Daily Archives: April 8, 2013

Kill the 30-Year Mortgage | North Salem Real Estate

After a devastating cycle of bubble and bust, the U.S. housing sector is on the road to recovery. New homes are being built at the fastest rate in years and prices are increasing across the country. Foreclosures are down and the number of “underwater” mortgages has declined by almost 12 percent since the peak at the end of 2011. Even Fannie Mae and Freddie Mac, the mortgage-finance companies in conservatorship since 2008, are reporting record profits.

What’s wrong with this picture? None of this would be possible without massive government support. Today, the government owns or guarantees about 90 percent of new mortgages, up from about 50 percent in the mid-1990s. It isn’t sustainable, let alone fiscally acceptable, for the U.S. to have such a domineering presence in what should be a private-sector function.

The housing recovery now under way creates a perfect opportunity to plan for the future of U.S. mortgage markets. Several recent innovations in mortgage finance by economists and academics are worth considering.

First, it helps to understand the origins of today’s situation. Before the New Deal, people bought houses by borrowing for a few years at a time. They only paid interest until the loans matured, at which point they would make a large payment or refinance. That worked well enough until house prices collapsed during the Great Depression. Lenders refused to refinance, hoping to get paid in full. Many borrowers defaulted; about 10 percent of homes ended up in foreclosure.

Downward Spiral

To prevent another downward spiral, the U.S. came up with the self-amortizing, long-term, fixed-rate mortgage. It enticed lenders into offering these products by promising to buy mortgages that conformed to certain underwriting standards. That’s where Fannie Mae and Freddie Mac come in: They bundle loans into securities, then sell them to private investors. For a fee, the government absorbs the risk of borrower default.

As long as house prices were relatively stable, the new system worked. But once prices soared, only to collapse a few years later, scores of homeowners defaulted. A cascade of foreclosures further depressed prices as more houses were dumped onto the market. Economists say this was responsible for 20 percent to 30 percent of the decline in home prices from 2007 through 2009. It was the Great Depression all over again.

The biggest challenge going forward is separating the choice to buy a house from the decision to make a leveraged bet on housing prices. Right now, when a borrower puts down $50,000 to buy a $500,000 house, she doubles her equity if the value of the house goes up to $550,000. The lender, however, has no claim to any of that appreciation. Alternatively, if the price declines to $400,000, the borrower is suddenly in the hole. She has a strong incentive to default, leaving the lender in the lurch.

Outside the U.S., floating-rate mortgages, where monthly payments rise and fall with the short-term interest rate, help borrowers deal with some of this volatility. Interest rates generally move in line with the health of the economy, so these mortgages are more flexible for both borrowers and investors. This approach effectively allows borrowers to refinance even if they are underwater, yet it does nothing to reduce the risk of default and foreclosure associated with negative equity.

The U.S. must figure out a way to better manage these risks if it is to turn housing back over to the private sector. Fortunately, economists have lots of ideas. The common theme is that mortgage principal should be keyed to economic conditions, and monthly payments should rise and fall proportionately. These features ensure that borrowers have a stake in repaying their loans, while also making it easier for them to do so when times get tough.

Continuous Workouts

These new mortgages would also damp the swings in spending that come from the wealth effect. Robert Shiller, the Yale University economics professor and co-founder of the widely used Case-Shiller index of home prices, and colleagues have modeled a few versions of a product called a “continuous workout mortgage.” In essence, the Shiller loans would allow borrowers to pay higher interest rates upfront in exchange for the right to lower principal and monthly payments when house prices go down.

These loans might be right for some people, but we prefer another idea: Mortgages with principal and monthly payments that move with an index of neighborhood home prices. As prices rose, so would monthly payments. Conversely, if prices fell, monthly payments would, too. These might be more attractive to borrowers since they wouldn’t have to pay higher rates upfront. Instead, they would compensate lenders by passing on the gains from house-price appreciation.

Borrowers would still have an incentive to maintain their property because they would keep (or lose) any change in the value of their house relative to the prices of their neighbors’ homes. Investors’ demand for these products would probably be strong, given their demonstrated eagerness to gain exposure to single-family house prices by buying them outright.

The government and the private sector have an interest in this sort of financial innovation. Right now, investors have little appetite for mortgages that lack government guarantees, partly because they were badly burned by misrepresentations the last time around. But if the U.S. ever hopes to reduce Fannie’s and Freddie’s dominance in the marketplace, as its regulator, the Federal Housing Finance Agency, recommends, the country needs to accept that the 30-year fixed loan — a financial product from our grandparents’ generation — has outlived its usefulness. We can create a better housing market by encouraging the development of more resilient mortgages that don’t depend on federal default insurance.

To contact the Bloomberg View editorial board: view@bloomberg.net.

Consumers’ views on home prices remain at record high | South Salem NY Real Estate

Home price expectations remained at a high in March, with almost half expecting an increase in the next year, according to data released Monday by government controlled mortgage buyer Fannie Mae.

The share of respondents who said home prices will increase in the next 12 months remained at 48% in March, matching February’s record high, according to Fannie

/quotes/zigman/226360 /quotes/nls/fnma FNMA . That share is up from 35% in March 2012. The data go back to June 2010, so after the housing bubble burst. The average 12-month home price change expectation fell slightly to 2.7%.

“Despite an uptick in concern expressed about the direction of the economy, it appears consumers believe that the housing recovery will march on,” said Doug Duncan, Fannie Mae’s chief economist, in a statement.

Another 37% of respondents said they expect prices to stay in the same in the coming year, while 10% expect prices to decline. Fannie’s poll included 1,004 Americans, and was conducted between March 2 and March 25.

Consumers’ upbeat views on housing prices follow months of positive news on the housing market. Year-over-year prices have been gaining since mid-2012, according to the S&P/Case-Shiller Home Price Index that follows 20 cities. Despite recent gains, home prices remain about one-third below bubble peaks.

However, when it comes to their personal finances and the economy, Americans remain concerned. According to Fannie Mae, the share of respondents who said the economy is on the right track fell three percentage points to 35% in March from 38% in February. Meanwhile, those expecting their personal-financial situation to worsen over the next 12 months rose four percentage points to 21% from 17%. These findings echo a recent report on consumer confidence that found gloomier expectations among respondents.

Why aren’t views on personal finances keeping pace with expectations for home prices? The answer may be found in wealth effects, which track increased spending from those who feel more confident given sustained asset-price gains.

“There is a growing understanding that households respond differently to wealth gains that are simply recover­ing from past losses, as opposed to gains that lift wealth to new highs. The former results in more muted wealth effects,” wrote Beata Caranci, deputy chief economist at TD Economics, in a Monday research note.

–Ruth Mantell

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CB Previews International Draws the Line on Pocket Listings | Waccabuc Real Estate

As inventories shrink and buyers frantically search for homes to buy off-market, “pocket listings” are becoming more prevalent, especially in luxury markets where the appeal of keeping the entire commission can be hard to resist for listing brokers.

However, many real estate leaders are pushing back against the practice of selling homes outside multiple listing services, which often results in the listing agency representing the buyer as well and earning both sides of the commission, known as dual agency. They’re concerned that large numbers of pocket listings will compromise the effectiveness of MLSs and skew the level playing field that is a hallmark of the cooperative system. The absence from the MLS of large numbers of properties for sale, especially if they are concentrated in a single price tier like luxury, diminishes the accuracy of listings-based market price reports that consumers and professionals rely upon to track market trends. Above all, these leaders worry that sellers are getting talked into staying off the MLS when it is not in their best interest.

In recent years, celebrities in the LA market and elsewhere have chosen not to list their homes to avoid publicity. More and more sellers of higher priced homes are using off-market sales techniques to test the market before for their homes before going onto the MLS. In super-heated Northern California markets, where prices are appreciating at double digit monthly rates and inventories are down by 40 percent on the year, sellers don’t need the MLS to find buyers and pocket listings have been on the increase. A number of agencies and at least one Web site now specialize in serving the pocket listing market, using social media to market pocket listings to networks of agents. (See Pricey Pocket Listings Put a Dent in MLS Dominance).

Off-market sales techniques and dual agency can cause serious legal problems for brokers and agents even in states like California where dual agency is legal. Concerned about the rise of off-market sales, the California Association of Realtors’ legal department distributed a Q&A on April 4 that discussed how pocket listings can lead to a civil suit for violating California Real Estate law for breach of fiduciary duty, how withholding information about listings violates the Realtor Code of Ethics and how the failure to make information available to all buyers can lead to federal Fair Housing Act violations. CAR is also hosting a webinar April 24 for members on “The Pressing Issue of Pocket Listings.”

In an interview with Real Estate Economy Watch, one of the nation’s leaders in luxury real estate spoke out against the pocket listings and shared her concern for their impact on organized real estate.

“If the seller is fully informed and provides written consent not to place their home on the MLS, then I’m not concerned,” said Betty Graham, president of Coldwell Banker Previews International/NRT, the Realogy franchise’s luxury brand. “But I’m not sure that’s the case in many of the pocket listings I have seen. The fact is that our first responsibility is a fiduciary responsibility to act in the seller’s best interest and with a pocket listing there is a great potential to violate that fiduciary responsibility.”

Ms. Graham has been observing pocket listings in the LA celebrity market for years. Before heading up Previews International, she was the president and chief operating officer of Coldwell Banker Residential Brokerage in the greater Los Angeles area. In her 30 years as an agent and broker in Malibu and elsewhere in the LA market, she represented such luminaries as Rod Steiger, Dustin Hoffman, Charles Bronson, George C. Scott, Cecily Tyson, Cleavon Little, LeVar Burton, Madonna, Sean Penn, plus five transactions with Johnny Carson.

“Often sellers will start out off the MLS, and then change their mind. Jennifer Anniston didn’t list her Beverly Hills house on the MLS but after a month or so it didn’t sell. When she put it on the MLS she sold it immediately,” she said. Candy Spelling, widow of the late TV producer Aaron Spelling and mother of actress Tori, tried to sell her $150 million home as a pocket listing for two years and it sold in a few months once she listed it. The sale was the top price ever paid for a home in Southern California.

Ms. Graham said another risk in marketing pocket listings is private showings to select buyers. “Many luxury buyers want to be the first to see a new listing, and sometimes they will pay more if they are. But if they are not, their interest in that property may be diminished,” she said.

“When you list on the MLS, it is a level playing field where all buyers have equal access,” she said.

Finally, there is the problem caused when a seller hires more than one agency to handle a pocket listing. “A seller will often tell several brokers they can have a ‘pocket’ on the listing. Which listing broker should a buyer work through? This creates confusion in the brokerage community for a broker representing a buyer,” she said.

Coldwell Banker Previews International is a dominant force in Beverly Hills and the greater LA celebrity market, and under Betty Graham’s leadership, a force discouraging the use of pocket listings. Advocates of pocket listings, like Andrew Clark, co-founder of Pocketlistings.net, deny the ethical and legal concerns raised by Betty Graham, CAR and others, and talk about the benefits for brokers rather than the consequences for sellers.

“Pocket Listings are not illegal, they are not unethical, and they are not unfair. The only people that complain about them are the agents that don’t have the wherewithal to adjust to the changing landscape that is marketing real estate for sale. It’s high time an alternative to MLS comes along, and it’s just a matter of time before MLS, as we know it today, either adapts or goes away,” writes Clark. “The argument about hoarding commissions is just untrue.”

Resolving unreasonable cleaning charges | Bedford Hills NY Real Estate

Q: I recently moved out of a rental home. I know that I can be charged for damages to the property, but I am not sure about the cleaning. My understanding is that I can be charged for any cleaning that is reasonable. Of a $2,500 deposit, I was charged $1,600 for cleaning based on a $35 per hour rate. That seems rather excessive to me and very unreasonable. How is “reasonable” defined?

A: The tenant-landlord laws vary depending on the state in which you live. In some states you are responsible for all cleaning that is necessary to remove any dirt or debris that wasn’t there at the time you moved in. Nonetheless, in many instances there are various issues that arise in which a landlord or property manager deals with an element of what is considered a “reasonable” cleaning charge.

I can see two aspects to the concept of reasonable in your question. One is that you are likely referring to the fairly standard language that the tenant should be charged only for damage that is “beyond ordinary (or reasonable) wear and tear.” In the case of cleaning, generally there is no exemption or allowance for “ordinary or reasonable wear and tear,” and the tenant is responsible for all of the costs of cleaning.

Another aspect of your question is whether $1,600 is a “reasonable” charge for the cleaning of your rental unit. At an hourly rate of $35 per hour, this equates to more than 45 hours of cleaning unless there are some charges for removal of trash or other items that you left or abandoned at the property.