Big Mortgage Changes Coming in 2011.

For the past year or so, a series of policy and procedural changes have rocked the mortgage world as the banks and regulators attempt to avoid the lending mistakes of the past.

These changes have been incremental involving appraisal procedures, consumer disclosures, new underwriting rules and finally the Dodd-Frank Financial Reform Bill which affects how loans are originated.

Buying Distressed Property- A :How To" Primer

If there is an upside to the current housing mess, it has given some people the opportunity to buy foreclosed real estate at huge discounts. A recent report by Multiple List suggests that lots of people are looking to take taking advantage of this situation. As reported recently in the Baltimore Sun, thirty percent of all sales in Baltimore City were foreclosures.  While the Baltimore Region as a whole is much better off than say, Florida or Las Vegas, still about 18% of all regional sales are distressed property according to research firm CoreLogic.

Is housing a Luxury or a Staple?

This seems like a silly question. Shelter is widely regarded as one of life’s basic necessities along with food and clothing. But is it a luxury item or a staple commodity?  What’s the difference? Well, in terms of future housing prices there is a big difference.  Staples (bread, soap, and corn flakes), tend to rise in price along with inflation. But luxury goods, tend to be consumed in greater qualities, as people get wealthier....think cars, jewelry, travel, boats.   History suggests that people will consume more or better quality housing as their real income, adjusted for inflation, actually increases. A great deal of research has been done on this subject by Professor Robert Shiller (co-author of the widely quoted Case-Shiller Home Price index.) He finds positive evidence that as people earn more, they spend more on housing, without necessarily increasing their consumption of staples.

The Rent vs. Price ratio in Baltimore sends a strong “Buy” signal

One overlooked metric is measuring whether a real estate market is over or under priced is the “Rent vs. Buy”  Index.  This index compares the average rent in a particular locale with the selling price of a similar  property. For example, if an apartment rents for $12,000 a year ($1,000 a month) and a similar condo sells for $180,000 then the rent/buy ratio is 15 ($180, 000/$24,000 = 15).

In a given market, if the ration is 15 or less,  the “for-sale” market is under-priced as compared with rentals. If it is over 20, renting is less expensive. Ratios between 16 and 19 may fall either way depending on locational and amenity factors.

Cities in the United States where renting is much cheaper includes the nations most populous and include New York, Boston, San Francisco and Seattle. The good news is that Baltimore is clearly in the “Buy” category with a ratio of 12, as reported by Trulia.Com, the real estate analytics  site.

We've seen this movie before.

Those of us who remember the real estate and mortgage world thirty years ago find a striking similarity to what’s happening today. Unemployment was widespread and topped 10%. Home prices declined and sales activity came to a standstill. Mortgage approvals were near impossible. The cause was different than today but the effect was the same. In the early 1980 the Federal Reserve under Paul Volker intentionally raised interest rates to stratospheric levels to break the back of inflation that had been running the dangerously  high for the previous 10 years. The effect was immediate. People couldn’t get loans, sales dried up, and unemployment soared. Adverse economic conditions persisted for nearly three years. In fact, it was a true double dip recession. The first recession ran six months, then a brief period of anemic economic growth and then another dip lasting 14 month. Pundits pointed to what was termed the “Misery Index”, a combination of the unemployment rate and the inflation rate, which hit 22% in mid 1980.  Eventually the Fed’s policies worked.  Inflation began coming down, employment improved and credit loosened. The effect on residential real estate was profound and lasted for the next 8 years.

The Forclosure Mess - the Banks do it to us again !

If things weren’t bad enough already, some banks decided to shortcut the foreclosure process by filing false affidavits with the courts.  One foreclosure processor testified that he signed and notarized 8,000 court petitions a week without reviewing the documents. Judges get angry when they are presented with false documentation.  Several lenders then halted foreclosures in the 23 states where only the Circuit Court can authorize a foreclosure. (In the other 27 states a foreclosure can be initiated without court approval.) Soon thereafter, the Attorneys General of the other 27 states began inquiring whether the problem was more widespread. In an abundance of caution Bank of America then halted foreclosures in all 50 states.