Bill McCord's Blog

The real estate crisis has gutted house prices, tipped millions into foreclosure, and rattled the global economy to its core. But for many would-be home buyers, the historic boom and bust have been a blessing in disguise. During the first half of the previous decade, easy credit and speculative excitement worked to make houses increasingly expensive. By the fourth quarter of 2005, median home prices had reached 2.77 times median household incomes. That is sharply higher than the 1.92 average of the 15 years ending in 2003 and too expensive for many families. But the subsequent crash in home prices–values have fallen roughly 30 percent at the national level from their 2006 peaks–has helped restore affordability to this once inflated market. By the third quarter of 2009, the price-to-income ratio–a key measure of housing affordability–had fallen below its 15-year average, to 1.84 for the nation as a whole.

Beginning Jan 2010 Silicon Valley Counties (North Santa Clara and Southern Alameda) sales prices have stabilized and some areas are now seeing small increases.

Apart from this being a normal process indicating the last stages of any financial cycle, it has been significantly driven by 5 major sources:

1. 1^st Time Buyer Tax Credits which ended mid 2010.
2. Extension of FHA and V/A maximum loan limits for High Priced Zip codes.
3. Historically low interest rates.
4. Huge increases in the number of 1^st Time Buyer programs from Federal, State, County, City, and Employment specific sources. These continue to increase and improve.
5. Major reductions in Bank Owned (REO), and Short Sale properties coming to market as Banks have beefed up programs designed to keep people in their homes where possible. This has allowed more normal conditions to have control of sales prices.

NOTE: I’m only describing my local Market here in Silicon Valley. I know conditions in other areas have been, and continue to be hit worse than us.  

The Administrations well meant efforts to make it possible for many homeowners to avoid foreclosure has stirred up a hornet’s nest among some media commentators.

The Plan described at http://www.makinghomeaffordable.gov/ uses up to $75 billion to provide incentives to holders of FANIE MAE and FREDDY MAC loans to work with Borrowers to refinance, or modify existing problem loans, rather than simply go ahead and foreclose.

This is a classic version of the glass ½ full, or ½ empty. Typically, in our current exclusively partisan media, the answer is dictated solely by political affiliation regardless of the facts.

This is unfortunate because there are legitimate reasons for supporting, opposing, or, better still, improving the current process.

One the one hand it is a legitimate effort to try to help Joe Public get through a situation brought about by failures in our economic systems. Given the Trillions of dollars being ploughed back to the very people who caused this situation, the $75 Billion allocated to this program is peanuts.

On the other hand there is a valid argument to be made that subsidizing refinances, or modifying problem loans, is simply putting off an inevitable final default. This can often hurt the very people it purports to help by having them use up scarce funds in a doomed attempt to save an impossible situation, rather than simply give the property back to the Lender and getting  on with life.

The December report on the status of this program provides ample ammunition for both schools of thought, and the regulators have shifted emphasis to try to deal with the problems showing up.

The summary shows that 728,000 loan modifications are already in the required trial phase. Unfortunately only 31,382 have completed that phase and have become permanent, saving homeowners an average of $550 per month. The low rate at which Trials become Permanent  is a serious problem raising concerns that a significant number of these modifications are simply allowing the Banks to delay acknowledging the number of bad loans on their books and to avoid taking the losses on to their Balance Sheets.

If that is true then the inevitable result will be a longer period of foreclosed properties coming to market as these failed modifications fall apart.

As with most things there is not a simple answer, but on balance I come down on the side of giving the program a fair shot. This is based mostly on my view that given the countless billions we have poured into supporting the financial institutions that caused the problems,  a little effort to give similar assistance to the victims is not unreasonable.

Reasons are:
1. The Bank has major financial reasons for wanting the property off its books so will respond quickly and realistically. Note: If you would like to understand these financial reasons drop me an e-mail and I’ll give you the details.

2. The REO listing and sales price will almost always set a new low for similar homes in similar condition in the same neighborhood.

3. This is not so for Short Sales where the price has NOT been agreed to by the major party, the Lender holding the mortgage. Even if the current owner signs your low price offer, the Lender is not going to do so unless it reflects the fair market value of the property i.e. the price at which an REO would be sold. Typically they will take between 2 and 3 months to actually respond with their decision. During that time you are in limbo.

4. Once the price has been agreed to the Bank will close within a week if you can.
5. Despite false rumours Banks will re-negotiate if major problems come to light through your inspections.
6. Approximately 80% of all Short Sale contracts in my area ever close!
I rest my case.