling into a recession. But he indicated that consumers could turn more cautious as they try to cope with all the stresses.

On Oct. 31, Bernanke and all but one of his colleagues agreed to lower the federal funds rate by one-quarter percentage point to 4.50 percent at the end of a two-day meeting.

The odds have grown that the country could enter a recession. A sharp cutback in consumer spending could send the economy into a tailspin. Against this backdrop, Fed policymakers will need to be “exceptionally alert and flexible,” he said.

That comment probably will be viewed as a sign the Fed may lower interest rates when it meets on Dec. 11, its last session of the year. Twice this year the central bank has trimmed rates to keep the housing collapse and credit crunch from throwing the economy into a recession. Those cuts came in September and late October.

In the October meeting, Bernanke and his Fed colleagues signaled that further cuts might not be needed. Since then, however, financial markets have endured more turmoil. The housing slump has deepened, consumer confidence has plummeted and consumer spending “has been on the soft side,” Bernanke said in a speech Thursday night to business people in Charlotte, N.C.

Bernanke spoke hours after the White House lowered its economic growth projection for 2008 due to the deteriorating housing market. The White House also raised its estimate for unemployment next year, but said inflation should moderate.

The Commerce Department reported that the economy grew at a 4.9 percent rate from July through September, the fastest pace in four years. The impressive performance, though, was not expected to carry into the final three months of the year, when analysts expect growth of 1.5 percent or less.

Take your home outside

So you have decided to stay in your home instead of trying to sell right now - or you are trying to think of ways to make your home more attractive to buyers.

An open-air "room" adds inexpensive living space that may come in handy at resale. And it needn't have a price tag as big as the great outdoors.

By Sarah Max, Money Magazine contributing writer
June 21 2007: 6:57 PM EDT

NEW YORK (Money Magazine) -- Pam and Mark Elmore weren't in the market for a home last summer. But when the Bend, Ore. couple happened to stop by a newly built house with a 1,000-square-foot patio, a fully equipped outdoor kitchen - fridge and range included -and a fire pit, they immediately realized they had to have it.

Now the Elmores cook dinner outside about four nights a week. "It opened up a whole new space in our house," says Pam. "We are constantly entertaining out here."
Good-bye, flipping houses. Hello, flipping burgers.

Americans, it seems, are rediscovering the pleasures of their own backyards. For many what was once a place for casual barbecues with friends has now become a full-fledged room with all the amenities of the indoors: gourmet appliances, light fixtures, cushioned furniture and even flat-screen televisions.

In colder parts of the country, homeowners are putting in heat lamps and fireplaces so they can lounge outside almost any time of year.

"The whole standard for outdoor space has changed," says Stephen Melman, director of economic services for the National Association of Home Builders.

A recent NAHB survey of builders and other industry professionals found that outdoor fireplaces are fast becoming standard in upscale homes, and almost two-thirds of architects surveyed by the American Institute of Architects last year reported an increase in demand for outdoor kitchens, patios and decks.

The most compelling reason to build an outdoor room is the pure pleasure of it. But you can reap practical benefits too: It's a relatively inexpensive way to expand your living space.
"The outdoors is basically a second living room for many of our clients," says Stefan Thuilot, a landscape architect in Berkeley.

In many regions Mother Nature will heat and cool the space so it won't increase your utility bills.
Property tax assessors typically base their valuations on "livable" (that is, indoor) square footage, so outdoor additions shouldn't raise your tax bill.

And though you probably won't recoup your full investment when you sell, you may get back a good chunk.

"In the upper end of the market, houses that have outdoor rooms sell faster and at the higher end of the price range," says Teri Herrera, a real estate broker in Bellevue, Wash.
But a back-deck remodel can easily morph into a six-figure extravaganza. You could spend $500 for a basic stainless steel grill - or $100,000 or more for a kitchen with granite countertops and luxury appliances; a fireplace can cost anywhere from a couple thousand bucks to $50,000 for a custom-built stone version.

But spending too much on a souped-up backyard isn't smart, especially in a weak housing market. Before you order an open-air home theater and invite your friends over for the barbecue of the century, you need to figure out what makes sense in your yard and match your dreams to your budget.

Lay the groundwork

There's no lack of magazines to give you inspiration, but also put some thought into the following practical concerns:

What you'll do outside
If you're aiming to entertain, you'll want enough space for a large table or sitting area; if you'd like to curl up with a book on chilly evenings, a fireplace might be the centerpiece of your design. If you're in a rainy region, you'll get more use out of an area that can be covered with a solid awning.

Once you have ideas, "audition" different parts of your yard with a portable grill and basic patio furniture, says Deborah Krasner, an outdoor-kitchen designer and author of "The New Outdoor Kitchen."

This will help you discover what parts of your yard have the best views or the least noise.
When Olga and Ken Hayes of Manchester-by-the-Sea, Mass. began designing their 1,000-square-foot backyard deck and garden sitting area, they thought about the movement of the sun.

"We put the living room and water garden on the eastern side so I could enjoy the morning light on the garden on a summer day," says Olga. "In the afternoons there's light on the western-side patio where we do our entertaining."

Your local rules
Depending on where you live and the scope of your project, you may need approval from the city, says Julie Moir Messervy, co-author of "Outside the Not So Big House."
Many neighborhoods ban fences and pergolas, or covered awning structures, and others dictate what materials can be used. You may also need approval from your homeowners association to make drastic changes to your property.

Your neighbors' yards
Peek over nearby back fences to make sure your plan isn't off the charts. "If you overspend for your area, you'll be hard-pressed to get that back in a resale," says John Bredemeyer, an appraiser in Omaha.

What you'll spend, what you'll get
If you don't have the cash to fund the project, get a fixed-rate home-equity loan (about 8 percent today). It's a better deal than a variable home-equity line of credit, which currently has an average rate of 8.7 percent.

But don't take on tons of new debt for a project that won't necessarily recoup its costs at resale, says Burlingame, Calif. financial planner Barbara Steinmetz, especially if you're not going to be around long enough to enjoy it. Says Krasner:

"If you're not sure you'll be there for five years, put in a nice patio and buy a grill you can take with you when you leave."

How to do it right

Chances are, your wish list and your wallet aren't exactly in sync. To cut the budget down to size, keep these tips in mind.

Hire the right help

For anything more extensive than a simple deck, you'll likely need an expert to help you map out the plan. But unless your renovation requires complex engineering work, you can probably hire a landscape designer for $50 to $100 an hour instead of a landscape architect, who may charge twice that much.

The typical plan takes about 20 hours, although this will vary. For an elaborate project it's often worth paying a 15 percent to 20 percent fee for a "design and build" firm that can do everything from sketching out your plans to subcontracting out plumbing and electrical work.

Do it in stages

Unlike most indoor projects, outdoor rooms can be built over the course of many summers. This gives you more time to save for the big-ticket items and makes it more feasible for you to do some of the work yourself.

Consider trade-offs

Instead of spending $10,000 for a custom-built fireplace, pay $200 for a portable fire pit or chiminea. If you like the look of an outdoor kitchen but aren't prepared to spend $20,000 on a full setup, opt for a high-quality grill set in cultured stone, says Kevin Schaffer, a landscape designer and president of Artisan Outdoor Living in Bend, Ore.

Flagstone is often considered the must-have material for patios, but at about $30 a square foot, it can be a budget breaker.

An elegant-looking alternative is stamped concrete, says Schaffer, which costs about $13 a square foot.

When Bill and Jackie Fritsch of Broomall, Pa. put in an outdoor kitchen and sitting room, they splurged for a $13,000 grill and $13,000 hot tub. The television, on the other hand, is "the cheapest flat screen I could find," Bill says. And it's getting plenty of use.

"For five years we never went out back at all," says Bill. "Now the patio furniture stays out until a week after New Year's."

Goodbye subprime, hello FHA

At mortgage conference, lenders push back-to-basics theme for industry in coming years.

By Jeanne Sahadi, CNNMoney.com senior writer

October 15 2007: 5:49 PM EDT

BOSTON (CNNMoney.com) -- If your credit is weak or your savings anemic, here are two phrases you're likely to hear from mortgage loan officers in the next few years: FHA and mortgage insurance.

They're part of a back-to-basics theme that was emphasized Monday at the annual conference of the Mortgage Bankers Association in Boston.

For those who entered the business in the past five years, they've only known the good times and will need to be re-educated, said Paul Bibb, CEO of National City Mortgage, who was on a panel of leading mortgage industry executives.

"You probably have a lot of loan officers who can't spell FHA," said Bibb.

Bibb and David Lowman, CEO of Chase's Global Mortgage, which is a top 10 originator and servicer, said that during the go-go days of the housing boom, loan officers would steer home buyers with weak credit to subprime loans. And they would advise them to finance part of their down payment with a home equity loan.

"We probably all wish we had trained our sales staff to sell mortgage insurance," Lowman said. "The reason we're in this crisis is that we got away from the basics."

Now with the subprime market eviscerated, loan officers will be steering more borrowers with weak credit to loans insured by the Federal Housing Administration and advising those with little savings to get private mortgage insurance in cases where they can't put down 20 percent.

The FHA program is intended for home buyers and homeowners with weak credit. Borrowers with FHA-insured loans - which they get from private lenders as they would any other mortgage - pay a small premium to the FHA every month.

The FHA, in turn, uses those premiums to cover the lender in the event of foreclosure and requires lenders to pursue viable ways to help borrowers avoid foreclosure if they become delinquent.

Bibb can remember a time when FHA loans made up 30 percent of National City Mortgage's business. A few years ago, however, FHA loans had shrunk to about 3 percent of the business. Now, he said, they currently account for as much as 12 percent.

The call to go back to basics comes amid a sobering forecast for home price growth. Patricia Cook, executive vice president and chief business officer of Freddie Mac, who was also speaking on the MBA panel, expects price declines on a nationwide basis this year and next and then only a slow recovery thereafter.

Some markets are holding up and will continue to do so, Bibb said. But he's less optimistic for markets such as Arizona and Nevada where home-price gains were driven by heavy speculation. "[In those markets] the correction could be quite severe and last into 2009, if not 2010," Bibb said.

Lawmakers have been working on legislation to reform the FHA to modernize its standards so that they reflect changes to the housing market in the past 30 years. Among the changes on tap, lawmakers want to:

Raise loan limits. Today the FHA won't insure loans above $362,790 for single-family homes, and even less in lower-cost areas. Lawmakers are considering raising that ceiling to at least 100 percent of the conforming loan limit for mortgages backed by Fannie Mae and Freddie Mac, currently $417,000.

Reduce down payment requirements. Homeowners would no longer be required to have 3 percent equity or the cash equivalent. They could get an FHA-insured loan with 0 percent down.

Reduce complexity. Lenders have been complaining about the time and expense it takes to make an FHA loan.

Separately, the Department of Housing and Urban Development, which oversees FHA, may move to introduce risk-based pricing. Riskier borrowers would have to pay higher premiums than less risky borrowers.

5 Hot Trends in Real Estate Development

Daily Real Estate News
From "Green Construction" to Mixed Use Developments, Engineering Firm Giffels-Webster Engineers identifies some of the most robust trends in Real Estate Development.

Green building and design. Increased pressure on communities and businesses to promote environmentally sound designs has led developers to incorporate green elements into their projects. A plan to develop a parcel of land for retail might include green roofs, rain gardens, or gutter water retention and irrigation systems. LEED-certified environmental experts soon will become "must-have" team members as demand for energy efficient, healthy spaces grows stronger.

Assisted living centers. Assisted living developments are on the rise due to higher life expectancies and the influx of aging baby boomers. By helping seniors lead independent lives in non-institutionalized environments, these projects are designed to incorporate nature trails, community dining, exercise facilities, music rooms, libraries, salons, and game rooms. Opportunities exist to work with both private developers and public government-funded projects.

Hospital expansions, education campus additions. The hospital and education expansion trend is fueled by institutional projects being funded privately though corporate gifts and individual endowments. These "recession-proof" resources mean even during economic downturns, the market segment moves forward with plentiful building and capital improvement projects.

Mixed-use developments. Mixed-use developments are growing popular today because they reduce risk. Retail and residential can adjoin each other, and it's common to see large, national retailers combined with smaller, boutique-type stores, as well as housing varying by size, budget, and amenities. With this approach, the developer's investment is spread across the spectrum so it remains viable even if one segment does not perform as expected.

Urban revitalization. To attract and keep people in their communities, municipalities and townships are working to make their downtowns, retail hubs, and central business districts more inviting and accessible. Streetscape improvements, including attractive landscaping, decorative streetlights, brick sidewalk pavers, and strategically planned parking areas, are examples of how municipalities are proactively transforming their space to appeal to potential and current residents.

What does this mean to you? By looking at these trends and spotting areas where any one of them is begining to take place, you may have the opportunity to purchase a property in an area rip for revitalization, for example. In such a case, your investment may increase in value both during and after revitalization. If you are considering building a home, integrate "green" technology to increase its desirability, efficiency and potential resale value.

The Thomas and Drake Group in Palm Desert has provided services to clients who operate Senior Assisted Living homes. The real estate itself is typically a five bedroom home in a quiet residential area with no steps or stairs. A small group of seniors live at the property and continue to lead independent lives with the help of a live-in caregiver. From a real estate investment standpoint, the property and its expenses are paid for by the income from the business. From a business standpoint, owning multiple smaller units is a more affordable capital outlay than purchasing a larger facility.

Since the temperatures in the California Desert can be extreme, the use of Green Technology and energy efficient design in construction is not only eco-friendly, it also can make a huge difference in heating and cooling costs. Super-insulated homes, for example, can cut summertime electric bills by as much as 90% - sound unbelievable? The Palm Springs and Palm Desert areas are known for their mid-century architecture. These beautiful homes were built as winter-time seasonal retreats - not year-round residences - and as such were not well insulated and were built in the 1950's when the technology for energy efficiency did not exist. A typical summertime electric bill for one of these mid-century homes can be as much as $1800.00. The same sized home built today with super-insulation, tight construction, radiant heat barrier, double-paned low-e windows has a typical monthly summertime electric bill of about $200.00.

Both Palm Springs and Palm Desert now have mixed-use developments under construction. Port Lawrence in Downtown Palm Springs is combining retail, office and residential in one project. Residential lofts and condos will be situated above retail, restaurant and other commercial space, and the interest is huge. Since Palm Springs is a resort destination, many visitors want to be in the middle of everything - as close to the restaurants, shops and casinos as possible. This project does just that.

What could a hospital or college campus possible have to do with your residential real estate investment? Rental Properties. As both The College of the Desert and the UC San Bernardino / UC Riverside campuses expand, students will need housing. A time-tested simple investment strategy is to own rental properties around college campuses.

If you would like more information on any of the Real Estate Trends in this article or on commercial or residential properties in the California Desert, including Palm Springs, Palm Desert, Rancho Mirage, Indian Wells, La Quinta, Desert Hot Springs, Cathedral City and Indio, please contact the Thomas and Drake Group or visit our website at www.ThomasAndDrake.com .

Warren Buffet, Ron Peltier: "This is a time of opportunity"

Team spirit turns hockey star into real estate czar
By Noelle Knox, USA TODAY
WASHINGTON — Lenders are collapsing, home sales and prices in many markets are falling and lots of investors are panicking. Not Warren Buffett. He told a group of his real estate managers late last month in Omaha that he sees this as a time of opportunity.
The man who will try to seize some of those opportunities for him is Ron Peltier, CEO of HomeServices of America, the real estate arm of Berkshire Hathaway (BRKA, BRKB) and the nation's second-largest residential brokerage firm. It's Peltier's task to scope out deals with high-quality, but beaten-down, realty firms that might be ripe for acquisition.
"We want to be in the top 60 markets in America in the next five years," Peltier says. "And we want to be the No. 1 or No. 2" real estate company in those areas.
Since Buffett bought HomeServices seven years ago, the Minneapolis-based company has shot up from about 4,000 agents in three markets to 20,000 agents in 20 markets, including Prudential California and Edina Realty in Minneapolis. HomeServices also offers homeowners insurance and title services, and it runs a mortgage venture with Wells Fargo.
In keeping with Buffett's conservative approach, Peltier's lending division, which accounts for about 15% of the company's profits, avoided offering the kind of risky adjustable-rate loans that have burned many lenders.
"I don't want to sound holier-than-thou, but it was irritating when there were all kinds of players out there in the market offering all kinds of products that were questionable," says Peltier, 58.
HomeServices has a broad reach
HomeServices of America is the nation's second-largest real estate brokerage firm, with about 20,000 agents in 20 markets across the country.



For the Complete article, go to: USA Today

Some home buyers gain edge from credit crisis

By Christine Dugas and Sandra Block, USA TODAY
August 27, 2007


What credit crunch? Home buyers with solid credit and money for a down payment are now better positioned than they were a few weeks ago.

The average 30-year fixed mortgage rate is at a three-month low. Home prices in many areas have fallen. And despite the meltdown in non-traditional mortgages, many community banks still offer jumbo loans (above $417,000), though rates have risen.

"If you want to move up to a bigger house or buy a home for the first time, and you have the credit and qualifications to do so, it's an excellent time to buy," says Gerri Detweiler of FreeRateSearch.com.

Contributing to a Buyer's Market:

•Lower long-term mortgage rates. The average 30-year fixed rate reached 6.52% last week, the lowest since May 31, according to Freddie Mac (FRE). Frank Nothaft, Freddie Mac's chief economist, says declining yields for Treasury securities and the housing slowdown helped produce lower mortgage rates.

•Falling home prices. Nationwide, median home prices fell 1.5% in the second quarter, according to the National Association of Realtors. In addition, sales were down in most states, the NAR said.

That's given buyers with sound credit a lot of bargaining power. James Aberle, 38, of Phoenix recently paid $288,870 for a home originally listed at $350,000. The builder, through its mortgage arm, arranged 100% financing and paid for private mortgage insurance, which typically kicks in for buyers who put down less than 20%. The builder also paid $7,400 toward closing costs, Aberle says.

And for some buyers, real estate appraisals are producing lower home values, allowing them to renegotiate the price, says Kyle Kilpatrick of LendingTree.com.

•Available jumbo loans. Many lenders have abandoned non-traditional loans, including jumbos. That's because investors, fearful that the crisis in the subprime market is spreading, are reluctant to buy jumbos and other loans that mortgage investment giants Fannie Mae and Freddie Mac won't buy. But now, many community and national banks have stepped in to offer jumbo loans. They're better positioned than some other lenders to make those types of loans because they can fund them with customer bank deposits, says James Chessen of the American Bankers Association.

•Lower rates on adjustable-rate mortgages. Rates on ARMs are often based on Treasury yields, which have fallen, notes Keith Gumbinger of HSH Associates.

For the complete article, go to USA Today

New-Home Sales Post Surprising Gain

MSNBC.com

Separate data show big-ticket factory orders jumped in July
The Associated Press
Updated: 10:34 a.m. PT Aug 24, 2007

WASHINGTON - Sales of new homes perked up, while factory orders took off in July, raising hopes that the economy can safely weather financial turmoil that has shaken Wall Street.

The Commerce Department reported Friday that new-home sales rose 2.8 percent in July, after falling 4 percent in June. The increase in July lifted sales to a seasonally adjusted annual rate of 870,000 units. A second report showed that orders to factories for big-ticket goods jumped 5.9 percent in July, the most in 10 months.

Both reports were better than analysts expected. They were forecasting home sales to fall and were calling for a much smaller, 1 percent gain in factory orders.

In the housing report, the improvement in sales reflected gains in the West and the South, where sales went up by 22.4 percent and 0.6 percent respectively. Sales, however, tumbled 24.3 percent in the Northeast and were down 0.9 percent in the Midwest.

For the complete article, go to www.msnbc.com

4 Tips for Cooling Down Your Energy Bills

We talk a lot about ways to increase your home's efficiency here, and here we talk some more. Nice information, but if we don't put it into practice, it means nothing. During one of the driest and hottest years on record here in the Desert, it's time to put all this good information into action.

You know August is approaching when temperatures are heating up and air conditioners seem to be constantly humming — and staying cool is on everyone's mind.

But many home owners are equally concerned about how they can cut down on their energy consumption and reduce their monthly cooling bills.

The American Council for an Energy Efficient Economy (ACEEE) has a few suggestions:

Clean or replace air filters in air-conditioning units to keep cool air moving and to reduce electricity consumption.

Have an air conditioner tune-up performed by a qualified contractor.

Make sure your attic, which traps a lot of hot air, is adequately insulated.

Replace old equipment. A new high-efficiency unit not only pares down utility bills; it can help you qualify for a federal income tax credit.

But before you buy something new, do your research. “Often people are so desperate to replace their equipment that they don’t take the time to research the investment, locking themselves into high cooling bills and less comfort,” says ACEEE researcher Katie Ackerly.

For more information log on to www.EnergyTaxIncentives.org

You can find more information for local rebates and resources on the SoCal Edison site at www.SCE.com

What have YOU done to improve the efficiency of YOUR home? Let us know!