Nevada Real Estate >> Las Vegas Real Estate Specialist: Nevada: Las Vegas: Spanish Trail

The two large GSEs, or government sponsored enterprises, that provide much of the liquidity to the secondary mortgage market are trying to improve their still misbehaving portfolios. Their underwriting guidelines have been steadily getting stricter which will certainly help, but most of the benefits of that will come later. The home loans currently causing such havoc for them were originated around the peak of the real estate bubble and soon after it spectacularly blew up into small particles. Their efforts are now largely focused on putting the breaks on the losses they are presently enduring.

Mortgage lenders requested to repurchase GSE's delinquent paper

When Fannie Mae and Freddie Mac audit distressed mortgage loans in their books and to their utter disbelief discover that their eligibility and underwriting guidelines have not been adhered to they can request the lenders to buy them back. Or they can ask to be compensated for the incurred losses. Fannie Mae's repurchases amounted to $1.8 billion in the first quarter, while at the same time in 2009 the same action brought in $1.1 billion. Freddie Mac, on the other hand, is to rake in $1.3 billion from distressed mortgage loans it sent back in the first quarter, whereas last year in Q1 it took home $789 million. For both the repurchase pace is obviously accelerating, indicating how feeble the housing market remains.

As mortgage lenders and servicers have to take back loans it saps their financial resources, choking in various degrees their channels of originating new ones. It can be especially harmful to mid-size and small banks whose revenue streams are limited, or heavily dependent on the home loan segment. Large lenders can better absorb Fannie Mae's and Freddie Mac's buy-back requests due to their diversification and sheer size. And should they still manage to stumble, as they obviously can with surprising flair, there is always Uncle Sam only a cell phone call away. Basically, that's why the recently-passed Wall Street reform bill was so sorely needed.

The entire mortgage lending platform is still operating under a big caution flag. The two GSEs are desperate to collect on these repurchases to give them some hope of a better future. These requests, however, suck badly needed energy from home loan providers who some time ago sent them carelessly underwritten paper. According to Freddie Mac, at the end of March around 34% of its unsettled buy-back demands were more than 90 days past due. Many mortgage providers simply lack the capacity to honor their contractual obligations. The weak is trying to get the other weak to pay up, making plain how fluid the situation still is.

The residential real estate market is on a turbo-charged roller coaster ride. One day the news is encouraging in the form of increased existing home sales over previous months. Or that housing prices are beginning to stabilize across the country. Pieces like that will get mortgage and housing industry observers and homeowners from Las Vegas to Miami all perked up and dreaming of a brighter tomorrow. And then out of nowhere all that good feeling and improved adrenalin flow is coldly shattered by another report saying that it's not over until it's over. And it may get worse before getting better.

LPS Applied Analytics, a mortgage data service shop, now estimates that it would take nearly nine years, or 103 months, to dispose of every bank foreclosure currently on their books - in other words REOs, real estate owned - and all the property that'll be foreclosed on in the next few years, given the pace of sales of foreclosures over the last several months. A cold-blooded assessment that certainly will make Washington policy makers consider redrawing some of their HAMP and other plans. In March mortgage lenders had roughly 1.1 million foreclosed homes in their inventory, continues LPS Applied Analytics. About 4.8 million additional home loan borrowers were already 60 days or more past due on their payments, a large majority of whom would end up swelling their distressed accounts even more. This so called shadow inventory grew by 30% from the same time last year.

Southern Nevada - home to North Las Vegas, Summerlin, Anthem, Rhodes Ranch, Green Valley, Mountains Edge and Silverstone Ranch - predictably is one of the leaders in this bothersome development. Being underwater is a serious problem in Las Vegas valley, causing many mortgage borrowers to abandon their homes even though many could afford to meet their payment obligations. What's the use when it may take ten or more years to swim dog-paddle back up to the surface? Others simply don't have the money to send in checks due to high unemployment. The severity of the situation in Vegas likely will take longer than close to nine years - LPS' estimate - to sell all the distressed property. It is possible mortgage lenders might speed up the rate of sales down the road, flooding the market with more listings, but that would then hurt price levels and bring them more financial agony.

In essence, LPS analysis points out to a long-term supply-flavored real estate market where prices will remain stagnant, hurting home loan providers' ability to mend their ill-treated books. Their mortgage underwriting criteria is going to stay tight as well while this uncertainty and supply-demand imbalance works its way through the system. Regardless, the housing market does have a pulse. Home buyers, especially first-timers, and real estate investors are deeply in love with rock-bottom housing prices common in many areas, including Las Vegas, and no one can complain about the still affordable mortgage money either.

Price-rent ratio is one good way to gauge whether a particular housing market's values are stable or not. The popular ratio is figured by dividing a city's median home price by its median annual rent. A pretty basic calculation that will actually say a lot. The national historical average has been 15, according to Marcus & Millichap, a California commercial real estate brokerage. That's where it again stood at the end of the third quarter of 2009, having retreated there from almost 21 where it had soared to during the housing bubble's climax in 2005.

By many real estate yardsticks, a price-rent ratio under 15 translates into a market where home values are considered quite stable. On the other hand, anything over it, and especially higher than 18, signals that prices remain soft and are likely to erode further. Unless a large down payment is used, going underwater - mortgage balance is higher than property value - in the coming months becomes a real danger.

Southern Nevada - featuring communities like Summerlin, Anthem, Mountains Edge, Canyon Gate, Spanish Trail and North Las Vegas - housing values have for the most part taken a brutal beating during the notorious downturn. It has thrown scores of Las Vegas mortgage borrowers into the underwater pool that has left them trapped in their homes, a development that will negatively affect future housing demand here. It has helped, though, move the price-rent ratio to the stable range, settling in the third quarter of 2009 at 15. The chances therefore are slim that values will drop any further, and if they do, it ought to be minor and subdivision-specific. The sources for this computation were Marcus & Millichap Research Services, Federal Housing Finance Board, NAR and Reis Inc.

Las Vegas sporting 15 as its score places it high in still another desirable national real estate ranking. It has for months "dominated" bad-boy lists that have measured such dynamics as mortgage foreclosure rates, price declines and underwater homeowner ratios. Finally there is something to cheer about. This time Sin City was tied for sixth place in the "most stable" category. The top spot went to Cleveland with a score of 12.

This is particularly useful information for renters who are thinking about buying a home using today's affordable mortgage money. They have understandably had concerns about possible further price erosion in Las Vegas valley and have as a result put off purchasing real estate now. This metric should give them something concrete and positive to rely on. Since prices tend to vary quite a bit between subdivisions, it's also advisable to do a thorough market analysis, preferably through a real estate professional, to ascertain which neighborhoods are the steadier ones before signing on the dotted line.

Photo by mandj98

The government has burned the midnight oil for months in an effort to help distressed homeowners deal with mortgage payments they can't afford and possibly find a way for them to stay in their homes. HAMP, or Home Affordable Modification Program, and other similar programs haven't really produced the results they were designed for, though. It is also almost single-handedly running the massive mortgage market today, pumping sufficient liquidity into it that in turn has kept interest rates record low. Despite its pro-active programs it can't do it alone. It needs the private home loan industry to play ball, which it simply hasn't done.

Lately the private mortgage brotherhood has given some indications that it's willing to shift gears, as it obviously is learning the hard way it really should do so. For instance, when a foreclosure claims a home it often gets thrashed inside and outside. Appliances, cabinets of all sorts and other equipment also tend to slide right out the door. To bring the property back to normal for resale can quickly become an expensive endeavor.

CityMortgage just kicked off an experiment that will offer wayward homeowners who can't qualify for loan modifications incentives to make their eventual exit venom-free. For starters, it'll allow some distressed mortgage borrowers to continue living in the house for an extra six months without any payments so long as they voluntarily give up ownership, called deed in lieu of foreclosure in the legal world. The program also dangles $1,000 or more in relocation costs once the move-out time comes, sometimes called cash for cooperation or cash for keys. The property has to be kept in its present condition, is the stern requirement from CityMortgage. For now it'll only be good in a handful of states.

Nevada is not among them. Especially distressed Las Vegas mortgage borrowers would like to see anything that could help come their way. In fact, it's a bit surprising that the pilot program doesn't include Southern Nevada, for here if anywhere the mortgage and real estate calamity has flared tempers against the banking sector and something like this would ease those hard feelings. True, some mortgage lenders presently have the cash for keys going on in Vegas, but since the problem is so widespread much more is needed.

If CityMortgage's initiative proves halfway fruitful for everybody, then it's reasonable to assume that other home loan providers will jump in with their own projects. Who knows how much this type of thing will help, but at least it's an adjustment in the right direction.

Homeowners who are upside down and facing mortgage payment trouble are increasingly being approved by their lenders to do a short sale, a process where the bank accepts less for the property than what the loan balance is. They amounted to roughly 12% of real estate sales at the end of 2009. Short sales generally are time-consuming and nerve-wracking and can cause to those involved in them heart palpitations and other physical harm. That often happens when there is only one mortgage, or lien, on the home.

When there is a second lien behind the first mortgage, things get even more hairy. Second mortgages became popular during the bubble buildup for various reasons. In a short sale the first lien holder gets what the market bears, although still absorbing a stinging loss, and the second lien holder gets nothing. But the thing is that the second mortgage holder has to drop the lien for the short sale to go through. If it refuses to do so, the home sinks into foreclosure. Often negotiations between the two will give the second lien holder something and increasingly this is what is happening. Everything is done on the table and is legal.

However, they normally get only small change and evidently some of the big mortgage lenders are unhappy about that. They want more. It's becoming more common, according to industry sources, for them to ask real estate agents and home buyers to pay them extra under the table. Off the official HUD settlement sheets, because should the first mortgage holder know about this it would promptly veto the short sale. These payments allegedly take place before closing, so once the cashiers checks clear they'll permit the short sale to proceed. Legal experts who know RESPA, or Real Estate Settlement Procedures Act, say that based on its charter this is illegal.

Las Vegas valley - including Henderson, Silverstone Ranch, Summerlin, Southern Highlands, Anthem and Aliante - housing market is flush with underwater homes and therefore has a ton of short sale contracts underway. It's only fair to assume that many buyers and real estate agents here are hearing these requests as a condition to get their deals closed.

Several of the mortgage industry flag bearers supposedly are involved in this. Their activity is rather curious. They are already under fire for not helping enough in the home loan modification efforts and now these quite serious accusations bubble to the surface. Apparently they feel they can do just about anything they please. Besides, if these payment requests are illegal, where are the regulators? The Treasury, HUD and FTC, or Federal Trade Commission, should already be all over this.

Early on after the real estate bubble burst the home loans that went bad were largely subprime and the general feeling then was that the defaults would pretty much stay in this particular segment. Lo and behold, slowly the Alt-A type of mortgage, once thought to be on really solid footing, started feeling the heat, too. The avalanche didn't stop there either. Defaults are now hitting the luxury homes that were supposed to somehow bypass the wrath of the mortgage gods, at least that's what many industry observers believed.

Mortgage payments on roughly 12% of loans over $1 million nationwide were 90 days or more past due in September, reports First American CoreLogic, Inc. a California research shop. Let's compare that to some other numbers. For home loans under $250,000 the corresponding figure was 6.3%, about half less. For every mortgage around it stood at 7.4%. One more. In September of 2008 it was 4.7% for mortgages north of $1 million. In short, in one year the figure has nearly tripled and that is mildly alarming.

Las Vegas valley - with communities like Summerlin, Anthem, Southern Highlands, Mountains Edge, Lake Las Vegas, Spanish Trail and Canyon Gate - luxury homes probably have even higher default rate due to the serious downturn of the once-booming housing market. Parts of Arizona, California and Florida, at least them, are other areas similarly affected. No market segment obviously is immune to the economic forces of the real estate collapse.

Many high-end homeowners have resorted to short sales to deal with the issue, so long as the mortgage lender goes along with the plan. It can be a tricky proposition, however. Let's say a nice mansion has a mortgage of $1.5 million on it and now the price is only $900,000, a 40% drop. The property is gloriously underwater. The bank would have to take a bath to the tune of $600,000, if sold like that. That's tough to swallow all in one shot. In comparison, a house with a $300,000 mortgage that is 40% underwater would be sold for $180,000, amounting "only" to a $120,000 write-off. Big, big difference for the mortgage lender.

When things fail to work out some homeowners decide to tiptoe away in the thick of night from the property, becoming a so-called strategic default, or a walkaway. These terms really have been absent from the everyday real estate vocabulary up until recently. Now they are being talked about from coast to coast over micro beers and at water coolers, and in high places, too, as it is becoming a growing pain for those dwelling in corner offices with a view.

Jumbo mortgage defaults will keep banks that have a bunch of them in their hack-proof electronic ledgers in a precarious position for a while. Some will never make it, some will do so over a long, painful stretch of time. Overall, it'll limit mortgage liquidity and prolong a true recovery. But, it also could be the end of the default cycle that kicked off with the subprime product. If so, then after this latest mess is sorted out the mortgage and housing markets can begin rising from the fog of misery to once again become power players in the national economy. Can't wait.

Mortgage and real estate market aficionados continue to debate how to fix this bone-chilling mess. While the back and forth is going on the government has taken a leading role in actually doing something. It had to act because the private sector - let's call it Wall Street - ran itself to ground, effectively scuttling the chance it could be of any help. Despite plenty of initiatives to stem mortgage foreclosures Washington has had limited success, however, in turning things around.

It seems that identifying the real problem has been botched, to put it bluntly.

So argues a seasoned MBS, or mortgage-backed securities, analyst from Amherst Securities. Up to now efforts to prevent mortgage foreclosures through loan modifications have generally been focused on lowering the payment via lower interest rate and extending the maturity date. That, of course, has only had a marginal impact at best on the problem, as everyone knows now.

The energy should be spent instead on solving the negative equity - or underwater - headache, she asserts. Principal reduction on first mortgages should be back on the table, despite the fact that a bill allowing bankruptcy judges to do that was just recently tossed in Congress. The other key concern is the second mortgage. Investors in them have been dragging their feet in dealing with loan mods, often flatly refusing to go along with any reasonable proposals. First or second mortgage holders still are slow in accepting the uncomfortable truth that giving up at least some principal would likely be to their benefit. Coping with the costs of fixing foreclosed homes and paying taxes, attorney's fees and real estate agent commissions can pile up over time and put a genuine dent on the bottom line. Near as anyone can tell, bankers do lose sleep over that.

Las Vegas valley - with Henderson, Southern Highlands, Silverstone Ranch, Summerlin, Anthem, Rhodes Ranch and Mountains Edge among its communities - mortgage borrowers know all about being underwater. Increasingly they are walking away from their homes, leaving their lenders with an asset that will bring them much less than owed on it in a foreclosure sale. Besides, now they have a vacant property in their hands to maintain. Lenders have been faithfully praying for a quick housing market turnaround here and throughout, but it's still many moons away. They need to wake up to the real world.

Perhaps the government can lend a hand here. Nobody wants to lose money, that's for sure. If mortgage lenders were to write off the loss of principal reduction all in one shot, good many of them would be wiped out just like that. This is where Washington comes in. It, the regulators there, could allow the loss to be phased out over a number of years; whatever, five or eight or ten years. That predictably would save the mortgage lenders and investors by giving them time to tidy up those ugly balance sheets. An incentive like this just might be the game breaker that's now needed.