Real Estate Analysis Consultation

Analyst David DePhillips

Ctl-Atl-Delete:

Atl-A- lendersNot holding back Sub Prime down slide.

Published. 7/30/2007 5:33 PM

Implications:

The Alt-A Lenders I thought would be the levee which held back the erosion of the sub-prime meltdown. Mortgage stocks sold off Monday July 30th 07, after American Home Mortgage(NYS:AHM) failed to make a dividend payment. The news sent down shares of other primarily Alt-A lenders, such as IndyMac dropped 5%, Impac Mortgage fell 12%. Countrywide Financial(NYS:CFC) the largest independent mortgage lender, dropped 2%. Luminent another mortgage-related company, fell 3% Monday even after it reaffirmed its dividend plans.

Analysis:

Mortgage stocks sold off again Monday after American Home Mortgage failed to make a dividend payment.American Home said late Friday it was delaying paying quarterly dividends because of margin calls and write downs. The news came just a month after American Home warned of a second-quarter loss but pledged to maintain its 70-cent common-stock dividend rate.

How far the affects of the Country Wide(NYS:CFC) reports and now American Home Mtg. spread into other like lending institutes may be a barometric of how far the sub prime affects will speed or contained.

This news may have an addition psychological rumblings in the home sellers and buyers market, and it appears more bad news is the vogue.

 

Ability to Borrow for Home Ownership overlooks Insurance cost.

This analysis is solely the work of the author. It has not been edited or endorsed:

Posted: 7/27/2007 4:15 PM

Implications:

Key Implications. Ability of borrowing overlooks the soaring insurance costs. Home owners and renters housing cost facing huge increases as a result of increased insurance premiums. In some cases more than 10 times what they paid last year. Casualty insurance cost will be a factor in home ownership.  The replacement cost continue to rise regardless of slumping prices.

Analysis:

Those of us home owners and Realtor members who weathered Hurricane Andrew in S. Florida in 1992 and it’s aftermath of rebuilding ignored the additional high cost of insuring our property. Property insurance premiums tripled and in some cases quadrupled Insurance companies who paid more than $57 billion to cover damage from additional storms in last few years. At that time an outcry by residents quickly subsided as home prices and home valuations rocketed higher grabbed our attention.

In recent years I had clients take a wrap around 2^nd mortgage to avoid PMI along with a very high insurance deductible to lower premiums and control payments.

David Lereah, former chief economist for the National Association of Realtors, said “In the South, the insurance issue is having a meaningful negative impact on sales; insurance is definitely becoming a factor in sales.”

The higher premiums shock is being felt by all, including renters and investors owners who have been forced to take on a much larger share of the risk of hurricane damage through higher deductibles in some cases jumps in cost of a few thousand per month.

There are no real alternatives for homeowners. While premiums on the homes of individuals have doubled or tripled, real estate and insurance people say the cost of coverage has risen because their value routinely represent a much higher concentration of risk for insurers . The increased short-term interest rates has caught many home owners in a “can’t pay, can’t sell, can’t refinance” vise in which increases in their adjustable rate mortgage payments are outpacing their income growth while their homes have not appreciated enough to cover the cost of a refinanced mortgage or to allow them to sell and walk away. Some of these borrowers who bought homes with ARMs have seen house values rise sharply in recent years, providing ample room to switch to a loan with higher interest but less risk. Some borrowers whose loans are being reset are simply taking out new ARMs that carry a fixed rate for three years or less. But others are seeking to avoid further increases in the future.

Increased request from past buyers to restructure their existing mortgages point out in some cases their inability to qualify for a fixed conventional loans. They are faced with devaluation of their property and can no longer avoid the PMI premiums when wrap around mortgage is blended into a new loan. They forgot our advise when speculation of 2^nd home purchase and flipping, buy real estate as if you are going to own it, because, you may have to.

Credit Seizure flood gates being Breached!

11/20/2007 3:50:00 PM

My Analysis: The flood gates of the housing markets credit seizure are being breached with the recent Fanie and Freddie announcements. Losses at Fannie and Freddie constrain their ability to perform their role of funneling money into the mortgage market when other investors are leery of home loans, early this year Gilchrist Berg founder of $2billion hedge fund firm Water Street Capital said in recent newsletter to investors that Fannie Mae(NYS:FNM) could lose $22-$29 Billion if foreclosures increase to 6%-8% Berg said it’s not implausible that 15% of Fannie’s mortgage exposure is sub prime. As Fannie and Freddie shop for additional very near-term capital-raising alternatives.” Last week, Fannie raised $500 million with a sale of preferred stock reported 11/20/07. The two lenders must be saved. Slamming the door on the consumers home buying process will prolong the housing crisis.

Will the Sub Prime Crisis be diluted?

Posted: 7/27/2007 4:25 PM

Implications:

32.6% of new mortgages and home equity loans in 2005 were interest only. 43% of first-time home buyers in 2005 put no money down. 15.2% of 2005 home buyers owe at least 10% more than their home is worth. 10% of all home owners have no equity in their homes $2.7 trillion in loans will adjust to higher rates in 06/07 70% of borrowers who took out pay-option ARMS in the past year have loan balances larger than their initial loan. According to Reality Trac, foreclosures up 53% over a year ago. The number of homes for sale is at record highs, and inventories are higher than a year earlier. The house price-to-income (rents) ratio is off the charts. According to HSBC, in 18 states accounting for over 40% of national home values. Nationally, home prices have not declined on a year-to-year basis since 1933. Recently, prices have been dropping in the North East, West and Mid-West.

Ofheo, Fannie’s regulator, has noticed company increased its sub prime exposure in recent years, not an enormous part of their business but it has been increasing. Ofheo report due out later this year is expected to show Fannie’s sub prime exposure is moving up.

Gilchrist Berg founder of $2billion hedge fund firm Water Street Capital said in recent newsletter to investors that Fannie Mae(NYS:FNM) could lose $22-$29 Billion if foreclosures increase to 6%-8% Berg said it’s not implausible that 15% of Fannie’s mortgage exposure is sub prime. That’s more than half of the roughly $40 Billion in capital Fannie had at the end of March.

A great deal of discussion about the housing downturn (Bubble) has focused on inventory and new home builder slow down.  However Sub Prime lending and ARM’s maturity in the next few months have my attention and expect it to have a continued significant negative influence on the housing markets.

Home loan lending readjustments heading up ward will have a greater motivation to the home owner to sell as the valuations of the homes continue to pull back. My buyers concerns weigh in on the side of caution to remain on the side lines for more assurances that their fears of buying a declining investment or low equity appreciation. Add this to the consumer sentiment pull back and jobs reports from affects of the auto industries will be played out across Americans collective living rooms. This creates a bearish scenario that few realtors and consumers have seen in the housing markets.

From the Realtor community it is one thing to be attentive to the buyer vs. seller motivations, but rarely has there been events where this volume of homeowners mortgage readjustments are to play out over the next few years as mortgage valuations go negative on their primary homes. These events will take years not months to work its way through the market that has been operating on an irrational false wealth affect that has come to its end.

Here are some facts to consider. Quoted from Comstock Partner.

32.6% of new mortgages and home equity loans in 2005 were interest only

43% of first-time home buyers in 2005 put no money down

15.2% of 2005 home buyers owe at least 10% more than their home is worth.

10% of all home owners have no equity in their homes

$2.7 trillion in loans will adjust to higher rates in 2006 and 2007.

70% of borrowers who took out pay-option ARMS in the past year have loan balances larger than their initial loan.

According to Reality Trac, August foreclosures up 53% over a year ago.

The number of homes for sale is at record highs, and inventories are 59% higher than a year earlier.

The house price-to-income (rents) ratio is off the charts. According to HSBC(NYS:HI), in 18 states accounting for over 40% of national home values, the price-to-income ratio is 3.6 standard deviations above the mean.

The OFHEO index of house prices deflated by the consumption price deflator has soared to a record high of 350 from 250 in 2001. From 1976 to 1996 it never was above 220.

Nationally, home prices have not declined on a year-to-year basis since 1933. Recently, however, prices have been dropping in the North East, West and Mid-West.

Some studies show that the housing industry and all its related activities have accounted for 30% to 40% of the entire employment growth in the current cyclical expansion. In addition it has been well demonstrated that mortgage equity extractions have been a cash cow providing home owners with hundreds of billions of dollars that have gone into consumer spending. With housing already in a hard landing, it will be extremely difficult to avoid a disruption in other sectors of the economy.

24 months ago analyst dubbed the housing market as a Goldilocks scenario. Low mortgage finance, abundant supply of existing and new homes, home ownership over 70%. Not to cold, not to hot, just right. That analogy did not conclude how the the nursery rhyme finished with the bears coming home in the end.

Orlando’s a Mouse Trap.

Implications:

Posted: 10/25/2006 4:12 PM

Competition for tourist dollars provides other alternatives to relocation.

Prices continue to reflect a cost to develop, without support growth at any cost.

Speculation has moved on.

This is what a buyers market looks like.

Analysis:

The numbers in the article reflect an overall market readjustment playing out in many other over-heated markets across the country, especially in areas such as South Florida.  The report lists the continued strength of moderate priced units in condos and town homes – this reflects a continued market for those types of homes. The dips in the housing market, specifically in Orlando, should not be measured by the overall housing inventory which includes existing home sales and new construction, and single family and multi-family developments.  Each number should be observed and evaluated on its own not as part of the overall market place.

The inventory of existing homes for sale, while down compared with August’s total, still represented a 10.3-month supply in September.  Anything more than six months’ worth of inventory is generally considered a “buyers” market. A BUYERS MARKET is what is taking place, a natural trend which takes place after such an unsustainable pace over the last 10 yrs.

My advice to my relocation customers still remains the same in a buyers market as it was during the crazy atmosphere which proceeded: “buy a home as if you are going to live in it and use it, because at some point you may have to.”

 

NAHB Forecast. Orderly adjustment in housing market.

Implications Posted: 10/9/2006 2:33 PM

Housing adjustment taking place not as catastrophic event as being portrayed.

Pull back to 2003, a banner year in it’s own right.

Housing activity and valuations to adjust in selective over loaded markets by Overvaluation of 35%.

Mortgage Equity withdraws was not driver for consumer spending

Analysis:

National Association of Home Builders Teleconference – 09/27/06

Presentations by NAHB Executives and invited Economist.

NAHB forecasts an orderly adjustment in the housing market with smaller affects on GDP than what had been suggested. New and existing home sales expected to decline 26% from 1^st quarter of this year into end of 2008. As expected the areas in the Northeast, Florida and California will pull back from overvaluation of 35%. It is expected that nationwide excess in the housing downswing will continue to work off excess inventory with builders pulling out all the stops with incentives and trying to minimize cancellations. Until those actions are widespread, I don’t see many who are into their contracts to sit on the sidelines looking at devaluations in their pre-constructed units as new buyers are coming in at a lower price.

Some historical points of view:

Housing has never been on the leading edge into a recession. Prior housing downturns followed recessions and were a result of higher rates or other economic factors such as employment downturns or financial crisis. Most of the price adjustments have occurred and the flippers and speculators have already moved on after creating an excess of purchased units this is most apparent in South Florida, Vegas, California, and Arizona. I would expect a rapid adjustment in price will flush out contract holders on new units in the coming months and project housing construction to pick up after this event takes place in the 4th Quarter of 08.

Builders are buttoning down and trimming expense side of operations and plan to make capital adjustments short term. They believe that the housing activity is in line with 2003 housing activity which was a banner year. They feel a pull back from 2006 construction pace is needed, and an orderly correction of new home inventory is expected in 2007 as we work through inventory that was far above previous peaks.

Expect the buyers to come back into the market in 2008 as net worth affect and consumers using home equity to build assets by paying off debt to strengthen their portfolio. Consumers have not used their equity as a piggy bank for consumption but instead reduced debt payments and made home improvement to bolster the value of their homes.

Home Price “Booms” Always followed By “Bust”?

Posted: 10/6/2006 1:47 PM

No! And, nationally, home prices have never declined.

According to a study released in May 2005 by the Federal Deposit Insurance Corporation (FDIC), most local market price booms in the past were followed by periods of price appreciation slowdowns that allowed other economic factors – including household income and housing supply – to catch up. Check out the study, Historical Evidence of U.S. Home Price Booms and Busts 1978-2003 for more detail on the subject.

Analysis:

Further, the limited number of FDIC-documented price “busts” occurred in markets where the local economy was under considerable stress and job losses were heavy, such as in the mid-1980s in Houston and other oil patch markets when oil prices collapsed. Could the employment tracking growth and in the case of Detroit be a prelude to the housing market. Or as the following article points out the increase in affordable housing with respect to minority home ownership.

Home Sick Mortgages.

This analysis is solely the work of the author David DePhillips, It has not been edited or endorsed:

Implications, Posted: 9/21/2006 7:08 AM

Ofheo, Fannie’s regulator, has noticed company increased its sub prime exposure in recent years, not an enormous part of their business but it has been increasing. Ofheo report due out later this year is expected to show Fannie’s sub prime exposure is moving up.

Gilchrist Berg founder of $2billion hedge fund firm Water Street Capital said in recent newsletter to investors that Fannie Mae could lose $22-$29 Billion if foreclosures increase to 6%-8%  it’s not implausible that 15% of Fannie’s mortgage exposure is sub prime. That’s more than half of the $40Billion in capital Fannie had at the end of March.

Analysis:

A great deal of discussion about the housing downturn (Bubble) has focused on inventory and new home builder slow down. However Sub Prime lending and ARM’s maturity in the next few months have my attention and expect it to have a significant negative influence on the housing markets.

Home loan lending readjustments heading up ward will have a greater motivation to the home owner to sell as the valuations of the homes continue to pull back. My buyers concerns weigh in on the side of caution to remain on the side lines for more assurances that their fears of buying a declining investment or low equity appreciation. Add this to the consumer sentiment pull back and jobs reports from affects of the auto industries will be played out across Americans collective living rooms. This creates a bearish scenario that few realtors and consumers have seen in the housing markets.

From the Realtor community it is one thing to be attentive to the buyer vs. seller motivations, but rarely has there been events where this volume of homeowners mortgage readjustments are to play out over the next few years as mortgage valuations go negative on their primary homes. These events will take years not months to work its way through the market that has been operating on an irrational false wealth affect that has come to its end.
Here are some facts to consider. Quoted from Comstock Partner.

·32.6% of new mortgages and home equity loans in 2005 were interest only.

·43% of first-time home buyers in 2005 put no money down.

·15.2% of 2005 home buyers owe at least 10% more than their home is worth.

·10% of all home owners have no equity in their homes

·$2.7 trillion in loans will adjust to higher rates in 2006 and 2007.

·70% of borrowers who took out pay-option ARMS in the past year have loan balances larger than their initial loan.

·According to Reality Trac, August foreclosures up 53% over a year ago.

·The number of homes for sale is at record highs, and inventories are 59% higher than a year earlier.

·The house price-to-income (rents) ratio is off the charts. According to HSBC, in 18 states accounting for over 40% of national home values, the price-to-income ratio is 3.6 standard deviations above the mean.

·The OFHEO index of house prices deflated by the consumption price deflator has soared to a record high of 350 from 250 in 2001. From 1976 to 1996 it never was above 220.

·Nationally, home prices have not declined on a year-to-year basis since 1933. Recently, however, prices have been dropping in the North East, West and Mid-West.

Some studies show that the housing industry and all its related activities have accounted for 30% to 40% of the entire employment growth in the current cyclical expansion. In addition it has been well demonstrated that mortgage equity extractions have been a cash cow providing home owners with hundreds of billions of dollars that have gone into consumer spending. With housing already in a hard landing, it will be extremely difficult to avoid a disruption in other sectors of the economy.

24 months ago analyst dubbed the housing market as a Goldilocks scenario. Low mortgage finance, abundant supply of existing and new homes, home ownership over 70%. Not to cold, not to hot, just right. That analogy did not conclude how the the nursery rhyme finished with the bears coming home in the end.

 

FHA The last shoe standing.

FHA Likely To Be The Next Shoe To Drop

The FHA is a big reason that home prices haven’t fallen even further. The FHA’s aggressive lending programs have continued throughout the housing downturn, causing its market share of the mortgage industry to grow from 2% in 2005 to 23% today. The FHA is an even larger percentage of the new home mortgage industry, with nearly 25% market share, according to HUD.

The FHA insurance fund, however, is likely running dry. According to a report from mortgage finance experts (click here to read the report), the FHA will not meet its minimum requirement as of its fiscal year-end, which is only 27 days from now. For months, we have been investigating this and reporting our findings to our clients.

While almost all of the experts believe that Congress would support the FHA if necessary (it’s currently self-funded), we wonder if FHA officials will be under pressure to continue tightening their lending policies, which currently allow 96.5% mortgages to people with 600 FICO scores. Already, FHA has contracted its own standards to require a 10% down payment for those with credit scores below 500.

Claims against the insurance fund have climbed, with roughly 7% of all FHA-insured loans now delinquent.

Given the FHA’s September 30 fiscal year-end, this financial reality will come to light about the same time that other market forces run out of steam:

Just as the $8,000 tax credit expires.

Just as more of the stalled REO currently held on banks’ balance sheets will be coming to market.

The culmination of all these factors means housing could see another leg down later this year or early next year.

Here are key reasons FHA is volatile:

Growing Pains: FHA lending has propped up the housing market since credit tightened and seller-funded down payment assistance went away last fall. The staff required to manage and oversee the tremendous growth has had difficulty keeping pace.

Subprime Wolves: Thousands of mortgage brokers who focused on the subprime market rebranded themselves by shifting into the FHA-backed business. Approved FHA lenders grew from just over 9,600 at the end of FY07 to nearly 14,000 today, according to HUD.

Shifting Distribution: Last November’s housing bill increased the size of the loans that the FHA could guarantee. As a result, FHA lending in high-cost states rose rapidly – California, Nevada and even Florida saw their percentage of originations spike. But these are also the states where collateral value has declined the most.

No Guard Dog: It’s hard to imagine, but the FHA has no Chief Credit Risk Officer, according to several industry experts including Ann Schnare, a leading FHA and mortgage finance expert with Empiris LLC. A HUD source says they are monitoring risk, however, and FHA Commissioner David Stearns expressed his personal concern in a USA Today article this week.

HUD’s audit for FY08 (which ended 9/30/08) showed that the FHA capital ratio declined dramatically from 6.4% to 3.0%, but projected that it would remain above its statutory minimum of 2% going forward. Conditions have changed drastically since that time, and none of the volatile points listed above were factored into that projection.

In June, even the HUD Inspector General conceded that, “if more pessimistic assumptions are factored in, the ratio could dip below 2 percent in succeeding years requiring an increase in premiums or Congressional appropriation intervention to make up the shortfall.”

In a study funded by Genworth Financial, Schnare, along with Michael Goldberg of Credit Facilitator Solutions, conducted their own analysis to come up with a more realistic projection of the FHA’s capital ratio. Factoring in assumptions about future house price trends and economic conditions from Economy.com, they predict that we’ll see a huge capital shortfall against the statutory minimum capital ratio of 2% by the end of this fiscal year – a shortfall of $3 billion in FY09 and $4 billion in FY10.

Recognizing that many of the market forces buoying FHA lending are running out of steam, there is a new effort on Capitol Hill aimed at FHA reform. The bill is officially titled HR 3146, or 21st Century FHA Housing Act of 2009, and its primary focus is to beef up the FHA to handle the swell of new business and to develop a mechanism to take punitive action against unscrupulous lenders and brokers.

Without a strong and active FHA, millions of potential home buyers lose access to mortgage credit. While the FHA is self-funded, it carries the full faith and credit guarantee of the U.S. government. Since taxpayers will be on the hook for credit losses, we suspect that a number of elected officials will call for the FHA to reduce risk. At the very least, expect even tighter credit to have a serious impact on home sales.

In summary, watch the growing controversy regarding the FHA very carefully. The decisions made to allow the FHA to continue lending will have a huge impact on the housing market, particularly when so few entry-level buyers have a substantial down payment.

 

Foreclosure supports market fever, its only cure.

The government might have expected that it could have some effect on foreclosure rates by working with banks to make money available to homeowners and by setting up programs for modifying existing mortgages to reduce monthly payments. Foreclosure numbers from the first half show that none of that has worked very well.

Foreclosure filings went up to 1.9 million in the first half, according to RealtyTrac. The figure is up 15% from the first half of 2008, so the rate of acceleration is depressingly impressive.

It will not surprise anyone that unemployment is a primary cause of the foreclosures, which means that the figures are likely to be worse in the second half of this year. It also raises the issue of whether the government really wants to be in the business of saving homeowners who want to stay in their houses and of helping banks provide more credit to people who want to buy a home, especially for the first time.

Government intervention may slow the rate at which real estate prices fall and the rate at which people loss their homes, but 1.9 million foreclosures is an overwhelming number. Recent surveys show potential home buyers are still staying out of the market, based to some extent on their expectations that prices have much further to fall.

The government could withdraw from any meaningful effort to salvage home prices. There would be a certain cruelty to allowing people to be pushed out of their houses, but it is the only way for prices to quickly and brutally find a bottom. Once home prices have adjusted down anther 15% or 20% on a national basis, the concerns about buying a home may whither. The value of houses will have dropped back to where they were fifteen or twenty years ago in some markets and the bargain hunters will come out in force. Then, prices will slowly start to rise.

 

Economic Green Shoots grow from Bull Patties.

Virtually every economic statistic released is called a “mustard seed” or a “green shoot.” When the job loss goes to 540,000 from the prior 650,000, its being cheered and presented by the ruling party because the rate of job losses is decelerating. Half a million people loose their jobs and they find a silver lineing. Treating such news in this perspective, is equal to a fly over of Katrina damage and lost touch of the sistemic missery setting in on our society.

They don’t even point out that the statistics are greatly manipulated to make them look better. The bureau of labor estimates actually have over 23 million people unemployed right now, which include the “discouraged” and part-time workers. Be year-end, we could be closer to 30 million.

The green shoots refer to the statistics showing a lower rate of acceleration. That’s why you often hear the words “second derivative,” which comes from higher math and is an expression for “acceleration.” But just because acceleration declines, doesn’t mean that the deterioration is over.

Instead, I call it “terminal velocity.” When someone jumps from the Empire State building, his acceleration stops at a terminal velocity of about 123 mph — i.e., the rate of descent no longer accelerates. But when he hits the sidewalk, he is still going 123 mph and goes splat.

All these green shoots will wither in the wind later this year for lack of water — that is, credit and corporate profits. The few profits made will be taxed away.

For now the reflation trade is alive. The game of money managers right now is to bet on a global economic recovery, which will increase demand for materials, energy and so forth. However, money managers are very often wrong. They are often forced to get into positions to not miss a move; after all, they are being paid to invest. If they miss a meaningful move, they may get fired or lose a lot of clients. So they plunge in even if they don’t trust the move. And currently they missed this short bull run and need to generate an active postion be it long or short.

We had a reflation rally in 2008. It ended in early September and brought disaster to the bulls. The popular sentiment about reflation was wrong; in fact, that’s when deflation really got going. The market doesn’t tell you anything about the future, just about the lemming response of the participants.

With the global economies withering, there is cost-cutting everywhere. No one needs large stockpiles of anything. Only China is buying, but its infrastructure is about 100 years behind most industrialized countries. China can now put all the stimulus money into catching up, but that won’t be enough to pull the global economies out of recession. Remember, China’s entire economy is only 25% the size of the U.S. economy.

All the theories behind the current rallies are wrong and will be proven so by the fall. The smoke-and-mirrors games played in Washington have for now calmed the fears of a global financial meltdown, but that’s what is really behind the rally: The “end of the world” fear is dissipating. But all the other problems remain and they will start to get attention again very soon.

The next bear market phase is when poor economic conditions come to the forefront. It’s one thing to rescue the banking system from meltdown, but a totally different thing to engineer an economic recovery when credit creation has plunged by trillions of dollars and tax burdens are soaring.

There is just “no gasoline in the tank” to fuel a recovery at this time, and Washington tax policies will ensure that any little spark of recovery will quickly be extinguished by higher taxes.

 

Storied Real Estate Franchise, soon faces it’s own foreclosure.

US News and World Reports 1 of 15 companies expected to go under.

Realogy Corp. (Privately owned; about 13,000 employees). It’s the biggest real-estate brokerage firm in the country, but that’s a bad thing when there are double-digit declines in both sales and prices, as there were in 2008. Realogy, which includes the Coldwell Banker, ERA, and Sotheby’s franchises, also carries a high debt load, dating to its purchase by Apollo Management in 2007 – the very moment when the housing market was starting to invert from a soaring ride into a sickening nosedive. Realogy has been trying to refinance much of its debt, prompting lawsuits. One deal was denied by a judge in December, reducing the firm’s already tight wiggle room.

Realogy Insists It Will Survive 2009
In response to recent US News story, 15 Firms That Might Not Survive 2009,

Realogy had this to say:

As of January, there were 88 other companies with the identical Moody’s Speculative-Grade Liquidity rating as Realogy. In short, your highly speculative blog post used a set of data to analyze Realogy without any further consideration of the broader context or our company’s strengths and proactive measures in this economy. Thus Realogy was unfairly lumped into a category in which we do not belong.

· During the past several years Realogy has moved aggressively to mitigate the impact of the economy on our company. We have successfully reduced our overhead by more than $350 million and continue to focus on maximizing the effectiveness of our cost structure;

· As we have focused on costs we have been equally focused on growth. In spite of the woes of the housing market we have made great progress in advancing our company. From new franchise sales to the retention of the top-tier brokers and sales associates to signing new clients at Cartus and Title Resource Group, we continue to be forward thinking and highly focused on the future of our company and the industry;

· In 2009, we expect to benefit from considerably lower interest rates since a significant portion of our bank debt is tied to LIBOR;
· None of our corporate debt is due until at least 2013; and
· Unlike many companies in today’s economy, we have the support and commitment of one of the best-financed private-equity firms in the country, Apollo Management. Private-equity funds managed by Apollo Management and co-investors originally invested $2 billion in Realogy so clearly Apollo has a substantial ongoing interest in the success of Realogy. If there is any question as to Apollo’s overall financial strength, one need only look to Apollo’s success in raising approximately $15 billion in capital last month for its newest investment fund.

 

Obama’s “Placebo Economics”, Will not prevent a Depression.

Cynical New York hotel clerks will soon be asking incoming guests, a refrain quoted from the great depression of the 1930’s. “You want a room for sleeping or jumping?”

The majority of the recent stimulus plan will not find it’s way into the public hands for a few more quarters. At which time if we have not seen some flattening of this down turn be prepared for a very long protracted economy and lost decade measured in GDP under 1%. We currently erased the last 12yrs of wealth creation and my humble opinion is watch for valuations on real estate, buying power and disposable income to pull back to levels of early 1990’s. WHAT! I make my assumption on the real estate barometer and the valuations of the bulk of foreclosures priced at pre-bubble levels. That bubble had its formation in 1990’s.

So with all this governmental programs and the political firestorms over the budget or the deficit, all the $trillions spent on a stimulus (set aside the TARP program) will it work or is it just

“PLACEBO ECONOMICS”?

Dictionary Web site defines an economic depression as a prolonged period of recession, or a significant and prolonged downturn in the economy. Characteristics of an economic depression include declining business activities, falling prices, rising unemployment, increasing inventories, public fear and panic.

Economists differ in their opinion of what exactly constitutes recession and depression. Many define recession as two or more quarters of reduced Gross Domestic Product (GDP). GDP measures national income and output for a country’s economy. Per capita GDP is often used to measure the standard of living, with the thought being that as GDP rises, so too does each citizen’s standard of living. Hence, measuring GDP provides clues as to the overall health of the economy and a glimpse into the health of an individual’s wallet.

When the economy moves into a recession, the country’s economy enters a period of negative growth. Real income declines, unemployment rises, and industrial production wavers. If a recession continues for a long time, the economy moves into an economic depression.

Waves of economic growth and contraction constitute the normal ebb and flow of free market capitalism. Throughout its history, the United States economy has undergone periods of boom and bust, with short and sharp economic downturns followed by growth that is considered normal.

However, in the late 1920s, an event happened that changed the world. From 1929 to the early 1940s, the United States and many industrialized countries worldwide experienced a prolonged and deep economic downturn. The Great Depression forced millions into unemployment, homelessness, and near-starvation.

At its worst point, unemployment in America soared to 25%. A decade of easy credit created a false sense of prosperity, while farmers struggled under heavy debt and declining farm goods prices. The ensuing market correction in 1929 evaporated the fortunes of many, with the entire population suffering as consumer demand dropped, jobs disappeared, and factories shuttered against declining orders.

Government intervention, in the form of public policy changes and job creation, improved conditions. The onset of World War II and rising demand for manufactured goods to support the war effort officially ended the Great Depression.

Is the United States entering another period of economic depression? Some economists point to the housing market bubble burst of 2007 as the start of a prolonged and severe downturn. The sub prime mortgage debacle, coupled with more and more factories turning overseas for cheap labor, has many worried that the United States is entering a dark economic period. Others, however, see the current economic downturn as merely a typical correction in the free market economy. Only time will tell whether this is a bump in the economic road or a major detour.

 

Time for ” Looking Backward” socialist view.

Since my days of radicalism of the early 60’s one book, “Looking Backward” has rung out a guidance of caution to me over and over. From the S&L failure to the dot.com bust, to the current financial carnage. I have read this book over 20times since then, for a perspective look into the financial abyss created by the financial services industry on the backs of the real estate assets. The following except rings true this week of stress testing our banking institutions. Enjoy, Think and remember it was authored in 1870’s

” By way of attempting to give the reader some general impression of the way people lived together in those days, and especially of the relations of the rich and poor to one another, perhaps I cannot do better than to compare society as it then was to a prodigious coach which the masses of humanity were harnessed to and dragged toilsomely along a very hilly and sandy road. The driver was hunger, and permitted no lagging, though the pace was necessarily very slow. Despite the difficulty of drawing the coach at all along so hard a road, the top was covered with passengers who never got down, even at the steepest ascents. These seats on top were very breezy and comfortable. Well up out of the dust, their occupants could enjoy the scenery at their leisure, or critically discuss the merits of the straining team. Naturally such places were in great demand and the competition for them was keen, every one seeking as the first end in life to secure a seat on the coach for himself and to leave it to his child after him. By the rule of the coach a man could leave his seat to whom he wished, but on the other hand there were many accidents by which it might at any time be wholly lost. For all that they were so easy, the seats were very insecure, and at every sudden jolt of the coach persons were slipping out of them and falling to the ground, where they were instantly compelled to take hold of the rope and help to drag the coach on which they had before ridden so pleasantly. It was naturally regarded as a terrible misfortune to lose one’s seat, and the apprehension that this might happen to them or their friends was a constant cloud upon the happiness of those who rode.
But did they think only of themselves? you ask. Was not their very luxury rendered intolerable to them by comparison with the lot of their brothers and sisters in the harness, and the knowledge that their own weight added to their toil? Had they no compassion for fellow beings from whom fortune only distinguished them? Oh, yes; commiseration was frequently expressed by those who rode for those who had to pull the coach, especially when the vehicle came to a bad place in the road, as it was constantly doing, or to a particularly steep hill. At such times, the desperate straining of the team, their agonized leaping ad plunging under the pitiless lashing of hunger, the many who fainted at the rope and were trampled in the mire made a very distressing spectacle, which often called forth highly creditable displays of feeling on the top of the coach. At such times the passengers would call down encouragingly to the toilers of the rope, exhorting them to patience, and holding out hopes of possible compensation in another world for the hardness of their lot, while others contributed to buy salves and liniments for the crippled and injured. It was agreed that it was a great pity that the coach should be so hard to pull, and there was a sense of general relief when the specially bad piece of road was gotten over. This relief was not, indeed, wholly on account of the team, for there was always some danger at these bad places of a general overturn in which all would lose their seats.
It must in truth be admitted that the main effect of the spectacle of the misery of the toiler at the rope was to enhance the passengers’ sense of the value of their seats upon the coach, and to cause them to hold on to them more desperately than before. If the passengers could only have felt assured that neither they nor their friend would ever fall from the top, it is probable that, beyond contributing to the funds for liniments and bandages, they would have troubled themselves extremely little about those who dragged the coach.
I am well aware that this will appear to the men and women of the twentieth century an incredible inhumanity, but there are two facts, both very curious, which partly explain it. In the first place, it was firmly and sincerely believed that there was no other way in which Society could get along, except the many pulled at the rope and the few rode, and not only this, but that no very radical improvement even was possible, either in the harness, the coach, the roadway, or the distribution of the toil. It had always been as it was, and it always would be so. It was a pity, but it could not be helped, and philosophy forbade wasting compassion on what was beyond remedy.

 

Survey shows bargain hunters are eager to buy real estate this year

Tuesday, 17 February 2009

Property investors are looking beyond the gloomy headlines and still looking to buy real estate abroad with the UK and India among the top ten places to invest, it is claimed.

The annual survey of new investors by property investment Jet-to-Let magazine shows there is a shift towards bargain properties especially in the UK and US.

Over 36% of investors said they wish to invest in foreign property in the next 12 months, with 27% keen to invest in the next six months, the 2009 survey shows.

The number one preferred country for investors was Cyprus, which is unchanged from 2008, with France and the United States ranked second and third. There were three new entrants this year, India ranked at five, the United Kingdom ranked at eight and Greece in joint tenth place with Turkey.

There are presently fantastic bargains in the UK for investors with the foresight and courage to see beyond the current economic climate. This is particularly so if buyers are holding strong currencies such as the US dollar or Euro which can add an extra 20% in terms of value.

France and Spain will always be in the top ten for UK and Irish buyers, but the relegation of Spain to number six reflects the change in market conditions and an erosion of confidence in the Spanish market.

The United Arab Emirates is fifth, Italy in seventh place and Morocco at nine. Brazil and Germany dropped out of the 2009 top 10 league, after being featured last year.

Given the current economic climate and the negative media coverage of property investment, this survey shows that investors can see beyond today and realize that property has few rivals in terms of medium to long-term prosperity and risk.

This is a moment of opportunity for investors and those who take action will reap the benefits in years to come. Caution and patience searching for properties should remain the order of the day, as I have advised for the last 30yrs, ” purchase real estate as if you are going to live in it, you may have to”. We will not always be in a recession and the economic policies being adopted now, will eventually bear fruit. The catalyst for a recovery will be a return to lending by banks around the world.

 

TARP – No Bank Left Behind Funding.

Last week, a five-member congressional oversight panel harshly criticized how the U.S. Treasury has so far spent the first $350 billion tranche of the Troubled Asset Relief Program (TARP). The bulk of that money has been used to inject capital into a wide range of potentially viable but ailing banks, giving the government an ownership share in return for these funds. The panel had several complaints about the way TARP has been run, but its basic criticism — widely held among members of Congress and the public — was that the Treasury has not required the banks to use the money for increasing loans to business and consumer borrowers.
These findings have strengthened a growing interest in Congress to condition approval of the program’s remaining $350 billion on a mandate that the Treasury not only track the funds but also require that they be used primarily to make new Main Street loans — to support homeowners facing mortgage defaults, struggling municipalities and other troubled segments of the economy.

The criticisms behind this sentiment are misguided. For one thing, the position of banks is dire, and lending is almost sure to contract even if TARP is fully successful. Furthermore, while “following the money” might seem like the right thing to do in terms of accountability and oversight of federal tax dollars, it is actually infeasible because bank loans typically cannot be traced to a particular source of funds — banks get their money for loans from a variety of sources, such as borrowing from other financial institutions and government or through private injections of new capital.

Much of the criticism of TARP reflects a fundamental misunderstanding of the basic financial problem that the program was intended to address. The first goal was to ameliorate the large and long-lasting contraction in lending that was the inevitable consequence of the mortgage-related losses by U.S. banks. This credit squeeze has already depressed bank lending and, if unabated, threatens to radically deepen and prolong the recession. It is unrealistic to expect troubled banks to make a lot of new loans. Only when the banks are stabilized can we expect them to raise new private capital to expand lending and fuel an economic recovery.

Look at the facts and the numbers: An International Monetary Fund analysis in October found that global banks and other lenders are likely to suffer losses of about $1.4 trillion from defaulting U.S. mortgages and consumer and corporate debt. (About half of that total is mortgage losses.) These losses, once recognized on the books of financial lenders, reduce their capital by an equal amount. That capital is the “backup” behind a lender’s overall portfolio of loans and other investments. In the United States, each dollar of lender capital supports, on average, more than $10 in loans and other assets; the “leverage ratio” varies among different institutions and different kinds of assets.

Bank supervisors, following a complicated set of regulations, are charged with keeping bank capital from falling and remaining below a “safe” level. If a bank’s capital does dip below certain levels, the bank is required to limit its lending. Equally important, as its capital falls relative to its assets, the bank would be considered increasingly risky by private markets, raising its cost of borrowing, lowering its stock price, and reducing its ability to attract new capital and expand its loans and investments. In short, for every $1 million of losses on bad loans, a bank must reduce its portfolio of loans by around $10 million, unless it can obtain new capital to offset the losses. Unchecked, this “deleveraging” process poses a serious threat to the economy.

The IMF has estimated that, without large infusions of government funds, U.S. and European banks over the period 2008-13 would be selling assets and failing to renew existing loans to the tune of $10 trillion, equivalent to a whopping 14.5 percent of their loan portfolios. More than half of this lending contraction would occur among U.S. banks. At this stage, therefore, TARP’s success has to be judged not in terms of how many new loans it produces but what problems it has prevented — fire sales of assets and the cutting off of credit lines.

So far, the TARP capital injection has reduced the size of the problem, but the problem remains large. We are not against providing additional help directly to homeowners, but any substantial diversion of TARP funds away from their central task would be a serious mistake and could worsen this very nasty recession. A restored financial sector must play its part in ending the recession and sustaining an economic recovery. Congress should release the second half of the TARP funds with rules that can actually be enforced and recognize what the program is trying to achieve — a recapitalization of the banks to limit any further contraction of lending.

 

Be it ever so humble, new home mortgages @3.99%

Keep the TARP money directed toward banks and allow the housing market to heal thy self. With one example to watch this month comes from Toll Brothers Builders. Their recent offering of 3.99% mortgage loans on new units is the best example of the real estate market adjusting to market demands. AS IT SHOULD and will if the feds stay away and the self promoting real estate organizations lobby efforts for FED intervention falls short.

One of the nation’s largest builders is trying to shock the flatlining new-home market into action with an incentive plan that will slash monthly mortgage payments for qualified buyers.

Luxury homebuilder Toll Brothers Inc., said Wednesday that it will offer buyers of its existing new-home inventory a 30-year, fixed-rate mortgage at an interest rate of 3.99% with no points paid up-front. That contrasts with a rate of 5.59% for the average 30-year, fixed-rate mortgage with 0.3 up-front point, as reported this week by Bankrate.com.

A buyer taking a Toll Brothers mortgage, as opposed to the 30-year rate quoted by Bankrate, could lower their monthly mortgage payments to $1,988 from $2,391, a savings of $403 a month on a $417,000 loan (the maximum mortgage loan that will be bought or guaranteed by Fannie Mae (FNM, Fortune 500) or Freddie Mac (FRE, Fortune 500) in most places).

 

“Financial Gravity The Science of Lending”, here it comes.

12/16/2008 4:16 AM

Lets get back to financial gravity as a rule of lending. No more no loan docs. or liar loans or no credit FICO reports.  Resets are not the answer to the cascade of mortgage failure. Pouring Capital on the problem is not the answer, getting back to basic laws of lending will heal the wounds of this credit amputee.

Analysis: Implications.

As lawmakers and housing advocates push the federal government to help cut the foreclosure rate, Comptroller of the Currency John C. Dugan offers this sobering statistic:More than half of loans modified in the first quarter of 2008 still fell delinquent within six months.

Dugan based his statement on data collected in a survey of institutions that service more than 60% of all first mortgages, or 35 million loans worth $6 trillion.

Experts say one possibility is that the modifications might not have lowered monthly payments enough to be truly affordable.

There are individuals for whom any loan modification would result in a mortgage payment they can’t afford, because they couldn’t really afford the original mortgage in the first place.

A well respected banker noted to me recently,

“After years of requiring stultifying documentation of checking, savings, stocks, bonds, credit bureau reports, income tax returns, personal financial statements, the mortgage lenders threw out most of these requirements to speed up the process.

Credit scores became the proxy for evaluating a potential borrower’s willingness to repay, and income verification became passé.  Low doc’s devolved into NO doc’s, especially as mortgage brokers combed the streets looking for borrowers who didn’t have most of the traditional stuff, anyway.  Alas, credit scores reflect recent past–when the borrower had a job, was happily married, was law abiding.  Credit scores are slow to pick up on unemployment, divorce, and imprisonment.

Three C’s of CREDIT, character, capital, and capacity, were basically jettisoned.  The reliance shifted de facto, by process of elimination, to collateral and conditions, the fatal assumption being that the economy would continue to grow and collateral would keep on appreciating.

Unfortunately, there is such a thing as “Financial Gravity”, and you know the rest of the story.”

 

Expect Expansion of the Fed Money $upply, before years end.

Rates are already very low and are not playing much part in the credit crunch that is strangling the economy.

Investors should know that the Fed still has plenty of ways to stimulate the economy, even with rates near or at zero.

The bottom line on Fed policy is supply of money. The Fed typically targets the price of money, but, with the price so low, it will focus on increasing the quantity of money through its balance sheet.In a word,, PRINT MORE MONEY. Inflation is not on the horizon.

Many in the real estate industry have relied upon the rate sheets to provide some guidance of the forward velocity of their marketplace.  However, with credit rates currently sinking to levels not seen in generations the affects of increase sales are not improving against the foreclosure trends.  Additionally we should expect 2009 to bring forth the affects of  0% financing and Option ARM’s to start to reset in the spring of 2009. This tide of credit leverage may have a negative affect on the consumer spending and credit activity.  The home equity loans  and Option ARMs marketplace may become a victim of the job market downturn and fear which comes during those times of negative job growth. Hold onto equity leverage without non fixed capital cost.  If possible place tang-ables  necessities in long range free and clear of the income stream. Expect credit leverage to loosen in 1st Q. of 2010 ….yes 2010.