Wednesday, October 12, 2011

"Are we there yet? Real estate's wild ride"

This op-ed piece was originally published on Sunday, December 20th, 2009 in the Miami Herald but has since magically vanished from their website.  I think it's a great work as people are suddenly interested in deciphering the current situation in the South Florida real estate market.

"Are we there yet?  Real estate's wild ride"


Since I think that most participants in the real estate market would rather be somewhere else right now, I'd like to compare our local housing downturn and recovery to a family road trip to Disney World on the Florida's Turnpike. Back in late 2005, we left home and after four long years on the road, we've only made it to Yeehaw Junction.

``Sure, it's the middle of nowhere,'' we tell the kids in back, ``but it's also an important crossroads.'' In two years, we'd like to be frolicking in the Magic Kingdom, but sadly, all we see right now is more signs to buy advance tickets, and an exit in not-quite-there-yet St. Cloud.

In the rear-view mirror, we can see obvious displeasure and barely contained impatience brewing in the back seat. But a quick check of the map shows that the Magic Kingdom is only a couple more years away -- and the scenery is definitely improving.

The residential real estate market is showing progress in the most urbanized locales. However, signs indicate that a second stage to the housing crash is underway. Middle class people all over are slowly being squeezed out of their homes by unending furloughs and pay cuts.


Compounding matters, there is a pent-up supply of homes of unheard-of proportions.
This means that while the housing market's fundamentals are shoring up -- appraisal valuations falling in line with sales prices and lending activity increases -- there's no double-digit percentage price improvements within sight.

Strong markets like the Miami Beach barrier island won't experience tremendous moves in any direction for the coming two years. And there is likely going to be mild price erosion in the suburban as well as high-end homes markets through the next two years.

As for condominiums, the boom is slowly transforming downtown Miami and Brickell neighborhoods into a realization of Walt Disney's original plans for EPCOT. In Walt's 1966 vision, urbanity would be constructed to the Nth degree. Everyone would work and contribute to the community -- the People Mover renders automobiles unnecessary -- and all dwellings are corporately owned, everyone is a renter. Surely, Mr. Disney never envisioned the landlords being from Colombia, Canada and Western Europe -- but the all-cash buying today will ensure that two years from now, absentee landlords will own a vast chunk of our central city district.

Recently, the FHA made a prudent move to modernize its condo finance program and expand the availability of its loans through brokerage outlets for all properties in 2010.

This should allow local buyers to jump into select projects with stable underpinnings in the district. By 2011, we should see a few of today's stalled high-rise projects become owner-occupied properties, promoting a more sustainable and local urban core.

However, FHA and Fannie Mae have both weighed in that, ``Any man that falls behind is left behind.''


Some condo projects have deferred maintenance too long, cannot afford insurance coverage. Others have less stakeholder equity than a Scott Rothstein investor. In the coming two years, many associations will take advantage of Florida's revised Condominium Termination laws to conduct mass short sales. This should rid the condo market of its weakest players, although it won't weed out all of the properties scrambling to keep their wooden eye in place.

Two years from now, the real estate market still won't be all the way to the Magic Kingdom. But assuming that we complete the return to the modern business cycle -- with limited interference from hurricanes, politics and external factors -- our journey through the swamps of this market should be reaching civilization. In some markets, there will be great fundamentals. Others will be worse in 2011 than they were even in 2008 when all bets came off the table.

No matter what happens, we'll be paying the toll for our current dilemma for years to come. But in a couple of years, signs will appear more frequently and as a market we should feel like there's some positive direction. When involuntary unemployment declines, we'll all be back in line to buy tickets, with the Magic Kingdom in sight on the horizon.

Friday, March 4, 2011

Condo Market Fractures Lending Standards

The deterioration of Condominium lending's standards between housing agencies has ruined the market for homeowners seeking financing.   Agency lending standards for Condos had been settled for nearly 30 years, with the four main housing finance authorities accepting each other's certifications for most projects. Recently, the two lead agencies in Condo financing - Fannie Mae and the FHA - updated their guidelines to achieve divergent risk management goals.  The end result is decreased access to credit, lower Condominium prices in comparison to surrounding single family homes and enhanced losses to mortgage holders.  The Condominium market needs a unifying set of approval standards and reciprocal agreements between housing agencies to revive normal lending activity.

A little historical context and legislative history illuminates the speedy evolution of Condominium Property rights and financing over the last 50 years.  Condominium real property exists as a purely legal construct, first recognized formally in modern law under France's Napoleonic Code of 1804.  The Condominium form of ownership began formally in the United States in Puerto Rico in 1951.

After ten years of lobbying, the National Housing Act of 1961's Section 234 allowed the FHA to insure condo mortgage loans.  Section 234 loans were wiped out  by the HERA Act of 2008.   HERA converted long used rules into flexible guidelines which HUD is open to interpret and change.  The FHA issued the first new Condominium approval guidelines since 1974 in 2009, with the intent of improving risk management.

Thirty years ago, attorneys from the (now) government agencies of Fannie Mae, Freddy Mac, FHA and the VA gathered to create a common standard for the needs of lenders to finance condo mortgages.   That document still provides some of the basic hoops every modern condo agreement should jump, such as minimum rental periods, recordation of documents with proper surveys etc.

Proceeding from those guidelines, there was a thirty year period of reciprocal acceptance of FHA Condo Approval by all parties, and over time, Fannie and Freddie virtually merged their standards with Fannie leading the way.  The former private market-makers also created condominium approval review exemptions (aka "limited reviews") based on the loan to value and occupancy of the borrower which exist today.

  Fannie Mae began changing their Condominium Approval process in 2007 by dropping direct reviews in favor of 100% lender delegated reviews.  After the real estate market calamity in December of 2008 Fannie issued harsh new lending rules for properties in Florida and nationally for new construction projects.   The agency has spent the last 24 months backpedaling from those tough guidelines, and spread fear throughout the market regarding condominiums.

Sadly, the fear spread by Fannie Mae's abrupt pullback sparked the consequences it sought to avoid, namely a collapse in condo prices throughout the market.   In a Minsky Moment, Fannie began quietly advertising to industry sources that even it's toughest PERS approvals would be flexible.  Eventually, they created a whole new approval category called "Special Approval Designation List".  This "SPAD" list is so special, no lender or correspondent wants to issue loans into those projects.

 The FHA was required by HERA to draft new Condominium Guidelines which they issued in late 2009.  The implementation is still being phased in today, after 20,000 expiring projects were given a reprieve from expiration this past December.  Unfortunately, during the break from past practice, Fannie Mae used the opportunity to cancel their reciprocity agreement.

The FHA's new guidelines have heavy emphasis on large cash reserve accounts, and restricting developers from renting unsold inventory while holding the units for sale or lease option sale.  Fannie's new guidelines aim to take a blood sample of each building and analyze the physical plant for flaws, this in addition to the usual financial checkups.

The two largest standard setters have gone in opposite directions.  As a result, the list of approved buildings for both agencies is shrinking.  Mortgage lenders who entered the market after 2005 have suffered losses even with loan to value ratios of 50/50 after some condo prices declined 90% or greater.    Condo owner/directors are rarely informed of the implications of sweeping changes affecting the marketability and price of their homes.   All of this has been happening without stakeholder input in Washington, D.C. aside from the  money center banks who now control vast swaths of the market for new mortgage loan originations.

 The privatization of Fannie Mae and Freddy Mac casts a long shadow at their standards departments during the interregnum.   It seems logical that new standards should be set in the private sector for Condos and the private non-profit corporations governing Condo property.

The fact that two large standard setters cannot agree, clearly indicates that there's no consensus on how to heal the wounded standards for what really separates a functional Condominium from a failed project.  The prolonged existence of the rift is eroding investors' trust in the legal form of Condo ownership's ability to withstand shock.  Ultimately, the condominium financing market needs new defining standards to resume normal functioning.

Monday, January 3, 2011

National Mortgage Licensing System Goes Live Today

The National Association of Mortgage Professionals (aka NAMB) fought in favor of a national licensing system for many years.  

 The NAMB had twin goals of allowing better access to multi-state markets for loan originators while simultaneously looking to end the practice of company licensing for non-depository mortgage originators (ie. a "Mortgage Lender" could employ as many unlicensed originators as they wished, while Mortgage Brokers could only use licensees to originate).    A tertiary goal was to stop abusers from state hopping since there was no sharing of data on abusive loan professionals, and in many cases (Florida inclusive) the state licensing systems only checked for state legal action and not Federal crimes (see Florida once again).

 During the boom, unlicensed individuals committed some of the worst abuses.   Countrywide Home loans, for example, was one of the top abusers of the system.  The only sad omission from the new system is employees of nationally chartered banks.  This means that another Countrywide could spring up, and send out legions of unlicensed people, to sell loans on a wholesale basis to non-depository lenders and brokers that are as a class, predatory.  In addition, it was these types of bank reps who encouraged brokers to find loopholes in underwriting guidelines, present and obtain unwarranted lending exceptions or worse.

  Ultimately, I agree with the perspective that it is counter-productive to asses the credit risks of a group of professionals disproportionately stung by the credit bust.   Mortgage brokers are the only real estate lenders who must disclose all of their fees and loan pricing on the Good Faith Estimates today.  The mortgage broker is the only check on bank and non-bank lenders' loan pricing and profit margins.  In addition, a mortgage broker is one of the few outlets remaining for borrowers who need access to private capital (the "hard equity loan") when they do not qualify for a traditional bank loan.   

 As the agents of the banks, mortgage brokers have gotten hit pretty hard in the PR war, being that we're the front lines, the people that the public is acquainted with.  The additional costs of new national licensing are a serious burden on Loan Originators and Brokers like myself, but needed to restore credibility to our profession.  But make no mistakes, if every mortgage broker in the country is sidelined for personal credit issues, it will simply complete the process of tilting the tables completely in favor of the too big to fail banks who caused this mess in the first place.