THE FALLOUT FROM B OF A'S FORECLOSURE MORATORIUM

Bank of America announced last Friday that it was halting foreclosure proceedings in all 50 states so it could perform an internal review of its foreclosure processes.  This follows the announcement that several major lenders in 23 "judicial foreclosure" states (i.e. states that require a court hearing before a foreclosure in finalized) have suspended foreclosures after concerns arose about the legitimacy of those proceedings.

Much has been written about this in the past five days, and it is a complicated and tangled web.  The one thing I am convinced of is that this latest injection of uncertainty is not going to help the housing market, the economy or the public's perceptions of banks.  It will also make some attorneys rich.

There are basically two material concerns at issue here that are being investigated:

1) Right to foreclose – does B of A (or whomever) actually OWN the loan they are foreclosing upon, and do they have the legal right to foreclose? Attorneys for foreclosed homeowners are asking that, prior to foreclosure, the original note and deed be produced by the lender. Because many of these loans have changed hands so many times (loans originally funded by WaMu, Indy Mac, Countrywide, etc.), in deals that were often brokered under severe duress by the federal government, the banks literally have no idea where thousands of these notes and deeds physically are located.

2) Costs and fees – at every stage of the foreclosure process, there are fees and penalties that are piled on to the borrower’s debt list. Attorney fees, publication fees, filing fees etc… in the 23 so called “judicial foreclosure” states, the bank is supposed to submit an affidavit verifying that these fees have been reviewed and are legitimate prior to foreclosing. The truth is that employees at Bank of America have admitted signing up to 300 of these affidavits in a single day, which means that the costs, fees and legal mandates are not being verified prior to foreclosure.

When clients sign a note and the deed of trust, closers often joke that the 15 page deed can be summarized in ten words. “If you pay, you stay. If you don’t, you won’t.”  At the moment, that summation is in doubt.

These cases right now are not going to “save” any homeowners. They are simply going to cause delays and inject more fear and confusion into the housing market, which cannot help the recovery process or the nation's fragile economy.  The sensational headlines may also motivate thousands of underwater or unemployed homeowners to default on their loans, since the once-obvious connection between not paying your mortgage and losing your home seems to be increasingly fuzzy.

The real agenda here, in my opinion, is a shakedown against the banks by trial attorneys, who have spotted a weakness in the system and who know that no one has deeper pockets right now than the banking industry (thank you, taxpayers).

This is a very negative development because really, there are only two things driving the housing market today, and that’s buyers in search of quality and/or value. And foreclosures represent value. Take that out of the equation, and what do you have left?

Let's think one step down the line on this so you can see the kind of chaos we are talking about here... let's say that five years ago, you took out a Visa card with Washington Mutual.  WaMu goes under, the accounts get transferred to Chase, and today you owe $21,000 on that card.  You don't deny that you spent the money, or that you have a legal obligation to pay it back.

But using the same logic that's bottling up the foreclosure process, you demand that Chase supply the actual written agreement you signed when you took out the card so you know they are in fact the correct creditor.  Could they do that?  What if they can't??

That's why this is a mess.  We are all for ensuring that there is "process" and that fairness be a part of this discussion.  But really, in my opinion, this is just a massive shakedown that won't ultimately save any homeowners from wrongful evictions. 

It's about the fact banks have deep pockets (courtesy of taxpayer bailouts and government-arranged mergers) and that certain trial attorneys see an opportunity to make a killing.  A killing which could further delay any recovery in the housing market and in the larger economy.

WHAT TYPE OF RECOVERY ARE WE GOING TO HAVE?

The goal here is to educate, not to scare.

Before you have a reaction to this post, keep in mind that there are two sides to every coin.  You want a 30 year fixed rate at 4.25%?  I'm sorry, they don't offer those rates when times are flush.

We are arguably living through the most challenging economic times since World War II.

Check out the job losses associated with the Great Recession as they relate to other periods (chart from Calculated Risk): 

Tracing back 33 months, we see that we have lost more than 5% of the nation's jobs.  The only recession that comes close, by comparison, was when we went through a national recalibration immediately after World War II.

Now the issue we all have to decide upon - anyone who plans to participate in this economy - is whether the graph of this recession is ultimately going to look like a V, some form of a U, or an L. 

If it's a V (and it won't be), we're going to come launching out of this recession any moment and it will all go down as a bad dream.  Too late for that - didn't happen.

If it's a U, and there's evidence to support that's the direction we're headed, we're in for a long, slow period of recovery that may never actually get us back to where we sat 33 months ago.  If you work, improve and focus, you'll come up with the curve.  If you don't, the bottom of the U may be where you stay.

And if it's an L, 10% unemployment is the norm (17% - 20% if you count those who have quit looking altogether), the stock market will continue to deflate and the housing market will stagnate for years.

Would it be worthwhile to spend some time getting educated on what's happening with the economy?  Would it be helpful to know if we're headed for a V, a U or an L? 

Having an informed opinion about where we're headed is the difference between finding amazing opportunities or throwing good money after bad.

I have said for some time that one consequence of the Great Recession is that we're all going to have to improve our skills, our work ethic and our level of commitment if we want to maintain our current standard of living. 

We're also going to have do a better job of educating ourselves about economics, because the recovery that's coming is going to reward those who understand it.

HAPPY NEW YEAR'S EVE!

A simple reminder to my friends in the business... are you ready for 2011?

An old real estate coaching axiom goes like this:  "Whatever actions you take today will determine what your income looks like 90 days from now." 

That means your economic realities for January 2011 are based upon your actions in October of 2010. 

So are you thinking about pumpkin patches, turkey dinners and holiday parties?  Or are you taking listings, showing properties and working on your business plan? 

2011 is not going to be an easy year.  In Colorado, we have lost nearly one-quarter of the agents who were in business just three years ago.  And a bunch more are on the way out.

So who survives?  Those who work.  Those who invent.  Those who create.  And those who do not lose focus.

Enjoy that glass of champagne tonight.  Because tomorrow the New Year begins!

WHAT WOULD WARREN BUFFETT DO?

BRACING FOR THE ROUGH ROAD TO COME... AT LEAST AS IT WILL BE REPORTED

Over the next few months, I predict we are going to see some absolutely brutal headlines about the real estate market, both nationally and locally.  But will it really be as bad as it sounds?  Or is there a larger picture to consider?

Let's start with the numbers we already know about.  We've all seen reports about the dropoff in year-over-year activity since the tax credits expired in April.  The overall number of Denver area homes under contract in August, for example, was down 22% from a year ago.

Part of this is because so much demand among first-time buyers and move-up buyers was pulled forward into the first four months of this year.  That's a fact.  So some buyers who may have waited until the fall were part of the spring frenzy.

But the other factor that's going to make the headlines look bad is that a year ago at this time, our market was piping hot because buyers were scrambling to beat the original November 30 tax credit deadline.  Last fall was an artifically super-charged market, and this autumn we are seeing an artificially depressed market.

Compare the numbers side by side, and it's going to look bad.

But let's go a little deeper, because the reality is there are most definitely some "green shoots" in the data.

Let's start with a more in depth look at the August numbers.  Last month, just about 2,800 homes went under contract in the Denver MLS.  One year ago, by comparison, nearly 3,800 homes went under contract during the same 31-day period.  That's a 27% drop, which is consistent with the kind of negative headlines we saw.

Drop back to 2008, however, and we see that in August about 2,800 homes went under contract - exactly the same level of activity we are seeing today.  And that occurred with buyers pursuing the original 2008 $7,500 first-time buyer tax credit.

Now it doesn't sound so bad.

I'm firmly convinced that the next four months are going to create some extraordinary opportunites for buyers, because negative (but mostly superficial) headlines will hurt market pyschology.  Fence sitters will stay put, and sellers will have to make additional concessions to compete.  Interest rates will stay low, at least through the end of the year. 

Psychology will start to change quickly at year end as the direct comparisons to the super-charged numbers from last year die out.  The headlines will start to look a lot better, and at that point I expect to see a true shift in attitudes about the housing market.

Wait until then, and you're likely to see higher rates, more competition, and sellers far less eager to negotiate.  This is exactly why so many investors are in the market right now, and why a lot of people are going to do well purchasing real estate in the final quarter of 2010. 

THE 15 MOST "UNDERWATER" STATES IN AMERICA

The San Francisco Chronicle recently compiled a list of the 15 states with the highest percentage of "underwater" mortgages:

1. Nevada: 69.9% of all mortgages

2. Arizona: 51.3% of all mortgages

3. Floria: 47.8% of all mortgages

4. Michigan: 38.5% of all mortgages

5. California: 35.1% of all mortgages

6. Georgia: 27.8% of all mortgages

7. Virginia: 24.3% of all mortgages

8. South Dakota: 23.8% of all mortgages

9. Maine: 23.8% of all mortgages

10. West Virginia: 23.8% of all mortgages

11. Louisiana: 23.8% of all mortgages

12. Mississippi: 23.8% of all mortgages

13. Wyoming: 23.8% of all mortgages

14. Maryland: 22.9% of all mortgages

15. Idaho: 22.7% of all mortgages

The national average for underwater mortgages is 23%, according to First American Core Logic.  Approximately 20% of Colorado mortgages are underwater, based on First American's automated valuation model.

AUGUST WRAP - BUYERS HAVE UPPER HAND

Market statistics for August are now out, and as I do every month, I've culled through the numbers to provide this latest snapshot of what things look like in the Denver housing market.

From a raw data standpoint, it's not pretty.  Overall inventory is now up 14.4% from a year ago, the fifth straight month where we've had more homes for sale on a year-over-year basis after nearly three years of steadily declining inventory.

The absorption rate held steady at 9.03 months, up 80% from when the tax credits expired in April but well below the 12 months of inventory we see on a national level. 

And there are just over five active listings for each home under contract, which means in the most basic sense sellers are competing with five other sellers for each buyer writing a contract. 

Of course, there is some good news, too, although you have to go a little deeper to find it.  The overall number of homes that went under contract in August - about 2,800 - is right in line with sales activity from August of 2008.  The numbers only look soft because this year's data is being compared to last year's data, and at this time last year the tax credit was driving a red-hot market, especially at the entry level.

We also saw a new report showing the overall number of completed short sales is up 48% from one year earlier, a clear sign that banks are finally looking for ways to liquidate inventory without the full tab brought on by a foreclosure. 

30-year fixed rates remain in the 4's and unemployment is mostly holding steady in Colorado.

Overall, it's not a great market, but it's not as horrible as the headlines are making it out to be.  If you are a seller, the negativity in the headlines is going to affect you.  Nothing good is going to be reported for the next few months, and so buyers are likely to remain in ultra-cautious mode.

For buyers, however, there is some opportunity.  The combination of low rates, ample inventory and negative headlines should be empowering and put you in a better negotiating position.  And if you believe that things are going to get better at some point economically, you've got about a 90 day window to play the very negative headlines to your advantage.  

By year end, when we stop comparing our sales numbers to the artificially charged data from a year ago, the data will look better (even if the market is the same) and  the headlines will start to get more optimistic.  Of course, in reality, the market is not much different than it was in 2008, except that interest rates are lower.  It's the perception that's different, and perceptions make all the difference.

ONE IN FIVE COLORADO REALTORS HAVE LEFT THE BUSINESS SINCE 2007

The National Association of Realtors reported this week that its membership in Colorado has fallen more than 21% in the past three years, from 27,000 dues-paying Realtors in 2007 to fewer than 22,000 today.  In a related item, the Colorado Association of Realtors has announced that after 90 consecutive years of holding its annual convention at The Broadmoor Hotel in Colorado Springs, CAR is terminating its contract with The Broadmoor after this year.

These are hard times for Realtors, as they are for all of us.  This market is not an easy one, and I've heard more than one agent this year say "It's just not worth it anymore."  Reluctant buyers, underwater sellers, underwriters who are terrified of making a mistake, appraisers who appraise too conservatively... it all adds up and takes a toll. 

Putting deals together is hard.  Holding them together is even harder. 

When I was a broker in California (1994-2005), everyone felt like a winner.  Sellers were pocketing huge equity gains.  Buyers felt like they were acquiring an asset that would appreciate 8 to 10% per year.  Agents were making excellent money.  It was a party.

Today, the reality is 180 degrees different.  Buyers are afraid of making mistakes and often grind hard on sellers every step of the way.  Many sellers have lost money, or worse yet, owe more on their home than it is worth.  They don't want to negotiate and they don't want to fix things.  Agents are stuck in the middle, with the chasm between buyer expectations and seller perceptions farther apart than ever before. 

Then there's bank-owned inventory, which is usually priced attractively but often full of deferred maintenance.  Appraisers call out condition items that need to fixed.  Banks don't fix anything.  Buyers don't have money for repairs.  Agents are stuck in the middle, again, having to find solutions. 

There is not a drop of glamour in real estate these days.

Having said that, there is a clear silver lining for the committed among us.  The consolidation going on right now is clearing part-timers out of the business, and it's driving marginally qualified agents to the sidelines.  Never in my 16 years as a broker have I seen a market which called for more persistence, creativity, innovation and skill. 

The GOOD agents, the ones who work 50-plus hours a week and look out for their clients, are going to ultimately benefit from this thinning of the herd.  Consumers are going to do better, as well.

Like you, we in the business are having to do more with less.  Those agents intent on making it to the other side are working harder, longer and with profit margins that are paper thin (if there's any profit at all).

As for me, I'm busy planning my next client appreciation party and working hard to close the deals in my pipeline today.  I'm making phone calls and holding open houses.  I'm communicating with my sellers and coaching and counseling my buyers.

Because experience has taught me that there is always business if you are excellent at what you do and that satisfied clients are like gold (because of the referrals they send), especially in tough times.

Again, I'm not complaining.  I'm just telling you how the market is affecting the brokerage community.  And I'm explaining why that agent who sold you your house three years ago may not be returning your call.

REWORK

Great business have a point of view, not just a product or service. 

That's one of the key themes in "Rework", by Jason Fried and David Heinemeier Hansson, founders of the nationally-known consulting firm 37 Signals.

By standing for something and living your values, the authors assert, you can create "superfans" who will be intensely loyal to your brand, whether you are a web designer, a shoe company or a real estate broker.

In a fun, fast-paced read, Fried and Hansson illustrate how rapidly the professional world is changing due to the influences of technology, social media, home-based businesses and global supply chains. 

In a chapter entitled "Meetings are Toxic", the authors discuss how ideas are the new currency of the 21st Century, and how wasteful and counterproductive staff meetings can be.  Direct accountability, corporate efficiency and personal and professional inspiriation drive progress and new ideas.  Attainable short-term goals are good... nebulous big picture business plans that aren't specific, concise and action-oriented are often misdirected or a complete waste of time in a marketplace that is dynamic and everchanging.

By focusing on the basics, Fried and Hansson have built a progressive software, consulting and contact management company with over 5 million clients and users worldwide.  Their book encourages us to rethink work, to focus on reshaping our business with intention and design instead of merely working ourselves to death.      

IS HOUSING A LUXURY OR A STAPLE?

On Wednesday, a story in the New York Times asked an interesting question:  Is housing a luxury or a staple?

The answer, whichever it is, will have a pronounced effect on if, when and how the housing market will see a recovery.

In the article, author David Leonhardt studied price fluctuations among luxury items (like boats, Mercedes and gold watches) and compared them to "staples" (like food and clothing) over the past 100 years.  His findings:  the prices of luxury items tend to rise and fall with great volatility, closely tied to increases in personal income.  Staples, on the other hand, tend to track the inflation rate, with less fluctation and less drama. 

From 1995 to 2005, according to the author, low unemployment and the availability of free and easy credit turned houses from staples to luxuries, and people began collecting homes like pieces of jewelry.  As the very nature of homes and home ownership turned from staple to luxury, prices rose accordingly, and millions of Americans who bought homes between 2000 and 2005 ended up paying luxury prices.

Five years later, most would agree that the prevailing psychology among home buyers has turned 180 degrees.  Underbuying is in, overbuying is out.  Conservation is in, excess is out.  Cash on hand is good, debt is bad.  This most definitely impacts prices.

We have always known that people make decisions based on how they feel, and if today's buyers feel that homes are merely staples, places to go to store your things and keep the cold out, then prices will be very slow to recover. 

A larger recovery in values will only happen when personal income rises, accompanied by the corresponding feeling of goodwill which comes with prosperity, which cannot happen when the unemployment rate is tracking above 10%. 

In short, the rules of homeownership have changed because the way we feel about housing has changed.  If you paid a luxury price during the boom years for something that has been redefined as a commodity (which I certainly can see firsthand in my own neighborhood), the premium you paid is gone.

In short, people gladly overpaid when they felt times were good.  Now, in a different economy, buyers stubbornly seek value above all else. 

Buyers and sellers have big choices to make in today's economy about whether buying or selling a home is the right move for them.  Everyone's situation is different, but it is important to understand how the rules of the game have changed and how people's perceptions from a few years ago have little connection to today's market.

In the big picture, there are reasons why buying a home today makes sense.  Interest rates are absurdly low,  builders are bringing next to nothing online, the populations continues to grow and we almost certainly will see better economic times ahead.  But as long as people feel uncertain, uncertainty will prevail in our market. 

The key takeaway from this article is that psychology affects prices, and the psychology that caused people to willingly pay retail for anything a few years ago has changed.  But just as things have changed in the past, surely they will change again.  And both home buyers and sellers should keep in mind that five years from now, we'll be talking about a whole new set of changes. 

EXTEND AND PRETEND

One national real estate figure calls it "extend and pretend."  Others refer to it as "kicking the can down the road."  I sometimes simply think the banks are holding onto their worthless chips because at some point, the government will redeem them once again.

What we are all referring to is the increasingly common tendency for banks to stop short of foreclosing on homeowners who have fallen delinquent on their loans.  Let's face it - the banks (at least the big ones, who survived) did very well with their 2008 and 2009 government bailouts, moving worthless loans off of their balance sheets and on to the ledger of the federal government.  Many smaller banks were swept away, but for the likes of Chase, Citi, B of A and Wells Fargo, being a survivor is profitable.

With the government agreeing to take so much bad debt (at taxpayer expense), it was important to keep things looking as manageable as possible.  Pulling this off required one simple ruse - getting everyone to believe that those losses ultimately wouldn't be very big.

To do this, the government changed the rules. The FDIC, which previously forced banks to get bad assets off their books, became a leading proponent of saving homeowners with loan modifications that likely just delay the inevitable.

With a little government pressure, the supposedly independent Federal Accounting Standards Board allowed banks to account for loans at theoretical values that were based on computer models rather than current market value.

An acronym soup of programs followed, which were promoted as providing help for America's homeowners: HAMP, HAFA, HARP, 2MP and more. But the reality is that, to date, these programs have resulted in little more than delays.

But delays can be profitable, if they allow banks to extract at least some payments (or partial payments) from homeowners who are ultimately not going to keep their homes.  By keeping the bad loans alive, the banks have a leveraging chip for future government aid while looking more compassionate in the interim.

The problem facing both lenders and the government is that they can neither kick homeowners out or bail them out, because either scenario forces the losses onto the books, which affects earnings, reserve requirements and investor relations.  The easier model is to delay confronting the problem, which works so well for the federal government that the banks are eager to give it a try.

Because I track foreclosure activity very closely (including pulling NED lists on a weekly basis in several of the neighborhoods where I work), I've seen this increasing reluctance to pull the trigger on homeowners who are clearly in default. 

I'm also seeing homeowners in foreclosure become increasingly adept at gaming the system, even renting out their homes on their way out of the neighborhood to create positive cashflow while they fail to make payments month after month.  This is one byproduct of a "soft enforcement" policy on defaulters.

To combat the spread of this mentality, lenders have to foreclose on a certain percentage of homeowners each month, or else the system will simply break down.  Call it foreclosure roulette.  Maybe it's your time to go... but maybe they'll give you six more months.

Trillions of dollars in negative equity is a serious problem, and I'm not advocating the "crash landing" approach to letting the markets reset.  But more creativity is called for here, whether it's creating a federal property management agency (renting back to foreclosed homeowners) or writing tougher legislation to limit the growing number of "strategic" defaults from owners who just decide to walk away. 

Letting the big banks set the rules, knowing the federal government views them as "too big to fail", is grossly unfair.  Taxpayers (and voters) deserve better.

ON ROCKETSHIPS AND MILLSTONES

When times were good, people felt that houses made you rich.  They only went up in value, and so the way to wealth was found by attaching yourself to the largest home you could possibly qualify for... except that during the last few years of the bubble, there was no "qualifying" for a home.  You simply had to want one.

Today, especially at the higher end of the market, we have far more people wanting to get out of big houses than wanting to get into them.  And that has obvious and ongoing repercussions for prices.

In previous posts, I have said that the first wave of foreclosures was caused by poor lending practices.  Round two, which we are experiencing now, is because of job loss and deleveraging.  People are fixated on getting out from under debt, on living small, and becoming financially nimble. 

Houses, especially big ones, are illiquid assets that are difficult to move.  The only answer, if you intend to buy a big house and want to be shielded from falling prices - buy it right.

Buying it right sounds easy, but it's not.  Buying it right involves work, conflict, and sometimes hurt feelings.  When people feel like the pie is shrinking, they cling to what they have.  For sellers, that means they are reluctant to let go of equity.  For buyers, they simply refuse to overpay.

The concept of buying it right involves harder negotiations, more interaction with banks and short sellers, and lots more work all the way around.

You will continue to see real estate agents leave the business in large numbers not because there is no business, but because for many the business has become too hard.  There are buyers and sellers - plenty of them - if you deliver great service and are knowledgable about your business.  But that doesn't mean it will be fun.

Houses are neither rocketships nor millstones.  They are uniquely positioned as an investment you live in, where you build dreams and bond with those you love.  My advice to buyers today is not just to buy it right, but love what you buy.  Because housing if for the long term, and if you aren't ready for the commitment, you should rent.