The New Architects and the Re-Construction of the Real Estate Market

The New Architects and the Re-Construction of the Real Estate Market

by Hassan Nicholás

At this moment, as you are reading, another headline signaling the collapse of the US real estate market is going to press. And so goes our desensitization to the current reality. In this day and age where mortgage delinquencies, subprime lending, and housing inventory are at historical highs it can be easy to have a casual attitude about our real estate market. Perhaps we have been so inundated with "doom and gloom" headlines that we have found acceptance in our fate and have resigned to the fact that if we're going to ride this wave, we got to get our feet wet.

In many ways this crisis will change the way people think about real estate in general. The so-called "American Dream" as picturesque as it sounds, has been nothing short of a nightmare for many homeowners...and even potential home buyers. Now that the "lions" and "vultures" have feasted all that we have is a shell of that "dream". When we decide collectively that we want to rebuild these abandoned neighborhoods, revive the market, and open up feasible opportunities who will be part of the re-construction?

Nonprofit Organizations

If there is a lesson to be learned it is that the home buyer must do their due diligence and not walk blindly into one of the biggest purchases they will ever make in their lifetime. Housing agencies and community development organizations target these individuals in hopes that through proper preparedness and education one can avoid making costly, emotionally devastating, sometimes unmanageable decisions.

Imagine how many families would have been saved if uneducated borrowers were fully explained adjustable-rate mortgages? Or even the correlation between their FICO score and their interest rate? Yes, some of the foreclosures are tied to the reckless spending of greedy "investors", first-timers trying to get rich off of real estate, and speculation. However, within that cloud we also find families who were simply victims; targeted by shady real estate professionals. To purchase requires a significant amount of money and likewise the buyer should invest a significant amount of time learning as much as they can about their purchase. First-time home buyer workshops offered through the aforementioned groups illustrate the home buying process to the would-be buyer as well as provides resources that can otherwise be difficult to access.

However, a homeownership education workshop is not a panacea for the inevitable. Even those who were well-informed purposely chose to dive head first into something they knew they couldn't afford - allowing greed to blind them. It is not the speculators that need education, rather the person seeking the "American Dream" - they are ones that need to be enlightened. Another group that would benefit, are of course, the current homeowners who risk foreclosure.


Policy Makers

To curb foreclosures from metastasizing any further Congress has been scrambling to put together new legislation that would alleviate the financial squeeze for distressed homeowners. A bill approved by the Senate in April of this year would give tax breaks to owners of foreclosed homes - a measure that would make the prices of "starter homes" (those that a first-time home buyer would typically start out with) artificially high - benefiting only the banks that own the foreclosed property.

Additional pressure has fallen on the weight of some of the very agents that helped perpetuate the trend of reckless lending, the big banks. Lenders such as Countrywide and GMAC have had to beef up their foreclosure prevention efforts and extend more opportunities for existing borrowers facing foreclosure. The government sponsored HOPE NOW initiative attempts to identify at risk homeowners for loan modification and restructuring, but the success that this program will achieve is yet to be seen. A California state plan called for a similar approach - but one that was limited only to borrowers who were current on their payments. It is the "limited spread" of assistance that concerns many real estate professionals and homeowners. FreedomWorks, a grassroots organization that promotes individual liberty held an educational event in March of this year for policymakers - outlining inequities found in the government's 'bail out' approach. There has been other vocal attempts coming from the real estate field to suggest a different approach for helping distressed borrowers, but until any major movements are made, options for borrowers will remain the same.

Much of the success of these programs is dependent on the leg work of the assigned nonprofit housing agencies to identify and serve eligible households. Counselors from these agencies are trained and certified to represent the borrower in all activities and correspondence with the lender and/or mortgage servicer. With their help, a borrower may be exposed to loan modification, forbearance, or any other workout plan. Other proposals have been aimed at re-working how down payment assistance programs work for first-time home buyers.

Affordable Housing Advocates

Advocacy groups supporting affordable housing initiatives can be instrumental in connecting public concerns (nonprofit organizations) with private and government backing. ACORN (Association of Community Organization for Reform Now) is one of the most vocal groups - taking their 'Stop Foreclosures' campaign nationwide. NeighborWorks, "a national network of more than 230 community-based organizations in 50 states" launched 1 888-995-HOPE, a government supported foreclosure prevention to address the needs of the many struggling homeowners.

As the US real estate crisis drags along one can imagine that years from now, when we have fully recovered, will we have learned our lesson? Most certainly most people, owner or renter, has become enlightened by this experience. Adjustable Rate Mortgage, 80/20, and short sale have entered our everyday vernacular. The real estate agent and mortgage lender professions have had their image tarnished. Consumers are more weary, lenders are more strict, and counselors are overwhelmed.

I can say that this whole debacle has certainly changed the way I view real estate and undoubtedly affected my approach to teaching homeownership to first-time home buyers. However, even amongst the "doom and gloom" there is light at the end of this tunnel.

When will this Crisis End...Seriously? Part II

When will this Crisis End...Seriously? Partii: Lost In Speculation
by Hassan Nicholás

The Doomers Perspective


Great time to buy? You're probably better off waiting. There is strong evidence that we are witnessing the beginning of what will be one of the most destructive periods in our otherwise polished economic history. In it's glory days the real estate market allowed owners, first-time homebuyers and investors alike, to purchase homes with little or no money down, stated income, and "loose" allowances. Enter the moral hazard risk that, at the moment the future values for real estate fall, owners can walk, not limp, away from their investment. Cursory lending standards provided the perfect incentive for shady deals to come to fruition. There was money to be made...on both ends.

Not only did the housing bubble give spectators and buyers the ilusion that they would turn an immediate profit, it also convinced developers to build things that shouldn't have been built, encouraged consumers to spend what they didn't have, and allow banks to loan money to those people through bundled loans sold in the secondary market. So for a while lenders, real estate professionals and buyers happily indulged in "Mickey Mouse" transactions in a fantasy world supported by inflated (perhaps, with helium) prices that now seem laughable.


Everyone played their part in artificially appreciating the real estate market beyond what it could handle. But now we know the truth; we paid too much for our houses, banks lent out too much money for what homes were really worth, we were simply too wreckless with our credit. And on top of that, we had greedy lenders, agents, and appraisors orchastrating those transactions. The point is home prices are still years ahead of incomes, even with prices falling all around us, and you still want to buy? Foreclosure rates have risen in Southern California and with more resets on the horizon, we can only assume a percentage of those resets will lead to foreclosure. Inventory is up. As buyers, we have much more selection. And this is fact. But even if you can afford it, will you be lining up anytime soon to buy a (still) overpriced cookie-cutter McMansion in a decaying neighborhood laden with vacant homes? Not to mention the late developers that will add a batch of newly constructed, quickly deppreciating homes to the inventory. Just recently I received an email from the developers of the nouveau hip Santee Lofts downtown offering $100k free money incentives to be used towards purchase price, HOA fees, or upgrades. A month before that they were giving away $60,000. Panic, perhaps?

Sure, the market for real estate is in a falling - and so is the market for first-time homebuyers. Banks and other financial institutions tied to the Market have clearly experienced substantial losses as well. The outcome is that lending standards and practices have tightened. 100% financing is hard to come by, stated income is a thing of the past, and your credit risk is scrutinized a lot more carefully. Monies reserved for low and moderate income first-time homebuyers by the Government are now being used to bail out existing homeowners. And since banks themselves must pull back on how much money they can lend, first timers will have to compete with other buyers in the same pool of financing. Let's not even mention that home prices are still historically high for many.

What makes now, NOT a buyer's market is because everyone is feeling the squeeze. Unemployment, rising costs of everyday necesities (hello inflation), and limited credit will impact the incomes of many. Until sellers realize it does not matter what they think their home is worth, but what buyers feel it is worth paying for, we continue to see this drop. If you're reading this you might be amongst the many waiting for the market to bottom out so you can snatch up your dream home at cheap. Collectively, you're pushing prices down farther too. It's a waiting game that great rewards, but serious risks involved.

The only route out of our current real-estate-bubble-inspired economic malaise is realizing a new "real estate reality". Current home owners and amateur investors must recognize that some of the prices we saw over the past couple of years were an anomaly, just like enourmous gains Internet stocks realized in the '90s. Prices are falling in SoCal, but they still got a ways to go before they stabilize. Buying today could be a $100k mistake.

If there's one thing we should learn from all of this is we can no longer be casual homebuyers. We need to be savvy and smart.

"Become wealthy, knowledge is King." - Nasir Jones

First Came the Lions, Now Heed the Vultures

First Came the Lions, Now Heed the Vultures

The Lambs, Lions, and Vultures of Today's Real Estate Scams
by Hassan Nicholás

And so goes the scene...

We open to a flat, barren landscape. An unforgiving sun hangs high in a cloudless sky. The naked earth resembles an abandoned wasteland, except for the pockets of dusty shrubs and aged trees hunched over. From the left a herd of gazelles move mechanically through the terrain. They stride cautiously, often pausing to scan the incessant horizon. What do they know? Behind the dry shrub, peering from the thick trunk of the trees a lioness awaits. The sun paints her coat a golden orange as she quietly preys. Her clan positioned behind her, steadfast and also patient. And then, suddenly everything stops. The gazelles in their herd, bodies frozen in time, eyes staring blankly sense their fate approaching. Within seconds they are in full flight; scattered yet moving in unison, kicking up dust in their organized confusion. The lioness and her clan follow closely behind, several times hurling themselves at their fragile bodies. They escape with their lives, but leave one. And so it seems the lions have not yet lost their pride. The gazelle, a trespasser to his own land, committed the error of putting too much faith in his own kin. With all the tenacity he can muster, he fends off the feeding of the lions, but not before his blood is drawn. Many moments later we find him, far from his herd, still haunted and dazed by the ambush. With the sun quickly easing into the horizon, he collapses to the ground overcome by fatigue. Then we hear the sound. Against the backdrop of an orange tinged sky a wake of vultures hover, circling their next victim, until they descend upon him gently like leaves falling through the wind.

They are the Lions
The mortgage crisis has exposed the underbelly of an American dream. Real estate agents, lenders, and brokers - defenders, protectors of the homeowners' financial and emotional equity have handed in their integrity in favor of greed. By now we have all become familiar with their modus operandi.

In "Fraud for profit" schemes mortgage insiders such as appraisers, real estate agents, loan officers, and lawyers, like in the wild, often work in teams to take down their prey. After falsely inflating a home's value they obtain a large mortgage using false identities or a "straw buyer". Once the house is "sold" to the buyer, they split the profits and disappear. According to a recent report by TowerGroup, a financial consultancy in Needham Massachusetts lenders will incur nearly $2.5 billion in losses as a result of mortgage fraud this year.

Another type of mortgage fraud prevalent in the post-real estate market crash was the popular "Cash back at closing" scheme. Predatory buyers, such as a greedy real estate investor, locates a home on sale for...let's say $250,000. Then, after obtaining an intentionally inflated appraisal, the buyer receives $320,000 from the lender. The investor recruits a "straw buyer" (using someone else's identity to purchase property) whose name will appear on the deed and mortgage. The seller is paid $250,000 while the buyer (investor) pockets the $70,000 difference. And with profits secure, the buyer lets the home go into foreclosure. Though there is nothing illegal about cash-back-at-closing deals in which all details of the transaction are disclosed to the lender, the opposite is true; if the mortgage company is tricked into lending (far) more than what the value of the property is, it is fraud.

These are the Vultures
The lions came and they feasted. Look around and it's hard to over look the remainders of their gluttony. The increasing inventory of houses are swelling up local markets, driving down prices further from the artificially high ones set by the predatory investors, the lions. They have turned neighborhoods to graveyards, houses a mere skeleton of an American dream turned nightmare. So, no, the chase has not ended. Though the lions retreated to their dens, some to lick their wounds, they left what remained to the vultures. And it is them that lurk in the shadows looking to take advantage of the injured homeowner. Enter foreclosure scams.

Sales agents search for troubled homeowners, who appear on lists used by banks and credit agencies to show owners approaching foreclosure - usually attracting them through mailings and poor marketing (have you seen those bland flyers that look like they took 5 min. to put together?). The sales agent offers an arrangement that sounds too good to be true; the owners put an "investor" on the home's title. In exchange, the homeowner will agree to pay a rent much smaller than the original mortgage payment that they can't afford. The "investor" takes out a new loan, and through misleading paperwork, gives the investor the right to replace the homeowner's name on title. Shortly thereafter, the "investor" stops making payments on the loan, pockets the proceeds from the equity of the home, and allows the homeowners to get evicted or foreclosed upon.

Distressed homeowners targeted by what appears to be a faith-based organization, nonprofit, or any other entity that appears trustworthy targets soon-to-be foreclosed homeowners. Just as in the aforementioned scam, homeowners sign over their ownership rights to a "surrogate owner" who in turn continues to receive payments from the homeowner. Many times the homeowner enters an agreement from six months up to two years of making monthly payments, with the promise that their home would be "returned" in their name once their credit score recovers. Instead, the home goes into foreclosure anyways, the theif disappearing with months or even years of collected payments.

Here Are the Lambs
Starting in 2009 buying a home will get costlier. In a recent agreement with New York State Attorney General Andrew Cuomo, Fannie Mae and Freddie Mac will only buy mortgages from lenders that use independent appraisers. Since these two companies account for more than 70% of all mortgage loans, pretty much all lenders will comply. As it stands, mortgage brokers are required to have only one appraisal for each deal. The broken can then include it with applications to as many lenders as they please. However, with this change a different appraisal will have to be ordered by each lender that the home buyer applies to. Because that is an extra cost to the lender, it will be passed down to the buyer. If the buyer is shopping around this would lead to multiple appraisals being ordered - potentially costing a buyer between $1,000 to $2,000. Now this puts the mortgage brokers business in jeopardy, because the buyer could save costs by dealing directly with a lender. Still, if you look at the numbers the costs of additional appraisals does not come close to how much money is lost when a home is over valued.

Another threat that I see on the horizon is down payment assistance scams. Unfortunately, there's another predator first-time home buyers should be aware of - and this one may not be feline nor carrion. I've seen several websites pop up advertising access to down payment assistance programs to potential buyers. And I've heard from clients who've attended free conventions at luxury hotels promising thousands upon thousands of down payment assistance program money and grants (free money in this this market? I think not!), all of which either don't exist or are obsolete, to the tune of $1,000. But, if you can't afford that, they will sell you a CD on how to locate these programs for just $25. And so the chase continues. Who will come when the vultures leave?

Perhaps the hyena...

Drop in Federal Funds Rate = Drop in Mortgage Rates?

Drop in Federal Funds Rate = Drop in Mortgage Rates?
by Hassan Nicholás


By now, we are all pretty accustomed to the bleek news that's reported daily about the failing real estate market. You might have even become desensitized to it and found other crises to worry about. So when we hear that the Fed announced another rate reduction, how should we respond? The little bit of optimism that we have left might tell us that we can expect a drop in mortgage rates, right? The short answer and probably most accurate is, we don't really know.

It's probably not the answer you wished for or what you've been reading from all those popular real estate discussion boards you're a member of. But my teachings in economics is begging me to resign to that fact that we can't predict the unpredictable...beyond predicting it's unpredictability (that's one for the books!).

So what does happen when the Fed reduces its rate?

For the sake of not boring you, I will keep this related to you and your interest in purchasing a home. When the Fed reduces the rate it is an attempt to stimulate the economy and encourage business. The Fund Rate is basically the rate of interest banks are charged for short-term loans.
Changes in the Fund Rate affect you because things such as credit cards, auto loans, ARMs and HELOCs (home equity lines of credit) are based off the Prime rate, which is derived from that rate of interest. So, when the Fed lowers the rate loans pinged to the Prime rate become cheaper. You will be more likely to break out the plastic in the department store, take out a car loan, or borrow money to expand your business - basically, you will be encouraged to spend and heat up the frozen credit market. Conversely, Certificates of Deposits and your online bank account at ING Direct will yield less.

Where does mortgage rates come in, you say? Since mortgage rates are long-term loans, they are less affected by changes in short-term rates. Mortgages are sold to investors as asset-backed debt called MBS (Mortgage Backed Securities). Basically, a piece of your mortgage is bought by a pool of investors, who then technically "own" your loan. The mortgage servicer, who you write your checks to, is the entity that "holds" the loan. The value of MBS are fixed, so when the future future value of MBS goes down the rate of interest to the homeowner will go up. However, this is not guaranteed. We have infact seen interest rates fall when the Fed made adjustments. [See where they're at now.] Historically, current mortgage rates are at a low, so instead of waiting for the housing market to bottom out or predict where mortgage rates are going, it might give you peace of mind (and save you money) to buy now...that is, of course, if you can afford it. But, we'll discuss whether or not now is the time to buy in another thread...