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According to the National Quarterly Housing Survey, only 64 percent – slightly less than 2/3 – of Americans think that “owning their own home is a safe investment.” That is down from 70 percent at the beginning of 2010 and from 83 percent in 2003[1]. And while home sales rose in January 2011 for the third straight month, the median home price hit its lowest point since April 2002. What does this mean for homeownership as “The American Dream?” It could mean that that particular concept has run its course.

There are disagreements on the part of experts about whether or not this is a bad thing. Some point out that a shift in perception of homeownership will cause rents to rise and could lead to an adoption of the “common-sense, rational concepts disregarded during the housing bubble years”[2]. Furthermore, as renting becomes more acceptable, it could lead to a prevalence of more desirable rental options in which favorable locations, “multi-modal transportation options,” pleasing layouts that feel more like homes and “higher levels of aesthetic and construction quality” dominate the market and make both renting and ownership of rental units a pleasant and profitable experience.

Doug Duncan, Fannie Mae’s chief economist, believes that this change in perspective is going to lead to “the demand side increase [being] in the rental market, not the housing [purchase] market.” And some experts believe that since high rental vacancies have “weighed on the core consumer price index” that a new focus on rental properties and multifamily housing could help the economy as a whole. Do you think that it is necessarily a bad thing – in the grand scheme of things – if owning your own home is no longer considered part of “The American Dream?”

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Describe your perception of “The American Dream” below.

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[1] http://www.huffingtonpost.com/2011/02/28/buying-a-home_n_829138.html

[2] http://www.washingtonpost.com/wp-dyn/content/article/2011/02/25/AR2011022500045.html

For investors interested in multifamily housing, the proposed unwinding of Fannie Mae and Freddie Mac, the government-controlled GSEs that many hold largely responsible for the housing crisis of the past few years, could be great news. In the white paper released two weeks ago to much fevered debate, one overlooked aspect of the end of Fannie and Freddie has been their impact on the multifamily market. While many investors fear that removing the GSEs from the multifamily loan equation could leave them high and dry without funding for development and other deals, the Obama administration’s proposal paper emphasized that “as we wind down Fannie Mae and Freddie Mac, it will be critical to find ways to maintain funding to this segment of the market”[1].

Of course, if the government remains heavily involved in this arena of real estate investing, it leaves the industry open to the same problems that have plagued the residential market. Many experts fear that poor lending decisions could lead to a commercial dip that could tank the already-delicate economy, while others believe that the administration is merely paying lip-service to concerned multifamily investors while not actually planning to continue to support the market. This belief is backed by the lack of specific strategies for insuring that there are “rental options near good schools and good jobs,” a goal cited in the report but not backed by solid strategy and action plans at this time.

Tom Musil, a finance professor and real estate specialist at the University of St. Thomas, points out that Fannie Mae and Freddie Mac essentially have kept the multifamily housing market afloat in the past three years – and probably longer[2]. “When it comes to multifamily housing, especially affordable, we’ve fallen way behind in this nation…The agencies are the players that kept working in those underserved markets,” he has said. In 2010 the GSEs delivered 60 percent of all multifamily loans, while in 2009 the number was even higher, 80 percent.

Do you think that it is appropriate for Fannie and Freddie to play such a big role in the multifamily housing sector?

Thank you for reading REJournalOnline’s Commercial Real Estate Letter.

Let us know how you feel about government and GSE involvement in multifamily housing moving forward below.

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[1] http://online.wsj.com/article/BT-CO-20110211-712137.html

[2] http://finance-commerce.com/2011/02/fannie-freddie-reforms-could-threaten-rental-market/

While “hardest hit” areas like Phoenix and Las Vegas still dominate media coverage of the housing market doldrums, around the country markets previously considered to be “stable” despite the crash are starting to cave. This “new wave of distress” is probably not surprising to residents of these areas who may have been experiencing low prices, high foreclosure inventories and difficulties selling for some time, but many “outside” analysts who believed that “economically diversified cities” would emerge relatively unscathed are finding themselves to be painfully incorrect[1]. According to a report from the New York Times, last year Seattle home prices declined more than those in Las Vegas, and Atlanta home prices declined more than Phoenix.

“Bubble markets” like Phoenix and Vegas may have fallen harder and faster overall because “builders and banks ran wild.” However, they may be slowing just in time for other markets that appeared to be more stable to start catching up. According to calculations by Zillow, Seattle home prices, for example, could fall as much as an additional 10 percent in the coming year. Government tax credits may actually have prolonged the pain because they artificially stimulated markets and made a recovery appear to be imminent when, in fact, the markets were simply not ready to recover yet. “We went into 2010 feeling gangbusters, thanks to Uncle Sam,” explained Zillow’s chief economist Stan Humphries. “We ended it feeling penniless, with home values tanking.” According to a report by Zillow earlier in the month, 34 percent of Seattle homeowners were underwater on their mortgages at the end of 2010[2].

With mortgage application volumes falling[3] and government-controlled Fannie Mae and Freddie Mac being phased out in the coming months, 2011 looks to be a year of uncertainty for the housing market for many areas instead of the beginning of a recovery. Many experts and real estate investors are adjusting to this change by placing heavier emphasis on a property’s current income potential (e.g. how much rent it brings in each month or how much cash it will generate in short order when it is resold) rather than on its appreciation potential, since no one knows what the future will bring in that regard. How have you adjusted your investing strategies to the new housing market in America?

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Your comments and questions are welcomed below.

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[1] http://www.nytimes.com/2011/02/14/business/economy/14dip.html?src=busln

[2] http://www.kirotv.com/news/26795616/detail.html

[3] http://www.bloomberg.com/news/2011-02-09/mortgage-applications-in-u-s-fell-last-week-as-costs-rose.html

According to information released by government-controlled Freddie Mac this week, cash-out refi’s hit an all-time low in the fourth quarter of 2010 as only 16 percent of homeowners refinancing opted to cash in on their equity. Nearly half of all refinancing homeowners (46%) decided to do a “cash-in” refi, meaning that they lowered their principal balance at closing by paying additional money in[1]. During the third quarter of 2010, 35 percent of all refinancing homeowners opted for cash-in refi’s.

Frank Nothaft, vice president of Freddie Mac and the GSEs chief economist, credits record-low 30-year fixed rates in 2010 with encouraging “borrowers who could do so to finance.” He believes that at the time, other investment options probably made paying down a mortgage look like a good idea. Given that getting a home loan or qualifying for refinancing has gotten harder in recent years and, with current legislation in the works is likely to get even harder, homeowners are likely acting now to solidify their home loans and the status of their mortgage.

This week, refinance rates jumped 3 points to 5.012 percent and all major lenders raised their refinancing rates[2]. Are you looking to refinance before restrictions on credit and lending get even tougher?

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Please leave questions and comments below.

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[1] http://nationalmortgageprofessional.com/news23397/freddie-mac-study-finds-share-refinancers-taking-out-cash-hits-record-low

[2] http://www.digitalnewsreport.com/2011/02/01-refinancing-loan-rate/7343

As newly-elected Republican congressmen and women attempt to hold true to the values that got them elected by initiating cuts in government backing for home mortgages, leaders in the housing industry are making it known that they are less than pleased with their long-time allies[1]. Banking executives and mortgage investors are holding meetings with both republican lawmakers and their staff members to try and elicit a commitment that they will make the government’s role in guaranteeing mortgages a permanent one. However, thus far, many republicans are holding firm. Representative Spencer Bachus, chairman of the House Financial Services Committee and a republican from Alabama, says he’s not surprised that “the industry” is showing up in force: “I would love to make loans and if they failed, let the taxpayers make up the loss. That’s a pretty sweet deal,” he said.

Many members of Congress blame government-controlled Freddie Mac and Fannie Mae for the housing crash, however. As a result, some want the GSEs eliminated and others believe that the entire system will have to be revamped to prevent taxpayers from shouldering further losses. If mortgages are no longer guaranteed, it is likely that interest rates will rise and many will investors will no longer be interested in those investments, say experts. Ultimately, the mortgage market could be “smaller, less liquid and more expensive,” explained Annaly Capital Management director Jeremy Diamond.

Many political analysts believe that this is the issue that will ultimately divide the Republican party and the Tea party representatives. Do you believe that the government should continue to back mortgages in some capacity, or has that time come to an end?

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Please leave comments and questions below.

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[1] http://online.wsj.com/article/SB10001424052748704279704576102310308442634.html?mod=googlenews_wsj

January 2-7, 2011

Major Commercial Developer Sees Commercial Real Estate Indicators as “100 Percent Positive”

Jan. 03, 2011 – CB Richard Ellis chief executive Brett White considers 2011 commercial real estate indicators to be “100 percent positive,” he told the Washington Post[1]. “There is no question that we are in the early days of a recovery phase,” he said, adding that investors’ sentiments are “strongly positive” and that businesses are looking years (instead of only months) into the future. White added that “vacancies have clearly peaked in almost every market and every asset class” and that while some markets might still suffer through part of 2011, the “vast majority of major markets now across the U.S. are turning positive.”

Failed Commercial Properties Find New Life as Public Parks

Jan. 04, 2011 – When the commercial real estate crisis was at its height, many feared that middle-tier commercial properties would never recover from the damage. With commercial buildings needing up-to-date technology and a vast oversupply of poorly built properties on the market that were thrown up by inexperienced developers at the height of the boom in an effort to make a quick buck, it is going to be difficult to fill all the vacancies still out there even as the commercial market recovers. According to senior research scientist Kevin Caravati of the Georgia Tech Research Institute, commercial properties that have truly turned defunct should not be resuscitated, but rather converted to green space to help green cities while reversing urban sprawl[2]. Caravati proposes that commercial loans that have been written off by banks should be developed as parks, while adjacent properties can be held vacant but maintained – possibly as picnic areas or playing fields – until the value of the property rebounds. Caravati believes that there is even room for private investors in this enterprise, explaining that “the investor buys a piece of real estate that has a seriously depressed value today” and then, through greening a small portion of that real estate, increases the value of the entire tract of land and can have it rezoned for higher, more valuable uses.

Bank of America “Settles” with Fannie and Freddie, Stands Accused of a “Backdoor Bailout”

Jan. 05, 2011 – Following the announcement on January 3, 2011 that government-controlled Fannie Mae and Freddie Mac had reached a repurchase agreement with Bank of America to the sum of $3 billion dollars, politicians, the media and the general public responded with skepticism[3]. The agreement, which resolved outstanding issues and claims against Countrywide, which was purchased by Bank of America in 2008, was designed in hopes of putting the vast liabilities incurred by Countrywide to rest once and for all so that the lender could move forward. However, many, including controversial congresswoman Maxine Waters (D-Los Angeles), are wondering aloud if the deal is actually a “backdoor bailout” for the lender, who has been rumored to be in need of more federal assistance after paying back its TARP money in record time[4]. Bank of America shares have risen 8 percent since the deal was announced, and it is this that concerns Rep. Waters, according to her public statement, which calls the settlement “both premature and a giveaway.”

Short Sales Heading Up in 2011

Jan. 06, 2011 – In south Florida, at least, the much-maligned short sale process appears to finally be settling in. According to a report released by Miami “real estate market intelligence” firm Condo Vultures, “all indications are that short sales will increasingly be the primary focus of buyers searching for properties in the south Florida market”[5]. Condo Vultures’ director of sales, Hernan Osorio, says that thanks to the “federal government’s loan modification program having minimal effect and the economy failing to create enough jobs to jumpstart the housing market,” more and more homeowners are opting for short sales, and lenders are starting to view the transactions as more viable than they have in the past. Banks are still trying to hold on to REO properties long enough to recoup their losses, but this makes the idea of adding to the REO volume unattractive. Hence, an increase in short sales. In December, short sales had increased 49 percent over the same time a year ago in south Florida.

Property Taxes May Go Up Despite Plummeting Values

Jan. 06, 2011 – While you might expect that opening your newly-lowered property tax bill would be the one bright thing about your property values heading down, many homeowners will not experience that silver lining this year. Around the country, local governments are trying to raise the revenues necessary to keep schools and other public services operating by raising property taxes even as the value of the properties falls. For example, in DeKalb County, Georgia, water rates and property taxes are projected to go up about $240 (an increase of 20 dollars per month) for most households in the area over the course of the coming year[6]. CEO Burrell Ellis announced this in his State of the County address, explaining that furlough days, unpaid holidays and job cuts across the board were not enough to keep the county running effectively. Higher property taxes have already resulted in higher tax lien auction activity in cities and counties across the country.

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[1] http://www.washingtonpost.com/wp-dyn/content/article/2010/12/30/AR2010123003271.html

[2] http://www.towardfreedom.com/home/global-news/2243-turning-failed-commercial-properties-into-parks

[3] http://www.dsnews.com/articles/bank-of-america-agrees-to-3b-settlement-with-fannie-and-freddie-2011-01-03

[4] http://latimesblogs.latimes.com/money_co/2011/01/maxine-waters-asks-if-bofa-deal-with-fannie-and-freddie-was-backdoor-bailout.html

[5] http://www.realestatechannel.com/us-markets/residential-real-estate-1/miami-short-sales-condo-foreclosures-in-miami-south-florida-home-sales-short-sales-listings-condo-vultures-mls-listings-condos-for-sale-in-miami-condos-for-sale-in-ft-lauderdale-condos-for-sale-in-west-palm-beach-3701.php

[6] http://www.wsbtv.com/news/26388627/detail.html

With the recent economic slump that had almost everyone suffering some financial loss, businesses have relied on lending to keep themselves afloat. Even mortgage companies have had their share of troubles during the economic downturn. One such troubled mortgage company is Ally Financial’s mortgage unit Residential Capital and its subsidiaries. This week, ResCap reaches an agreement with Fannie Mae in resolution of repurchase exposure that may arise from breaches in warranties and selling representations[1].

ResCap and its subsidiaries are now released from liability for the $292 billion unpaid balance it owed Fannie Mae – thanks to a $462 million settlement reached with the government-controlled GSE. The settlement will cover loans serviced by GMAC Mortgage prior to the 30^th of June, 2010 on behalf of Fannie Mae. Mortgage-backed securities purchased by Fannie Mae prior to the settlement are also covered in the settlement.

“At the start of 2010, we set a goal to substantially reduce risk in our mortgage operation and, during the last twelve months, we have successfully completed a series of steps toward that objective and are largely complete. This agreement, along with prior repurchase settlements with Freddie Mac and others and the sale of legacy assets and operations, has significantly reduced Ally’s risk related to the legacy mortgage business going forward,” Ally CEO Michael A. Carpenter said.

The settlement does not cover contractual obligations such as those that may arise from mortgage servicing. Also, Ally Bank is excluded from the settlement. Aside from the settlement, ResCap and Fannie Mae also made arrangements for ResCap’s mortgage insurance proceeds payment for rescinded or cancelled mortgage insurance coverage.

ResCap CEO Thomas Marano said yesterday that “We are very encouraged to have reached this agreement with Fannie Mae. They are a key counterparty to our mortgage business and we look forward to continuing our important and productive relationship. With our de-risking initiatives largely complete, the mortgage business will focus predominantly on the origination and servicing of conforming mortgages, which is where the company holds leadership positions.”

[1]http://www.dsnews.com/articles/ally-financial-reaches-462-settlement-with-fannie-mae-2011-01-03

State attorneys general in all 50 states have recently launched a joint investigation on the recent allegations of fraud regarding foreclosure paperwork and proceedings. With the real estate world focusing on said issue, banks and mortgage lenders can never be too careful. This is why the country’s largest provider of mortgage financing has decided to suspend foreclosure work with a law firm that’s under hot water and investigation by the state attorney general regarding foreclosure of homes.

Fannie Mae, which holds $3.3 trillion book of business, announced a halt in referrals to Florida foreclosure processing law firm Law Offices of David J. Stern PA. The firm is currently being investigated by Attorney General Bill McCollum for alleged fraud and improperly prepared documents on foreclosure proceedings. Even Citigroup Inc. announced a suspension of referrals to Florida-based Stern’s Plantation.

“Given the increasing questions related to the Stern law firm, we decided it was appropriate and responsible to suspend new referrals to the firm,” explains Fannie Mae’s spokeswoman Amy Bontitabus.

Washington-based Fannie Mae put into effect the suspension last October 11. The government-sponsored enterprise hired law firm Bradley Arrant Boult Cummings LP. The law firm is tasked to review the processes and operations implemented by Stern on foreclosing homes.

David Stern’s attorney Jeffrey Tew said that Stern will cooperate fully with Fannie Mae. He further says that the mortgage giant is just being dutiful and the law firm welcomes that. Tew says, “The firm is fine with that and we’re happy to let them do their review.”

Second largest mortgage financing provider Freddie Mac has also made the same decision: it has severed ties, for now, with Stern’s firm. Holding $2.2 trillion book of business, Virginia-based Freddie Mac announced concerns regarding reports that Stern’s firm has failed to follow appropriate legal standards when preparing and filing foreclosure documents.

Amidst the suspension of referrals, rumor has it that Fannie Mae has imposed quotas on Stern’s firm and that Stern has paid for food and lodging on Fannie’s employees. Fannie Mae has denied both.

The normal law of supply and demand does not apply in the current U.S. economic state – whether home prices go up and down, supply remains high and demand remains low. And not for the first (or maybe even last) time, analysts and economists are questioning government intervention in the housing market.

Recent evidence shows that U.S. home prices may continue to slide in the next three years. Even with that prediction, 12 million more properties are expected to hit the market as shadow inventory – or foreclosed homes and homes in default – is expected to be sold. This expected supply, though, is what’s preventing the market from reaching its rock bottom prices after plunging 28% from 2006.

According to Fannie Mae , Moody’s Analytics Inc., Morgan Stanley, and Barclays Plc. Analysts, the expected shadow inventory is only an add up to the vacant houses and houses expected to be sold by their owners as soon as a slight improvement in the market occurs.

“Whether it’s the sidelined, shadow or current inventory, the issue is there’s more supply than demand. Once you reach a bottom, it will take three or four years for prices to begin to rise 1 or 2 percent a year,” says San Francisco’s Morgan Stanley’s U.S. housing strategist Oliver Chang.

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Goals are very important, especially within an economy that seems to still be on the downhill.

The Housing and Economic Recovery Act of 2008 (HERA) requires the Federal Housing Finance Agency (FHFA) to establish the mortgage market goals for different target segments. The Freddie Mac and Fannie Mae conservator, therefore, has released its final housing goals for the government-sponsored enterprises. These new rules will apply for the year 2010 to 2011.

The recently established rules have three goals: one for single-family, owner-occupied home purchases; one for very low-income families; and another one for families living in geographical areas with lower-income populations, with high number of minority residents, or that were declared by the state as a disaster area. The last one, disaster areas, includes a sub-goal of addressing lower-income and minority areas needs.

Last February 26, FHFA published their preliminary goals to be able to solicit comments. When the goals were finalized, there have been no changes with low-income and very low-income home purchase mortgages goals. Goals for low-income refinances, accommodating recent market conditions, came to a final downsized goal.

The four single-family goals have been given four benchmarks: 27% low-income home purchases, 8% very low-income family home purchases, annually FHFA-set percentage of low-income/high minority/disaster areas home purchases (sub-goal of13%), and 21% low-income family refinancing. These benchmarks are said to be minimum goal-qualifying mortgage shares.

As set by HERA, there are also seven factors that FHFA had to consider in creating the final single-family housing goals:

• national housing needs;
• economic, demographic, and housing conditions plus projected market developments;
• Enterprises’ previous performance and effort in achieving housing goals;
• Enterprises’ ability to lead the industry in creating available mortgage credit;
• other reliable mortgage data that may be available;
• purchase money of other conventional mortgage market or refinance market that caters to the same family types; and
• maintaining sound financial condition of the Enterprises.

Because the current market conditions are on a downward trend, the final multifamily goals have been lowered. Fannie Mae needs to acquire mortgages financing at least 177,750 low-income and 42,750 very low-income rental units; Freddie Mac’s targets are 161,250 and 21,000. Acquisition of mortgages for low-income units in 5 to 50-unit properties will also have to be reported by the Enterprises.

It is to be noted that mortgage purchases in private-label securities – such as commercial mortgage-backed securities – are prohibited from any credit. GSEs are still expected to support affordable housing but should not risk everything – like with uneconomic or high-risk activities – just to meet the goals set by FHFA.