Nevada Real Estate >> Las Vegas Real Estate Specialist: Maryland: Bethesda

According to Census Bureau statistics the U.S. homeownership rate remained at 66.9% in the 3^rd quarter of this year. It is actually at the lowest point since the end of 1999, the decline predictably brought on by the severe real estate turbulence that continues to roil the market to this day. For the last year the drop has been 0.7%. Interestingly, the West had the lowest percentage at 61.3 while the Midwest exhibited the highest at 71.1%.  

It could lose more ground in the coming months since mortgage foreclosures seemingly are not abating, banks are still repossessing houses by the thousands and the weak economy waters down consumer interest in buying homes. Moreover, the government currently is heavily subsidizing housing, pushing the idea that every American should make an effort to own a home. But some real estate observers are beginning to argue that the subsidies should be curtailed. Homeownership isn't for everyone, they add. And they have a valid point by just pointing at today's high mortgage foreclosure numbers. Therefore, should Washington remove some of the subsidies, it would further erode the homeownership rate.

Now, let's consider something else that may happen. 

The fact is that the deep mortgage finance and housing recession has dramatically scaled back prices, often more in the hardest-hit states like Nevada, California, Arizona and Florida than in some other parts of the country. In some newer Las Vegas suburbs values have crashed up to 60%, dragging them way down to levels last seen in the 90's. Understandably this kind of correction will put a smile on faces of many aspiring home buyers. What it does is bring the price structure to a level where consumers who couldn't afford to purchase a property a few years ago can now start looking. So long as they have confidence in the real estate market and can meet the current more stringent mortgage qualifying guidelines.  

The reworked price framework could actually keep the homeownership rate pretty much where it now is, or perhaps even nudge it upward.

The wounded mortgage industry has been working as best it can to pick itself up from the canvas, with massive support and guidance from the government. It has instituted many internal policy changes, on one hand, to correct the grave underwriting, mortgage-backed security and other mistakes made in the not too distant past. On the other, Washington has come up with its own legislative cures to prevent another spectacular mortgage and real estate collapse from creeping up on the country again. Despite the continuing uncertainty and weakness in housing, cautious optimism is also entering into the mix. Maybe the worst is over, or about to be over, many hope.

And then another unexpected lightning bolt strikes the still vulnerable home loan industry.

Evidently in their haste and lack of qualified staff - other valid reasons may come to light later - several large mortgage providers and loan servicers seemingly have signed off on foreclosures without bothering to read the documents. In essence, they have failed to carefully scrutinize them for accuracy before submitting them to courts. Borrowers are increasingly contesting their home repossessions because of this. If the process was flawed, the titles to the properties the banks received through foreclosure are smeared. While the courts are trying to untangle these challenges, in the meantime mortgage lenders can't sell their REOs - real estate owned - due to defective titles. It is possible many borrowers could get their homes back.

As a result, GMAC Mortgage - a division of Ally Financial - has stopped all evictions while it contemplates its next move. Similarly, JPMorgan Chase has requested courts to suspend foreclosure decisions for now. Bank of America has also held up foreclosures in 23 states while reviewing its documents. They - and predictably many others - are well aware of potential lawsuits and want to proceed cautiously. At this point several states - Florida, California, Iowa, North Carolina, Illinois, Connecticut and Texas - are investigating the matter. Conspicuously absent from the list are such hard-hit states like Nevada and Arizona. Logically speaking they have a load of mortgage borrowers whose homes were possibly repossessed under the faulty processes and should now be in the forefront in protecting their residents.

The worst of this could be that mortgage borrowers who lost their homes during this housing meltdown could challenge years later the repossessions. That puts a cloud on a title and the current owner, who probably purchased an attractively-priced foreclosure, say in Las Vegas, cannot now sell because of the defect. In fact, he likely isn't even the legal owner of the property at that point. Ownership rights normally surface during a title search when a property is under a sales contract. What a mess in the making. This could potentially blow up into a truly toxic situation for the mortgage lending and real estate industries desperately looking for more light at the end of the tunnel.

It appears relative calm has descended on the long-suffering housing market, especially when it comes to price movement. For months now home values have shown signs of stability, and even moderate increases in some areas. Real estate observers of course like to see that but are generally unconvinced that a sustainable real estate recovery is imminent. Too many hazards remain in its way, among them the still notable oversupply, a weak job market and the potential of many more mortgage walk-aways.

Yes, that walk-away - a term that has finessed its way into today's popular real estate vocabulary - where a homeowner who can afford to make his home loan payments chooses instead to take a hike due to being severely upside down. This is the standard definition of it.

Walk-aways represent 15-35% of present delinquencies, according to housing industry estimates. The range is wide because it is hard to really figure out who can afford to make the mortgage payments and who can't. But really, what does it matter; walk-away is a walk-away regardless of the mortgage borrower's finances.

As things stand, the mortgage walk-away trend is likely to shift into a higher gear for the foreseeable future. There are quite a few reasons why so. Any intermediate-term price appreciation will be modest at best, leaving people in the suffocating embrace of negative equity for much longer than they feel comfortable with. They understandably start thinking of their options. If prices backtrack some more - as some real estate experts confidently predict - the decision will be easy. HAMP and other private mortgage provider modification programs are helping to some degree in alleviating pressures on struggling homeowners, but many don't qualify. They see an alternative in walk-aways.

In addition, the shame that has been associated with mortgage foreclosures and walk-aways is gradually dissipating. More people are tackling their distress from a financial survival standpoint instead of what the prevailing moral obligation calls for. They are making decisions based on what's best for them and their families. This is also made easier as mortgage lenders now are increasingly being perceived as being responsible for the housing wreckage.

These developments inevitably point toward the mortgage walk-away problem getting worse from here on out. For how long is impossible to say. It is going to cause trouble, however, for any durable real estate market turnaround hopes.

The prevailing housing mess was for the most part caused by too many homes chasing too few buyers. That's a classic case - Economy 101 stuff on college campuses - of real estate supply and demand going their separate ways. A not just a tad, but by a mile, to put it mildly. Of course, easy mortgage money egged on the housing market to ever further heights that ultimately began defying gravity. Even that precarious stage lasted longer, despite a host of red flags being hoisted, than many real estate observers foresaw.

Moody's Investor Service recently reported that at the end of the second quarter there were an extra 1.8 million vacant homes idling on the vast real estate scene from the usual norm. An uptick from the first quarter's 1.7 million. Mortgage lenders are nowadays repossessing at an increasing pace property that homeowners could not get a modification for - like under HAMP or through their own home loan provider - and are being foreclosed on. Over the last 20 years vacant homes amounted on average to about 6% of the total housing inventory and now that number stands at 7.7%, Moody's continues.

As its own estimate for a better housing supply and demand alignment, Moody's believes an adequate balance will materialize by the end of 2012. Strict mortgage qualification criteria, thus far persistently high unemployment and less than stellar homebuyer credit background are issues that should improve by then, and help narrow the currently wide gap.

That may be true in areas where the real estate market experienced only mild blows, like kid gloves would do. Washington, D.C. metro fits well this picture. But regions that went through the tremendous housing acceleration and then a dizzying, G-force dive probably will take much longer to find a comfortable, workman-like balance. Las Vegas for sure heads the list in this category, and has uneasy company from many parts of California, Arizona and Florida. The notorious four.

One thing that would speed up the balancing process would be for home builders to curtail their current activity even more. For instance, they could cut in half the current production rate from whatever it is to quickly bring the supply side much closer to where demand is. This would pour new energy into the real estate market by propelling price appreciation and then also help boost the entire economy, jolting it out of the present lethargy. Washington has tried quite a few solutions to right the housing and mortgage markets and it ought to keep trying until it finds the real thing designed specifically for today's conditions. This might be worth taking a serious look at.

It looks like the Federal Housing Finance Agency - or FHFA - is getting ready to introduce new regulations later this year that would prevent Fannie Mae, Freddie Mac and the Federal Home Loan Banks - FHLBanks - from investing in mortgage loans tagged with these now notorious private transfer fees. This would then effectively bring major government-controlled home loan players in agreement about them, because FHA already is, according to HUD's regulations, banned from insuring mortgages on homes with private transfer fees. They are considered "legal restrictions on conveyance" in FHA talk.

These private transfer fees are brought to life by covenants attached to a deed that result in a payment to a third party every time a home is sold. The fee generally is 1% of the sales price and paid by the buyer, who may or may not know about it until he's sitting all excited at the closing table. Finding out about it typically elevates his blood pressure even further. Home builders are the ones who usually - but not always - would do this type of thing, giving them an additional, effortless revenue source for 99 years, the standard duration of the arrangement.

FHFA finds several problems with them. They hike home ownership costs up front, make property transfers more complicated and sometimes legally uncertain because regular title searches may not reveal their existence, particularly after multiple ownership changes. They can cause trouble elsewhere, too. Secondary mortgage market investors, lenders and title firms are vulnerable to possible hidden liens and title flaws.

The increased cost factor to home buyers and legal issues for mortgage industry participants are by themselves enough to cause concern. The other big issue is that the home builder who sets up the private fee structure does not provide any service or product to enable him to honestly earn the continuous stream of income. When it's finished with a subdivision, it's gone but would still collect for a long time money for free. Frankly, this seems to take us back to the creative instruments Wall Street not so long ago came up with that ultimately led to the current mortgage and real estate meltdown.

FHFA is on the right track to decisively curtail this from spreading any further. At the moment government entities control over 90% of the mortgage market, so its upcoming regulation will effectively put a stop to private transfer fees, for the good of consumers and the home loan and housing industries.

The recent oil spill has had a harsh impact on everything associated with the Gulf of Mexico and its alluring waters. One of the less-discussed issues, so far at least, has been residential real estate and how severely is it going to be affected. CoreLogic - a California analytics, business services and information boutique - has bravely ventured into the topic and has compiled some sobering numbers for everyone involved in housing to debate about.

Residential real estate values are supposed to wane in the coastal areas by $648 million for the first year and possibly rise to as high as $3 billion over five years, CoreLogic estimates. This is based on what has happened there to date, which is already quite a monster. Popular beach destinations string along from Mississippi and around the curve down Florida's west coast and hold something like 600,000 homes within 1,000 meters from the water.

CoreLogic's research is based on much-used techniques for forecasting environmental amenity values on coastal property on one side and then measuring adverse impacts on those values when a calamity like the Deepwater Horizon oil spill strikes, on the other. Like in this case, recreational use of the beaches is either limited or possibly completely restricted for a period. Buyers have paid nice premiums for homes on the water and now that extra expenditure is largely lost.

Moreover, should the already spilled oil somehow work its way around Florida and up its legendary east coast the cost would leap up to $28 billion through five years, CoreLogic reports. Florida's housing market is already on a super strong drip treatment and this would set it back even further.

Many who were planning to take advantage of today's low mortgage rates and purchase something around the Gulf of Mexico are predictably having second thoughts about that. Either they are going to wait and see or then look elsewhere, like further up the east coast, all across the Pacific shoreline and also give lakefront real estate a chance. These alternatives may experience a moderate upswing in activity in the coming months.

If the oil in the Gulf is cleaned up rather quickly and unhindered beach access is restored throughout it could lessen the expected amenity value erosion. Even so, the memories surrounding the events from the rig's explosion and demise to the inaccurate oil flow reports and the economic loss to the seafood industry and to the struggles of wildlife will long linger in everyone's mind. There are hundreds of oil rigs operating in the Gulf and their presence could harm potential buyers' trust that their coastal property investment is safe from another calamity.

Photo by divemasterking2000

Fannie Mae recently took an assertive step, in its own mind at least, to stem the growing tendency of mortgage borrowers pulling off strategic defaults. In that homeowners who could afford their payments choose to walk away from the obligation anyway. The GSE went ahead and added another category to the new policy. Home loan recipients who fail to do a workout in good faith also fall under the spell of its new guidelines. What this all means is that property owners fitting these parameters would be ineligible for mortgages backed by Fannie Mae for seven long years from the recorded foreclosure date.

Strategic default entered the already crowded mortgage and real estate vocabulary just recently when the ever thinner-skinned housing bubble couldn't hold on any more worthless air and popped. The event sent property values on a long skid toward the beckoning abyss and in the process wiped out equity in numbers not seen in modern times. Eventually home prices sank below the underlying mortgage balances and to the utter horror of observant homeowners just kept on going down, spawning the unpleasant designation for the phenomenon; underwater. And those underwater on their mortgages are prime candidates for a strategic default.

Right now Fannie Mae controls a decent chunk of the mortgage market and that gives its policy adjustment some teeth. Yet, as government-affiliated home loan providers today just about completely dominate the housing finance arena, no one else has thus far followed suit. Freddie Mac and FHA are the other major performers and predictably will then attract with their less restrictive rules much of the business Fannie Mae will be turning away.  

The private home loan sector is still struggling to rise from the ashes, but when they do so Fannie Mae's policy is bound to lose even more of its bite. Mortgage applicants - with strategic default/ foreclosure on their record - with down payment funds and solid income will be shopping for the best deal and private mortgage lenders with their innovative minds are certainly going to find a way to accommodate this specialty slice of the real estate market pie.

As things stand, Fannie Mae's policy change seems to hold minimal deterrence power for homeowners contemplating to go for the now notorious strategic default. People simply have too many options besides Fannie Mae to look at.