This article appeared in today’s online WSJ. Portland gets some major love. Here are a few excerpts:
*Alex Payne plans to move to Portland with his wife next month, while keeping his job at San Francisco-based Twitter Inc. Last October, Mr. Payne caused a stir when he blogged about his frustrations with San Francisco’s quality of life, including criticisms of its public transit and high cost of living.
In contrast, the 26-year-old believes Portland is a “model of urban design.” Mr. Payne is especially impressed with the revitalization of Portland’s Pearl District, a once-grimy industrial neighborhood that now teems with art galleries and restaurants. Portland’s lower property costs also are appealing, though he initially plans to rent.
*San Francisco’s median home value in late February was $691,600, compared with $362,800 for Seattle and $236,100 for Portland, according to real-estate site Zillow Inc. San Francisco’s median home price increased 1.1% over the past year, while the average price fell 7.1% in Seattle and 9.9% in Portland, according to Zillow.
I don’t pretend to be an expert on land use planning but anytime Oregon is featured in the WSJ I like to check out the story. This morning there is a feature article about Oregon’s land-use laws and the impact it is having on pear farmers in Jackson County (Southern Oregon).
As a resident of Portland I see the pluses and minuses of land-use regulation. On the positive side I enjoy being able to drive 15 minutes out of town and be totally surrounded by open fields. I also like the fact that random housing developments aren’t sprawled across Oregon’s countryside. However, I also see the minuses. Portland has become a mecca for in-fill residential development which means the death of backyards. Furthermore, artificial restrictions on development places a premium on land inside urban growth boundry making housing more expensive than it otherwise would be.
But, I’d never thought about the impact of our land-use regulations on farmers.
Do you have thoughts about Oregon’s land-use laws? If so, leave them in the comment section below.
Rob Chrisman wrote in yesterday’s edition of the “Pipeline Press” (a great blog if you want to stay abreast of the changes in the mortgage industry) that new accounting rules may make covered bonds more common with regard to securing mortgages. I originally blogged about covered bonds back in 2008 when the subprime mortgage crisis was unraveling in front of our eyes. Rob provides a great summary about what a covered bond is:
What is a “covered bond”?
In this case, covered bonds are debt securities backed by the cash flows from mortgages, and recourse to a pool of mortgages secures (“covers”) the bond in case the issuer becomes insolvent. Covered bond assets remain on the issuer’s consolidated balance sheet, which comforts end-investors, since they are held on the issuers’ books and the interest is paid from an identifiable source. (Current MBS’s are not held on the issuers’ books.) This type of security has been popular in Europe, but not here in the US. New accounting rules, however, require issuers to carry collateral on their balance sheets even for securitized products such as mortgage bonds, a key feature of covered bonds, and there may be some legislation brewing regarding the FDIC taking over an issuer (in the event of a collapse) that would make it easier to issue them. In the event of default, the investor has recourse to both the pool and the issuer.
The key to the covered bond is that issuing banks are required to keep “skin in the game” which would ultimately lead to more conservative underwriting guidelines. Depending on who you are you may think this is a good or bad idea. Feel free to leave your thoughts below in the comment section.
On February 8th I provided an industry update to a group of real estate professionals. The subject of the presentation was focused on providing realtors with the essential information they should be aware of when working with buyers and sellers who are using mortgage financing. Here are the slides for your learning pleasure:
Ryan Frank of the Oregonian blogged about the latest RMLS Market Action report in this post. I thought there were a couple interesting inferences about the 2009 Portland Real Estate Market.
Here are a couple of the highlights that I found interesting:
*”Portland-area home prices fell 3 percent in 2009 to $242,200 in December…”
*”Since the August 2007 peak of $302,000, the median home price has fallen 19.8 percent.”
*”For the year, the median home price fell 3 percent, closed sales were down .9 percent and new listings dropped 19 percent. That 10,000 decline in new listings helped drive down the inventory from 19 months in January to 7.7 months in December.”
* For December, “closed sales were up 53 percent from a year ago and pending sales rose 41 percent.”
I read somewhere that 6 months worth of inventory was considered an equilibrium for a housing market so we can still say it’s a “buyer’s market” but not as much as it was in January of 2009. It will be interesting to see what this number does after the expiration of the first-time homebuyer tax credit.
The NY Times published this article yesterday that examines the ethos of our culture as it relates to homeowner’s who are confronting a home that is now worth less than their mortgage. When I read it I began to think about how our social fabric has evolved along with financial markets.
Fifty years ago a homebuyer would take a mortgage from a local bank who would have then put the loan on their own balance sheet and lived with the consequences. I can imagine that the homeowner had a greater incentive to stay current with payment even if property values declined because they probably did their banking at the same branch that they signed their mortgage papers. Therefore, they’d have to confront the same bankers who would ultimately be negatively impacted by foreclosure.
Today, borrower’s can no longer identify the people who will be negatively impacted by their default. Furthermore, mortgage note holders no longer have the same personal interaction with the people who owe them money. Ever since the birth of securitization the mortgagee/ mortgagor relationship has become depersonalized.
I wonder what impact this has had on creating the current state of the mortgage and housing industry? If you have some thoughts please leave them below.
Mortgage Industry bellwether Fannie Mae announced this morning that it has successfully implemented the latest version of it’s automated underwriting engine known as “Desktop Underwriter”. Fannie Mae is the largest purchaser and “securitizer” of mortgages in the United States. The new guidelines featured in this version of the software will make it more difficult for many loan applicants to qualify for mortgage financing. The changes will impact mortgage applications starting today.
Here are the highlights:
* Update to Credit Risk Assessment: Fannie Mae has made adjustments to it’s credit assessment with the intent of managing, “default risk in this market and to provide reasonable, prudent, and sustainable homeownership options to borrowers.” In other words, Fannie Mae is raising the bar on borrowers with marginal credit histories. These applicant’s are going to have a tougher time getting approved for financing.
* Reduction in maximum debt-to-income ratios (DTI): DTI ratios measure a loan applicant’s proposed housing payment plus all other monthly debt obligations divided by their monthly gross income. Up until today loans with DTI’s as high as 56.9% were regularly approved. As of today most applicant’s will only get approved if their DTI is 45% or less. With compensating factors (i.e. large down payment, stellar credit, lot’s of reserves) an applicant may go as high as 50%.
On the surface this update seems completely reasonable. However, keep in mind that most households have cash-flow coming in that cannot be included as income on their loan application. Therefore, an applicant’s qualifying income, which is the denominator in the DTI equation, is often a very conservative interpretation of their actual monthly cash-flow. This will have an especially large impact on self-employed persons (sorry realtors).
* Tighter guidelines for applicants with foreclosures & BK’s: For applicants with foreclosures on their credit report they will not be eligible for Fannie Mae financing for the first 5 years from completion date (they may be elgible for FHA financing sooner). After 5 years they need to have a minimum of 10% down payment, a credit score of 680 or higher, and will not be permitted to do a cash-out refinance. Keep in mind that in most cases the foreclosure falls off the applicant’s credit report after 7 years.
Applicant’s with a Chapter 13 BK on their credit report that was discharged within in the past 24 months, dismissed within the previous 48 months or a non-Chapter 13 BK (i.e. Chapter 7) that was filed, discharged, or dismissed within the previous 48 months will not be approved for a new mortgage. The previous guidelines had timelines fo 24-36 months.
*Duplex maximum loan-to values (LTV’s) decreased: Under previous guidelines many loan applicant’s could get up to 95% financing for owner-occupied duplexes. When the mortgage was to be used for investment property purchase of a duplex the maximum LTV was 85%.
Under the update the maximum LTV is 80% for owner-occupied purchases and 75% for investment property purchases. Interest-only loans are no longer available for investment property.
Here are the two key points which look intriguing:
*Senators agreed to extend the existing tax credit for first-time homebuyers while offering a reduced credit of up to $6,500 to repeat buyers who have owned their current homes for at least five years…
*The tax credits would be available to homebuyers who sign sales agreements by the end of April. They would have until the end of June to close on their new homes…
Professor Jeremy Siegel wrote this opinion piece for the WSJ yesterday and I thought it was interesting. In it, Siegel defends the Efficient Market Hypothesis by pointing out that the paradigm in which most Wall Street firms made decisions during the credit boom (which in hindsight look like bad decisions) were steeped in the Great Moderation where bubbles and volatility were not the norm. As a result, there models for evaluating risk did not anticipate the level of volatility that reality has now presented. Here are a couple excerpts which I found interesting:
*The economic response to the Great Moderation was predictable: risk premiums shrank and individuals and firms took on more leverage.
*According to data collected by Prof. Robert Shiller of Yale University, in the 61 years from 1945 through 2006 the maximum cumulative decline in the average price of homes was 2.84% in 1991. If this low volatility of home prices persisted into the future, a mortgage security composed of a nationally diversified portfolio of loans comprising the first 80% of a home’s value would have never come close to defaulting.
*Our crisis wasn’t due to blind faith in the Efficient Market Hypothesis. The fact that risk premiums were low does not mean they were nonexistent and that market prices were right.
*But this does not mean that risks have disappeared. To use an analogy, the fact that automobiles today are safer than they were years ago does not mean that you can drive at 120 mph.
What’s your take? Do you believe in the Efficient Market Theory? Leave your comments below.
The expiration of the $8,000 first-time homebuyer credit is only 52 days from today. For those who qualify for the $8,000 credit they must close on their transaction no later than November 30th. And although there has been much speculation about an extension of the credit; to date nothing has been passed by Congress and their is growing skepticism that anything will get done before health care reform is enacted (which means it may not get extended).
That said, we are expecting that Monday, November 30th will be a busy day at the county recording offices because many homebuyers will wait to the last minute to close. The excess demand for recordings at that time is amplified by the fact that Thursday, November 26th is Thanksgiving day so all of the recording offices are closed. The problem of course is that the county recording offices may not be staffed to handle the additional capacity and if a transaction doesn’t actually record until the following day it may mean that the buyer does not receive their $8,000 credit.
We would encourage homebuyers to close a week or so before the expiration of the credit so long as time permits but realize this may not be feasible. That said, we have been pro-active in learning how the tri-counties are going to be responding to the expected additional demand. Here is what we found out:
Multnomah County: Will be open for the full day on Friday, November 27th (day following Thanksgiving)/ may add staff if needed/ is not allowing vacations to employees on November 30th/ currently planning on closing at 5PM
Washington County: Will be open for the full day on Friday, November 27th (day following Thanksgiving)/ planning on adding staff to help out/ is not allowing vacations to employees on November 30th/ will close at 5PM but staff will stay as late as needed in order to record all documents in that day
Clackamas County: Will only open for a 5-hour shift on Friday, November 27th (day following Thanksgiving)/ not currently planning on adding staff/ has not made any policies regarding vacations to employees on November 30th/ will close at 5PM as normally scheduled
Clearly Clackamas County recordings are the most at risk. Plan ahead!