The Pit and the Economic Pendulum

The whole world knows, by now, that the United States real estate market is in a pit, and the pendulum of its cyclical market has swung to tight money, with corresponding low asset prices.   Mixed economic signals abound, but the smart money is still placing bets that today’s prices. 

The secondary market for mortgage loans is fully consolidated between three government-owned or sponsored agencies.  New valuation models have emerged in the residential housing markets, based on financing and market to sales times, which are not uniformly factored into bank’s lending calculus before the boom or today.

The twin issues of valuation ambiguity and regulatory mayhem have conspired to cause a sharp consolidation of the national mortgage lending market into the hands of 5 money center banks who control nearly 65% of new originations, and limit competition through their oligarchy.   

  The barely-existent finance market is in the peak of the bust, while residential lending has been regulated to its knees

Investors have scoured the market for rock bottom deals in South Florida real estate during 2009 and 2010 with many pulling the trigger.   This bear market rush virtually exhausted the supply of new construction condominiums in Downtown Miami within a couple of years, rather than the 5-10 year horizon gloomier souls predicted. 

The bear market buying frenzy was helped by a combination of low prices, government assisted lending and many individual cash buyers from foreign lands.   There is a new bifurcation of real estate values caused by the predominance of cash transactions by the great majority of individual buyers. 

Two main investor’s pricing models have emerged for residential housing: Cash Basis and Financing Basis. 

The Cash Basis pricing model from lowest price to highest is the foreclosure auction price, the “short sale” price and the REO or repossessed home price. Cash basis pricing is typically based on the market capitalization rate, or the percentage return an investment yields on a real estate investment proportionate to an interest rate on the equity invested.   These prices assume anywhere from an immediate to 15 day closing, in cash. 

In the middle, real estate pros refer to the “Cash Price” which is the price at which a cash buyer would buy a property without any obvious distress or for a bank owned property in reasonable state of repair.  This is also a price where buyers will invest into a lender blacklisted, fractured or distressed condominium.  In condos, this price is typically 50% of the comparable apartment’s Government Supported Housing price.

The Financing Basis price starts at the price a financed buyer would accept with a 20-25% down payments and bank or GSE agency financing.   The final pricing nuance is: Government Supported Housing.  The highest priced residential real estate, are homes that are eligible for 3.5% to 5% down payments.  These are select condominiums and all single-family homes with sellers accepting financed contracts and up to 60-day closings.    

Banks order real estate appraisals that currently only evaluate “Financing Basis” pricing of home sales.  There’s no model of integrating the Cash Basis sales, unless there are only “Cash Basis” sales inside the sub-market.   The resulting confusion is hurting banks’ ability to lend responsibly and borrower’s ability to leverage real estate.   However, investors are using these pricing variations to buy up bank inventories below end user prices and turn around and flip these properties to end users paying a premium.

Just as national money center banks have become too large to fail, their lending units have taken virtual complete control of the primary mortgage market as supplied through mortgage bankers, brokers and retail originations through their banking franchises.   The Freddy Mac rate survey indicates that even as underlying Treasuries rates have been getting lower, origination fees are rising.  Furthermore, from July 2010 through October 2010 there was a 50 basis point (0.5%) drop in  Treasuries that yielded only a 23 basis point drop in average lending rates.

Bank of America simply painted new colors onto the Countrywide Home Loans lending and servicing operations, and handed them the keys.  Their disastrous robo-signer issues, and newly discovered possible securitization process flaws point to the inherent danger of consolidating too much financial control into a single institution.    However, that didn’t stop the Octopus of Charlotte from dropping their mortgage broker channel in November.   This means the largest lender in the country now has zero transparency regarding yield spread premiums issued to consumers through their entire origination channel.  

The bull of a financed real estate market has been neutered by heavy-handed government regulation.  The mandate that all loans have documented sources of income for repayment is excellent for wage earners, but completely locks self-employed persons out of the home finance markets.  These entrepreneurs are risk takers, who traditionally were able to get a (safe for a generation) loan by simply showing their good credit behavior, cash in the bank and equity in the home.   Traditional standards were 25% down payment for one of these loans. 

Self-Employed people, as well as foreign persons, US Citizens who work abroad and wish to repatriate, permanent residents with legitimate foreign sources of income are forced to seek higher interest rate loans with 50% down payments.  These high rate loans are also the only resource for borrowers whose FICO credit score falls below 640 for any reason.  Non-Traditional and lower income documentation loans are only available for investment properties. 

New regulations require a 3-business day waiting period on ordering appraisals.  Federal disclosures have been transformed from simple, transparent documents that include all pertinent information on a page to a veritable paper mache’.  The new Good Faith Estimate has triple the information, but obscures entirely lender loan profit margins and the total cost of home ownership.  

The bear market cash buying frenzy is showing signs of acceleration even as new lending guidelines further depress available housing demand for end users. 

Certainly, there’s a glut of available properties on the market and in the “shadow market”.  However, these new regulations have created shadow demand as most end users are locked out of the finance market for their own protection.  Ultimately, lenders pricing models need a complete, national overhaul to reflect current realities.     

Until the real estate market shifts from an Investor’s market to an End User Buyer’s market, we won’t see the normal price appreciation that signals a healthy housing market.   It will take years of momentum to chip away the worst of the new regulations, and revive the economically crucial mortgage markets on a national level.  In due time, the pendulum will swing back again. . . 

FHA Gives Condo Lending Market Reprieve

As reported by Realtor.org and  Mortgage News Daily this morning at 9 am, FHA announced a Condo Project Approval extension after the article Condominium Financing Markets Lose Government Insured Lending Supports was published to this blog and set for 7:30am release.  HUD held an "industry call with Gary Long and his partner in the condominium policy department in Washington DC and revealed numerous facts about FHA's condo program through the years, as well as the implications of the new project approval changes.  


Condo Projects will have a staggered expiration based on when they were approved starting at year end and proceeding through September 30th, 2011.    

FHA condos extensions are by year approved.  Projects approved with number of affected projects in parenthesis:

1972-1980 (403) and 1981-1985 (1800) expire 12/31/2010

1986-1990 (7800) expire 5/31/2011

1991-1995 (5700) expire 7/31/2011

1996-2000 (3800) expire 8/31/2011

2001-2005 (2000) expire 9/30/2011

2006 - Sept. 2008 (1700) expires 3/31/2011

HUD clarified that it will accept loans with an FHA Case Number issued up to and including the expiration dates, which clarified a point of lender concern that approval expiration was date based, not case based.


HUD's new FHA condo lending homepage contains current condo guideline resources including recertification processes which will be handled by a contractor with HUD supervision for the "HRAP" process.  Once a condo has expired, it has 6 months to re-certify.  Afterwards it will have to re-apply from scratch.  Florida condos must use the HRAP process to re-apply directly through HUD.  HUD's goal is to have a 30 day recertification process.


During the call, HUD also announced that the temporary guidance guidelines issued last year is also administratively in the extension approval process.  These guidelines require all Florida condos to go through HUD review and allow certain leniencies as well.  However, re-certifications can be handled by lenders using the DELRAP process if the original review was completed by HUD.

Condominium Financing Markets Lose Government Insured Lending Supports

At the stroke of midnight last night, December 7th, the FHA officially invalidated the condominium approval list that it spent the last 30 years to create.  With this last salvo against the condominium financing market, FHA is signaling the bottom in Condominium lending has just officially begun.  The evolution of condo lending standards has devolved into a cacophony of competing standards.  Clearly, lenders are unable to properly evaluate counter-party risk, building management practices and capital structure using any of the competing standards in Condo evaluation.    The lack of end user Condominium financing amounts to the erection of an Ivory Tower to guard new condominium towers from commoners and homeowners.

The condominium market upon which most of the pre-2007 standards were built, reflected realities for fairly small apartment housing projects with shared ownership starting in the 1970s.  Nobody at the time realized how much more complex and active the market would become when untethered from oppressive Co-Operative Housing Corporation rules and restrictions, when coupled with it's exposure to the mortgage interest tax deduction.

Condominium lending started slowly with the FHA in the early 1970s and by the early 1980s had an organized process to approve condominium projects directly through HUD.   Over the decades, HUD amassed thousands of project approvals covering the 50 states, and available through the "FHA CondoLook" database.  (link: https://entp.hud.gov/idapp/html/condlook.cfm) ***  

  The HERA Act of 2008 wiped out the old statute authorizing condo lending, and shifted funding authorization to the Single Family housing statute.  This law caused expiration hard project approval rules, which FHA replaced with administrative guidelines.   The FHA set out a complete refresh of their condominium project approval rules, and these went into effect 1 year ago.  

Notably, the FHA guidelines are used to enable end user borrowers to place 3.5% down payments.  After deducting the 1% financed FHA insurance premium, these buyers are borrowing 39 times their down payment.

The new guidelines discarded a 30 year old legal guidelines agreement between Fannie Mae, Freddy Mac, VA, FHA and HUD.  In addition, FHA the approval process, due diligence practices and eliminated on site inspections.  It placed new emphasis on budget reserves and site insurance analysis, while eliminating on site inspections and the bulk of new construction projects.  As a result, both Fannie Mae and the VA cancelled their approval reciprocity with the FHA earlier this year.   

Meanwhile, Fannie Mae spent 2008 implementing tough new "PERS" Condo Project Approval standards and mandatory national reviews.   By the start of 2009, their failed "get tough on the market" approach yielded to a new "Special Approval Designation" list known as the "Spade" list by industry insiders.  "Spade" approvals are so special that it has taken 9 months for initial lender adoption, mainly because this list included nearly every highly distressed project imaginable.  In fact, it was virtually a case of creating an approved black list by Fannie Mae, since entry on the list virtually guaranteed that local banks and portfolio lenders shunned included projects.  

As of today, Fannie accepts loans through it's PERS process, Special Approval Designation, "Full" Review and "Limited Review" (25% down payment by borrower minimum for no review) or absolutely no review at all for "Refi-Plus" loans.  Got that?  Complicating matters are state by state guidelines for Private Mortgage Insurers who exclude some of the largest condo markets entirely, such as Florida, leaving "Conventional" borrowers with a minimum 20% down payment on all condominiums.

The onslaught of exotic lending products pushed our multi-family single unit financing market is at it's nadir today.  No single project standard is accepted across the secondary market for mortgage lending.  Today's mass expiration of government insured lending eligible condominiums is a blow to every potential owner occupant looking for a starter home in condominium communities.  Until project approval standards are re-evaluated altogether, from today forward, the Condominium finance market will be stuck in neutral until further notice.


(SEE UPDATE at 4:30pm today)

Condo Terminations May Be Next Phase Of Real Estate Crash

Condo Vultures® Opinion Column

BY GRANT STERN

Nearly 18 months after beginning the lengthy and uncommon process, Condo Terminators has successfully unwound a 44-unit association in South Florida. 

Think of it as a administrative do-over of a troubled condo complex that probably never should have ever been converted.

By our estimates, as many as 15 percent of the existing condos in Florida are legitimate targets for termination due to plummeting values caused by high foreclosure rates, unpaid maintenance fees, expired insurance, and serious code violations that jeopardize a project.   

In terminating the Sunset Lake Villas condominium in suburban Fort Lauderdale, we are providing a much needed relief for a project where prices of individual units have plummeted to 10 cents on the dollar from the original boom time values.   

Our plan of termination was recorded in the Broward County Public Records on June 11, clearing the way for the failed Sunset Lake Villas to revert back into a single-title apartment building. 

The idea of terminating a failed condominium started with a hunch: while condo conversions had been the boom transaction, the mass short sale of a condo project had to be the child of the real estate bust.

Corporations are often viewed as entities with unlimited life. I knew that each and every building is required to have a clause allowing the dissolution, having drawn my own condo documents in my own projects. 

At the time, I speculated that the same market forces, which so mispriced multifamily dwelling assets in the boom, would reverse themselves horribly during the bust.

This month, the idea became reality when my consulting group, Condo Terminators, announced we had successfully turned back the clock, offering another way for faster resolution of the foreclosure crisis.

Developer Anthony Galeotafiore of AJG Capital LLC in Bethpage, N.Y., assisted in bringing the transaction to fruition along with his counsel Sree Reddy of Roth Reddy & Associates in Miami Beach, who drafted the instrument of termination.

Pursuant to this plan of termination, a special purpose trust company managed by Condo Terminators took possession of the apartments. 

This trust company is instructed to proceed with the orderly wind-down of affairs for the Homeowner’s Association by the plan.

The main purpose is to prepare the project for sale to AJG Capital, which intends to operate it as a rental apartment building.

Once the plan of termination was approved and filed, the building's title was transferred to the Termination Trust. 

This transfer stripped the existing mortgage liens - all currently in foreclosure - from the individual units.

The mortgages are still valid and attach to each unit owner’s share of the proceeds of sale of the property - even if these proceeds are insufficient to cover the whole amount owed.

A real estate appraiser visited the property to determine market value for all units, as per the plan.

The Sunset Lake Villas project is being liquidated for its current fair market value estimated at around $18,000 to $22,000 per unit. The condo units had depreciated 91 percent from the sales prices in 2008.  

Based on mortgage documents in the public records, the terminated units had a present loan-to-value in the 700 percent to 1,000 percent range.

In 2007, the Florida condo statute’s termination section was revised to provide an orderly process to wind down and terminate failed condos. 

It allows these properties’ legal agreements to be dissolved, and for the properties to be reconfigured or sold to investors as multifamily commercial property.

Condo termination could potentially produce positive outcomes for local governments, banks, and the market as a whole in addition to savvy investors looking to profit from the bust.

Ultimately, I estimate that up to 15 percent of the post 2003 condominiums developed statewide in Florida could be legitimate targets for condo terminations in the course of the next five years.

Grant Stern is the owner of Morningside Mortgage Corp. in Miami. He can be reached at 786-220-0117.

Condo Terminators Appears on CNBC's Realty Check

Click Video to Play:

Condo Terminators Completes Florida’s First Mass Short Sale

FOR IMMEDIATE RELEASE

Grant Stern, founder of Condo Terminators in Bay Harbor Islands, Florida is pleased to announce Florida’s first Optional Condo Termination proceedings.

Miami - Condo Terminators, a specialty consulting group of Morningside Mortgage Corporation, in Bay Harbor Islands, Florida, has completed the filing process for Florida’s first mass short-sale of a failed condominium conversion on June 9 at the Sunset Lake Villas Condominium in Margate, Florida. 

This project is expected to lead a wave of Condominium Terminations, resulting in mass short-sales of failed condominium conversions, reversion to apartment buildings, and the debut of a new legal instrument, the Plan of Termination.

Sunset Lake Villas is majority owned by Anthony Galeotafiore, Managing Member of AJG Realty LLC development group of Bethpage, New York. Sree Reddy, Esq., LLM, of the Miami law firm Roth, Reddy PA, drafted the Plan of Termination and represented the Developer at today’s proceedings. 

Condo Termination was “the only way out” said Galeotafiore, “after all of the units we sold fell into foreclosure, all of the unit owners moved away or rented units without paying HOA dues.  Nobody is financing condos, but apartment buildings are bankable”

Condo Terminators provided specialty business advice to the Developer and transactional advisory services to his council and accepts projects for these services throughout the state of Florida.

“Condo Termination transactions are the only way to resolve Florida’s real-estate slump and protect the rights of home-owners, banks and the value of our tax base,” says Condo Terminators President, Grant Stern, “The Condo Termination law is meant to cut through the tangle of lawsuits and provide fair resolution to the parties of interest, outside of court.”

For questions and further information, please visit www.condoterminators.com or contact Grant Stern directly at 305.219.0326 or info@condoterminators.com or Anthony Gaelotafiore, President of AJG Capital of Bethpage, NY at 516-933-3507 or agallo@ajgcapitalresources.com

CondoTerminators.com Launches Today!

The CondoTerminators.com website is officially ready for prime time! 

It includes news articles from this blog and specific information for condo owners, renters and investors.  (free registration required, can use your GMAIL, AOL or YAHOO accounts)

South Florida Tax Base Absorbing 90% Drop in Condo Values

Condo Termination can remove the weakest sales from the condo market and restore value to our eroding tax base.  Failed condo conversions are seeing enormous drops in tax assessed values.  Today's Miami Herald article highlighting the property tax appraised value updates showed another mid-teens double digit percentage drop from the year prior for South Florida's market taxable assessments.  The new, larger homestead exemption passed when property values and taxes skyrocketed in the boom years is creating unintended consequences.   When combined with dirt cheap apartments in failed condos, these developments promise to create new problems and iniquities in the tax base if left unaddressed.

The Miami Herald reports that the Broward County tax base shrunk by 12.1% last year and Miami-Dade by 13.4%.  Some neighborhoods saw mild price increases or declines, while others dropped by up to 30%!  This shrinkage means that while values drop, millage rates will have to be raised to provide the same services as the prior year, services get cut or create some tough choices for local politicians.  Even worse, this could force tax bills to rise when homeowners were expecting tax relief in line with their new, lower property values.

Last week, CondoTerminators.com posted the Notice of Termination to the owners of a Margate, Fl. complex, which was tax assessed at $159,000 for 2009.  The owner of the majority of the units challenged the 2009 appraisal and had it dropped to $117,000 per unit, saving $298 per unit.  This week's released 2010 assessed values were for $15,500 per unit, an over 90% drop in valuation from one year to the next!  

Florida's Homestead Exemption provides strong protection for homeowners against their creditors, as well as a discount in the assessed value of the home for property tax determination.  In January 2008, it was sensible to extend tax exemptions to provide relief to new homebuyers whose value assessments were an order of magnitude higher than longtime owners who were capped at 3% annual increases with low purchase prices in the early 90s and prior.   

 The old inequalities where longtime homesteaders underpaid and new buyers overpaid will suddenly reverse, permanently if these failed condos are the basis for ongoing tax rates.  The $50,000 Homestead Tax exemption combined with the 3% cap on increases means that a $20,000 condo purchased today, and homesteaded will take approximately 36 years to return those units to the tax base! 

Non-Condo property owners are facing rising millage rates and tax bills.  Condo prices are depressed due to the complete lack of financing options.  Short of passing new legislation to force bankers to loan into condos, this will remain the norm for several years to come - and leave open a window of opportunity to permanently depress property tax bases.   Condo termination will remove these underpriced units from the market and return their taxable values to higher, commercial income values based on cash flows.

Fannie Mae Requires Pre-Closing Credit Checks

Home applicants must freeze credit activity or face scrutiny when they go to close on new home purchase loans.  These Gap reports will raise the cost of consumer credit, while ultimately not affecting consumers' need to increase credit lines after home buying.  Traditionally, housing is the driver of American consumer activity, with new homes requiring furnishings, appliances and general improvements in re-sales of existing homes.

Second Credit Checks For Home Buyers: Be Prepared

Megan Mollman, HousingWatch Contributor

 (excerpted below)

Starting June 1, Fannie Mae has a new rule going into effect which requires the lender to check for additional lines of credit, such as a new credit card or a car lease, that a borrower may have obtained that have not been reflected on the credit report over the course of the loan process. 

Tip No. 1: Get the house before the car 

Across the board, mortgage brokers say that opening new lines of credit is the easiest thing to trigger the lender's attention, especially with the news of Fannie Mae's mandate. For example, this means opening up a store card at Lowe's to get a head start on buying some new appliances or paint or leasing a car to have something shiny to park in your new garage. 

Grant Stern, president of Morningside Mortgage Corporation in Miami, Fla., believes car loans are "the No. 1 culprit" in lenders turning down a prospective buyer's home loan. "We always tell people as mortgage brokers, 'Get the house first, then they will give you the car," he says.

Tip No. 2: Don't switch professions (or tax brackets)

Brokers say its not earth-shattering to change jobs in the same field, especially if you are making more money at the new place of employment, but it's complicated when a professional is moving job classifications, for instance, from employed to self-employed, or from a salaried-position to a commission job. "Moving from an employee to a contract basis is a dagger," says Stern, as two years of federal tax returns need to be included with a loan application. "[In this case], it could take three years to get approved for a mortgage."

Today It Begins

This afternoon, my firm initiated the first Condo Termination in the State of Florida since the 2007 legal requirements revisions at a 44 unit multi-family condominium complex in Margate, Florida.

The waiting period before a condo can ratify a Plan of Termination through a Special Meeting is two weeks.  Our vote is going to be held at the Trustees office on June 9th at 9 am.  After the Plan is ratified, and recorded, the Condo Association will continue to exist, but building will be deeded to a Condo Termination Trust managed as a special purpose entity by Condo Terminators and Howard W. Mazloff, Esq. an experienced real estate attorney.

Condo Termination Benefits Everyone

The Florida condominium statute provides an orderly process to terminate failed condos and revert them into apartment buildings with single owners. Condo Termination has the potential to produce positive outcomes for local governments and the Florida Condo market as a whole. Local governments are facing eroding tax bases due to mass cascading failure of the Florida condo market. The market for condominiums in Florida is oversupplied with liquidation priced condo units. Removal of failing condos from the housing stock will ultimately speed the recovery process in the Florida condominium market. Communities face a wave of decaying multi-family housing projects and "investor hotel" condos without adequate cash reserves and looming deferred maintenance. Condo associations all over the state lacking insurance, reserves with high levels of negative equity should be removed through Condo Termination, soon.

Local governments, school boards rely on property taxes for their operating budgets and to pay debt service. The Florida Constitution requires that this local tax money is set aside for the exclusive use of counties. With the implosion of thousands of condominium unit values, local tax bases are shrinking faster than budget predictions. When a few units inside the project sell at liquidation prices, and financing is frozen, local tax assessors have little choice but to write down values for the entire project. The net effect is raising property tax millage rates across the board. Single family homeowners with lower absolute value depreciation will feel the squeeze, while condo investors get the tax break from lower assessments. County governments will still be forced to cut back on services due tax base erosion, while homeowners will feel the squeeze of higher proportional taxation on their depreciated homes. Condo Termination will allow multi-family housing to be assessed at the leased income value, which is higher than market value where condo prices have crashed.

There's no mechanism to transfer distressed units to new end users without abundant financing. Agency and Government lending authorities place financing restrictions on projects that are largely investor held. Financing for fractured condos still poses tremendous challenges for developers with inventory and investors alike. Investors are weary of lending into or buying into condos due to the potential for sharply rising HOA dues or potential Special Assessments. Condo bulk buyers face the potential of developer's liability buying as few as 7 units. Condo Termination will reduce inventory quickly without requiring thousands of loan workouts and new loans in a tight credit market.

Local economies benefit by the maintenance and repair cycles in multi-family housing. The Florida condo market has a vast supply of Class B and C condominium units where rentals once existed. Healthy condo associations set aside hundreds of thousands of dollars over the course of years for the purpose of replacing roofs, aging plumbing, and improving electrical and/or fire systems. Like apartment buildings, condos require regular maintenance and periodic replacement of major components. Many projects near the end of their economically useful lives were sold to condominium converters and sold to end users with a few engineering reports, limited reserves and abundant financing. Lacking sufficient operating funds, these condos have limited or depleted reserves. Deferring maintenance will further reinforce the negative cycle condos are experiencing. Condo Termination will invite value seeking investors to purchase failed condos in need of repair, creating jobs and helping local economies.

Many new communities were launched with unsound footing and inadequate reserves during the recent real estate boom. Condo Termination will reverse eroding tax bases in the Florida condo market by removing liquidation priced units. It will reduce inventory quickly, without thousands of bank transactions when negative equity is drowning communities. The recovery process will accelerate with lower inventories and establishing criteria for communities that are failed. Apartment house maintenance will be performed by value seeking investors after Condo Termination, which will stimulate local economies and maintain high quality of housing stock. Ultimately, I believe that up to 15% of the post 2003 condominiums developed statewide in Florida could be legitimate candidates for Condo Termination in the course of the next 5 years.

Miami Condo Developer Kicked Around by Northern Trust

Often banks cause the very problems they seek to avoid by their pre-emptive strikes against developers who borrow to build. Northern Trust bank is not your typical real estate lender, but made a special exception to lend money to a long time client, Developer Mario Egozi.

After the project's completion, the bank spent over a year refusing to allow changes to the developer's business plan, nor support his efforts to obtain condo certification from Fannie Mae, nor the FHA.

Developer alleges Helms-Burton Act violation - South Florida Business Journal by Paul Brinkmann

excerpts from story published in the South Florida Business Journal on May 8th, 2010

Mario Egozi, the Cuban-born developer of a $24 million luxury condominium in North Bay Village, is citing the controversial Helms-Burton Act in a legal battle to fend off a foreclosure lawsuit by a development group with past connections to a resort in Cayo Coco, Cuba.

Egozi, 52, worked primarily as an architect rehabbing upscale homes in New York until 2005, when he convinced his longtime family bank, Northern Trust Bank, to provide a $16.9 million construction loan for his dream project, the 16-story Cielo on the Bay. But Northern Trust sold the loan last year to a company called 7835 NBV LLC, some of whose principals are affiliated with French-Canadian real estate firm Thibault Messier Savard & Associates. At least one member of that firm, professional hockey legend Serge Savard, was also involved in tourism development in Cuba several years ago.

That connection with Castro’s government should disqualify the new owner from doing business in the U.S., Egozi alleges. An attorney for 7835 NBV disputes Egozi’s allegations; the case is now before a bankruptcy judge in Miami. Egozi is stung by Northern Trust’s decision to sell the loan. In an e-mailed statement, attorneys for 7935 NBV denied that the company was in violation of the Helms-Burton Act. “Neither 7935 NBV nor its members have conducted business with the government of Cuba,” said Jose Casal, a litigation partner with Holland & Knight. “A separate foreign entity indirectly related to one of the investors of 7935 NBV’s owner held an interest in a joint venture with other foreign investors who invested in a hotel project in Cuba.”

Egozi has alleged that Northern Trust breached its fiduciary duty to him by suggesting midway through the project that he pledge $3.5 million to cover his personal guarantee, then walking away from the project. Cielo on the Bay includes 35 units originally priced from $750,000 to $1.8 million.

The building is considered a top-flight luxury condo with incredible views, said Grant Stern, a mortgage broker at Morningside Mortgage. “Northern Trust didn’t work with Mario, they just kicked him around,” Stern said. “Northern Trust Bank was always such a chi-chi service-oriented bank that took care of long-term customers,” Percal said. “But the bank was very aggressive and self-centered here.” On a recent balmy day, Egozi glanced up at the building, and said: “I was prepared to walk away with the loss of equity, but there was this pledged collateral also. What I am hoping for now is that they will leave me alone and let me do my project."

FHA Busts Red Tape, More Lender Responsibility

Obama's Federal Housing Administration cut red tape, and eliminated one of the least useful and most arduous processes for small businesses who wish to do business with the Federal Government. The direct link to FHA's final rule

Mortgage Insurer Turns to Lenders to Police Brokers by Nick Timiraos

excerpts from story published in the Wall Street Journal on May 8th, 2010

The Federal Housing Administration, the government agency that insures a bigger and bigger portion of home loans, plans to rely more heavily on lenders to police mortgage brokers.

The changes will put more of the onus on lenders to make sure there is no fraud or faulty underwriting in the loans they fund, and less on the FHA. The lenders could be held liable for losses if a loan insured by the FHA goes bad and there are signs of fraud or mistakes in the underwriting.

...the number of brokers approved to arrange FHA-backed loans swelled to 9,043 at the end of 2009, from 5,759 two years earlier. The FHA has required mortgage brokers to submit an annual audit to the agency and to maintain a $63,000 net worth. It also tracks the performance of brokers' loans.

...Under changes set to take effect May 20, the FHA will stop certifying mortgage brokers or tracking the individual performance of loans that they originate. Instead, it will require lenders to sponsor brokers and to assume responsibility for those loans, including losses from fraud or poorly underwritten loans, such as those in which the income stated on a loan application doesn't match accompanying financial documents.

Mortgage brokers have borne the brunt of blame for bad loans made during the housing bubble, and lenders have become more wary of dealing with them as a result.

The National Association of Mortgage Brokers generally supports the FHA's changes. Grant Stern, president of Miami brokerage Morningside Mortgage Corp., said they represented a "huge cut in red tape" that should produce better rates for consumers.

Why? Why would this produce a consumer benefit?

Mortgage lenders do not disclose to consumers the payments they receive for originating and then selling loans (service release premium" and yield spread premium) to GNMA, the secondary market maker for FHA insured loans. However, most investors reasonably know before closing what those premiums will be through the Rate Lock process - and many banks offer Rate Lock guarantees to their customers. The prior reasoning for non-disclosure is that banks couldn't know for certain how much they would earn upon sale - implying some rate risk. Some lenders do in fact have rate risk, but no loan correspondents would have rate risk.

Ginnie Mae (GNMA) performs the Mortgage Backed Security sales function of Fannie/Freddie but doesn't issue underwriting guidelines or portfolio loans. (a possible future model for the GSEs I would add)

Mortgage brokers must disclose to consumers any yield spread premiums earned - and have for some time - that are earned from lenders as a result of raising the loan's interest rate to obtain a bank payment.

FHA Loan Correspondents under the mini-eagle program acted like mortgage brokers, but probably table funded (the lender makes the loan with the lender's and immediately assigns the loan to the lender over the table) most of their loans, to gain the ablility to hide their Yield Spread premiums and so be noted as the lender of record on the mortgage itself and avoid disclosure.

Yield spread premiums are significantly higher for FHA insured loans, nearly 100 bps above agency premiums - which indicates that the market IS paying Originators a premium for insured loans. If you take a look at the Agency vs. FHA "loan level price adjustments", you'd see that the GSEs are paying substantially less to buy loans than FHA investors, which translates into higher payouts to originators for lower rates with FHA. Yet, FHA average rates are far higher than the Freddy Mac Weekly rate survey.

To give a couple of simple scenarios:

a) A First time homebuyer (FTHB) with a 680 credit score putting down 3.5% with a $100,000 FHA insured loan at 5.5% rate would give an originator's YSP of 4% or $4000 for originating the loan. Imagining that you have the same FTHB in a market with Private Mortgage Insurance available (let's imagine we're in Texas) and the borrower is getting a 95% LTV Fannie Mae loan: $2438

b) A First time homebuyer with a 680 credit score putting down 20% with a $100,000 FHA insured loan at 5.5% rate would give an originator's YSP of 4% or $4000 for originating the loan. Imagining that you have the same FTHB and the borrower is getting a 80% LTV Fannie Mae loan: $3188

The FHA loan carries an Up Front Financed Mortgage Insurance Premium of 2.25% currently (up from 1.75%) which the PMI loan lacks, but still, you can see why the interest rates on FHA loans have been higher, banks simply make more money writing them higher. If you don't have to tell anyone how much money you're making, and everyone is charging higher rates - then you charge the higher rate to make more money, regardless of the best interests of the consumer.

The GSE loans have so much more competition that banks and lenders simply can't act that way, since they'll lose market share to lower interest rate providers. There's a lot of premium built into the FHA loans that is being earned by FHA approved loan correspondents and not disclosed to consumers. Allowing more outlets to market these loans and outlets that have stronger consumer disclosures of the origination premiums should lower rates.

It's an important story in the housing finance markets that FHA rates could trend sideways or lower as mortgage rates rise due to this important procedural change. The FHA is really pushing for a more efficient market for its loans and reducing red tape! I'd say this is news considering that public perception might be strangely the opposite.

Postlude: To my loyal readers, I offer an apology for leaving a large gap in recent posts, but with the coming of the Summer, arrives the coming of a great many new posts to this blog.

FHA Raises Insurance Premiums and Credit Standards

The Federal Housing Administration (FHA) announced today that the government wants better credit quality from its low down payment buyers, as well as higher up-front premiums to be paid by all new borrowers who participate in it's Mortgage Insurance Program. In addition, the FHA commissioner David Stevens announced that "seller concessions" - the practice of sellers enticing buyers using the proceeds of realty sales to subsidize buyer's closing costs - would be halved from 6% of the purchase price to 3% after the comment period expires during the summer. The push by President Obama's appointees to modernize the FHA programs and guidelines is focused on averting the kind of loss making claims explosion experienced by the FHA insurance fund during the 1970s.

The credit change to restrict borrowers who have FICO scores of 580 from borrowing more than 90% of the purchase price of a home is not surprising. The minimum down payment on FHA loans currently stands at 3.5% of the value of the purchase. The FHA's rules and regulations were written prior to the wide adoption of the FICO score. The broad use of the FICO credit scoring system was adopted universally during the late 1980s but truly blossomed during the real estate boom, then bust of the 2000s, when lenders went so far as to issue loans solely based on collateral and FICO scores.

Raising the Upfront Financed Mortgage Insurance Premium (UFMIP) from 1.75% to 2.25% increases the costs to borrow for all new FHA loans immediately. The UFMIP is paid by every borrower regardless of down payment, the fee is added to the balance of all FHA insured loans at closing. The borrower pays the fee over 30 years or when the FHA loan is paid off in full. Today's announcement specified that this UFMIP change was a prelude to making a risk-based Mortgage Insurance Program fee scale - which will require legislation to accomplish. The Secretary announced that he will seek a change that will redistribute the UFMIP fees to borrowers with higher risks due to lower equity contributions or lower credit scores.

The reduction in sales concessions from 6% to 3% to pay closing costs, aka the "seller kickback", is aimed at raising borrower's equity ratios in their homes. Government Sponsored Agency loan programs only allow sales concessions greater than 3% when borrowers have 20% down payments. Modern FHA lenders receive generous premiums for issuing insured loans, and the need for 6% of a sales price towards closing costs provided more opportunity to send money to intermediaries, than pay for actual borrowing costs.

The Obama Administration's push to modernize the FHA's programs while their market share explodes has been handled evenly during the last year. The changes are in line with the market's expectations for prudent lending. The FHA's new set of policies should ensure that risk premiums are paid sufficiently to cover losses, as well as to discourage risky real estate transactions at the fringes. High risk loans may account for a small percentage of the insured pool, but likely represent a large percentage of un-reimbursed losses to the government.