Eisrael Gomez Realtor - Monterey County Blog

courtesy of THE WALL STREET JOURNAL

WWW.WSJ.COM

By Nick Timiraos

Why are so many homeowners underwater on their mortgages?

In crafting programs to prevent foreclosures, policymakers have assumed that the primary reason homeowners owe more on their home than it is worth is that they bought at the top of the market. In other words, they’ve lost equity primarily through forces beyond their control.

A new study challenges this premise and finds that excessive borrowing may have played as great a role.

Michael LaCour-Little, a finance professor at California State University at Fullerton, looked at 4,000 foreclosures in Southern California from 2006-08. He found that, at least in Southern California, borrowers who defaulted on their mortgages didn’t purchase their homes at the top of the market. Instead, the average acquisition was made in 2002 and many homes lost to foreclosure were bought in the 1990s. More than half of all borrowers who lost their homes had already refinanced at least once, and four out of five had a second mortgage.

The original loan-to-value ratio for these borrowers stood at a reasonable 84%, but second and third liens left homeowners with a combined loan-to-value ratio of about 150% by the time of the foreclosure sale date.

Borrowers, meanwhile, took out around $2 billion in equity from their homes, or nearly eight times the $262 million that they put into their homes. Lenders lost around four times as much as borrowers, seeing $1 billion in losses.

“[W]hile house price declines were important in explaining the incidence of negative equity, its magnitude was more strongly influenced by increased debt usage,” writes Mr. LaCour-Little. “Hence, borrower behavior, rather than housing market forces, is the predominant factor affecting outcomes.”

If other housing markets across the country offer similar findings, then the study argues that current “policies aimed at protecting homeowners from foreclosure are misguided” because lenders, and not borrowers, have born the lion’s share of economic losses.

Borrowers that bought homes without ever putting any or little equity in their homes could have seen huge returns on investment simply by extracting cash through refinancing. “Why such borrowers should enjoy any special government benefits such as waiver of the income taxation on debt forgiveness or subsidized loan modifications to reduce their borrowing costs is at best unclear,” the authors write.

The average length of unemployment is higher than it's been since government began tracking the data in 1948.

By MORTIMER ZUCKERMAN

The recent unemployment numbers have undermined confidence that we might be nearing the bottom of the recession. What we can see on the surface is disconcerting enough, but the inside numbers are just as bad.

The Bureau of Labor Statistics preliminary estimate for job losses for June is 467,000, which means 7.2 million people have lost their jobs since the start of the recession. The cumulative job losses over the last six months have been greater than for any other half year period since World War II, including the military demobilization after the war. The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.

Here are 10 reasons we are in even more trouble than the 9.5% unemployment rate indicates:

David Klein

- June's total assumed 185,000 people at work who probably were not. The government could not identify them; it made an assumption about trends. But many of the mythical jobs are in industries that have absolutely no job creation, e.g., finance. When the official numbers are adjusted over the next several months, June will look worse.

- More companies are asking employees to take unpaid leave. These people don't count on the unemployment roll.

- No fewer than 1.4 million people wanted or were available for work in the last 12 months but were not counted. Why? Because they hadn't searched for work in the four weeks preceding the survey.

- The number of workers taking part-time jobs due to the slack economy, a kind of stealth underemployment, has doubled in this recession to about nine million, or 5.8% of the work force. Add those whose hours have been cut to those who cannot find a full-time job and the total unemployed rises to 16.5%, putting the number of involuntarily idle in the range of 25 million.

- The average work week for rank-and-file employees in the private sector, roughly 80% of the work force, slipped to 33 hours. That's 48 minutes a week less than before the recession began, the lowest level since the government began tracking such data 45 years ago. Full-time workers are being downgraded to part time as businesses slash labor costs to remain above water, and factories are operating at only 65% of capacity. If Americans were still clocking those extra 48 minutes a week now, the same aggregate amount of work would get done with 3.3 million fewer employees, which means that if it were not for the shorter work week the jobless rate would be 11.7%, not 9.5% (which far exceeds the 8% rate projected by the Obama administration).

- The average length of official unemployment increased to 24.5 weeks, the longest since government began tracking this data in 1948. The number of long-term unemployed (i.e., for 27 weeks or more) has now jumped to 4.4 million, an all-time high.

- The average worker saw no wage gains in June, with average compensation running flat at $18.53 an hour.

- The goods producing sector is losing the most jobs -- 223,000 in the last report alone.

- The prospects for job creation are equally distressing. The likelihood is that when economic activity picks up, employers will first choose to increase hours for existing workers and bring part-time workers back to full time. Many unemployed workers looking for jobs once the recovery begins will discover that jobs as good as the ones they lost are almost impossible to find because many layoffs have been permanent. Instead of shrinking operations, companies have shut down whole business units or made sweeping structural changes in the way they conduct business. General Motors and Chrysler, closed hundreds of dealerships and reduced brands. Citigroup and Bank of America cut tens of thousands of positions and exited many parts of the world of finance.

Job losses may last well into 2010 to hit an unemployment peak close to 11%. That unemployment rate may be sustained for an extended period.

Can we find comfort in the fact that employment has long been considered a lagging indicator? It is conventionally seen as having limited predictive power since employment reflects decisions taken earlier in the business cycle. But today is different. Unemployment has doubled to 9.5% from 4.8% in only 16 months, a rate so fast it may influence future economic behavior and outlook.

How could this happen when Washington has thrown trillions of dollars into the pot, including the famous $787 billion in stimulus spending that was supposed to yield $1.50 in growth for every dollar spent? For a start, too much of the money went to transfer payments such as Medicaid, jobless benefits and the like that do nothing for jobs and growth. The spending that creates new jobs is new spending, particularly on infrastructure. It amounts to less than 10% of the stimulus package today.

About 40% of U.S. workers believe the recession will continue for another full year, and their pessimism is justified. As paychecks shrink and disappear, consumers are more hesitant to spend and won't lead the economy out of the doldrums quickly enough.

It may have made him unpopular in parts of the Obama administration, but Vice President Joe Biden was right when he said a week ago that the administration misread how bad the economy was and how effective the stimulus would be. It was supposed to be about jobs but it wasn't. The Recovery Act was a single piece of legislation but it included thousands of funding schemes for tens of thousands of projects, and those programs are stuck in the bureaucracy as the government releases the funds with typical inefficiency.

Another $150 billion, which was allocated to state coffers to continue programs like Medicaid, did not add new jobs; hundreds of billions were set aside for tax cuts and for new benefits for the poor and the unemployed, and they did not add new jobs. Now state budgets are drowning in red ink as jobless claims and Medicaid bills climb.

Next year state budgets will have depleted their initial rescue dollars. Absent another rescue plan, they will have no choice but to slash spending, raise taxes, or both. State and local governments, representing about 15% of the economy, are beginning the worst contraction in postwar history amid a deficit of $166 billion for fiscal 2010, according to the Center on Budget and Policy Priorities, and a gap of $350 billion in fiscal 2011.

Households overburdened with historic levels of debt will also be saving more. The savings rate has already jumped to almost 7% of after-tax income from 0% in 2007, and it is still going up. Every dollar of saving comes out of consumption. Since consumer spending is the economy's main driver, we are going to have a weak consumer sector and many businesses simply won't have the means or the need to hire employees. After the 1990-91 recessions, consumers went out and bought houses, cars and other expensive goods. This time, the combination of a weak job picture and a severe credit crunch means that people won't be able to get the financing for big expenditures, and those who can borrow will be reluctant to do so. The paycheck has returned as the primary source of spending.

This process is nowhere near complete and, until it is, the economy will barely grow if it does at all, and it may well oscillate between sluggish growth and modest decline for the next several years until the rebalancing of excessive debt has been completed. Until then, the economy will be deprived of adequate profits and cash flow, and businesses will not start to hire nor race to make capital expenditures when they have vast idle capacity.

No wonder poll after poll shows a steady erosion of confidence in the stimulus. So what kind of second-act stimulus should we look for? Something that might have a real multiplier effect, not a congressional wish list of pet programs. It is critical that the Obama administration not play politics with the issue. The time to get ready for a serious infrastructure program is now. It's a shame Washington didn't get it right the first time.

Mr. Zuckerman is chairman and editor in chief of U.S. News & World Report.

Again buyer's be patient!  We will be seeing more homes soon. -eisrael gomez

Thanks Loren for sending me this great article.  

We are seeing mutliple offers, many times above asking price for some homes hitting the market in Salinas and the Salinas Valley.  Buyer's hang in there!  There is more inventory to come.  This article shows "shadow inventory" will reach the market eventually.  These are all the vacant homes you see, but not for sale yet. 

Hi everyone,

Great article below.  I agree that keeping people in their homes should be a priority and is a faster way to the housing recovery.  I have added a modification link at the top of my website home page.  The firm I recommend is attorney based and has even been featured on CBS news by Katie Couric.  See if you qualify for loan mod and let me know how it goes. 

Loan modification should be considered by anyone that is upside down on payments, is going to be upside down on payments, thinking about short sale or foreclosure of a property.

Thanks again for all the great questions and emails.  Enjoy the article!

Eisrael Gomez

ARTICLE from the Wall Street Journal:

By RUTH SIMON

The Obama administration is pressing mortgage-servicing companies to step up their efforts to modify troubled loans under its housing-rescue program, the latest sign of frustration with the pace at which mortgage companies are reworking troubled loans.

"We believe there is a general need for servicers to devote substantially more resources to this program for it to fully succeed and achieve the objectives we all share," Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan said in a letter to 25 mortgage-servicing firms.

The letter was sent Thursday to the chief executives of companies that have signed contracts to participate in the government program, which provides financial incentives for mortgage companies and investors to reduce borrowers' payments to affordable levels.

More than 270,000 borrowers have received modification offers under the program. But housing counselors complain many borrowers are waiting for help as mortgage-servicing companies get up to speed. The administration has said its program could help as many as four million homeowners.

The administration has "started to see a significant ramp-up" in modification activity, the letter said. But it added, "there appears to be substantial variation among servicers in performance and borrower experience." It called on mortgage-servicing companies to beef up staffing and training, and to provide "an escalation path for borrowers dissatisfied with the service they have received." Freddie Mac, which serves as compliance agent for the program, will be developing a "second look" process in which it will audit a sample of rejected modification applications, the letter said.

The letter also called on mortgage companies to suggest ways the administration can improve the program's design.

Housing counselors say they have been disappointed by the lack of progress under the administration's program. "We are not getting anywhere near the level of resolutions we expected," said Bruce Dorpalen, national director of housing counseling for Acorn Housing Corp., which works with financially troubled borrowers. "The real issue is that generally the servicers are not up to speed."

Often, housing counselors "must educate the staff of the servicers about their own program," said Maeve Elise Brown, executive director of Housing and Economic Rights Advocates in Oakland, Calif., which counsels homeowners. "Homeowners on their own are not able to navigate the system."

Write to Ruth Simon at ruth.simon@wsj.com

P.S. Remember to click on the Loan Modification Link at the top of my home page

www.gomezhomes.com/loanmod

REIT Is Seeking $1 Billion for a Private-Equity Fund That Will Focus on New York and Washington

By ANTON TROIANOVSKI of the Wall Street Journal

Vornado Realty Trust, one of the biggest real-estate investment trusts in the U.S., is seeking to raise $1 billion for a private-equity fund to invest in the wave of distressed properties expected to hit in the next few years.

The move signals that Vornado, which has one of the industry's most respected management teams, believes it can raise equity more cheaply from private investors than in the public market. But the company, long a darling of investors, risks dismaying shareholders who hoped Vornado would use its investing expertise to do deals on its own balance sheet.

View Full Image

Richard B. Levine/Newscom

Vornado Realty Trust owns the space formerly occupied by the Virgin Megastore in Times Square in New York City, shown here in January.

Vornado says the proposed fund, Vornado Capital Partners LP, would be the company's "exclusive vehicle for real-estate and real-estate-related investments," according to a presentation to potential investors that was reviewed by The Wall Street Journal. In the presentation, Vornado said the fund would aim to generate returns of over 20% by taking advantage of distress in the real-estate market. Vornado would focus on the areas it knows best -- office and retail properties in New York and Washington.

The company would provide 20% of the capital in the fund. That means Vornado would generate management fees and a big chunk of any profits. But if Vornado hits a home run, much of the profit would go to private investors like pension funds and endowments, as opposed to Vornado's common shareholders.

"This has long been a company that has created an awful lot of value by taking advantage of opportunities on its own balance sheet," said Green Street Advisors analyst Mike Kirby. "If you're bringing in outside partners, granted you can make outsize fees, but the challenge will be convincing [shareholders] that those fees are as lucrative as the opportunities themselves."

For Vornado Chairman Steven Roth and Chief Executive Michael Fascitelli, the fund is a chance to do more of the bottom-market deals that made the company successful after previous downturns. In the early 1990s, Mr. Roth made a bet on Alexander's, a bankrupt Manhattan retailer, that paid off years later when the Bloomberg LP headquarters was built on Alexander's land. And in 1997, Vornado got a foothold in the Manhattan office market by buying stakes in seven office buildings for $700 million. Messrs. Roth and Fascitelli declined to comment on the proposed fund.

Some analysts believe other bargains will emerge as real-estate deals completed at the top of the market return to the market, at much cheaper prices. On Friday, a partnership led by developer George Comfort & Sons agreed to buy Worldwide Plaza in Manhattan from Deutsche Bank for about $600 million. According to Real Capital Analytics, the building was purchased in 2007 for $1.74 billion by developer Harry Macklowe. Unable to refinance short-term debt, Mr. Macklowe handed back control of Worldwide and six other Manhattan skyscrapers to lenders led by Deutsche Bank.

Analysts believe Vornado is well positioned to ride out the commercial real-estate downturn. The company played defense by raising $710 million through a stock offering in April.

In all, REITs raised some $13 billion in the stock market this spring. Much went to pay down loans, but analysts and REIT executives have said they expect REITs to continue raising capital in the public market to buy properties from distressed landlords. "Most smart observers feel like the cheapest capital for the next few years is going to be in the public market, not the private market," Mr. Kirby said.

Vornado's move appears to counter that view. To go on the offense, the company will try to tap private investors, a tall order in today's market. "Vornado has some marquee strength because of the people," said Geoffrey Dohrmann, who heads Institutional Real Estate Inc., an industry consulting firm. But "a lot of folks are feeling that while there are going to be tremendous opportunities, they haven't unfolded in wholesale fashion yet, and there's no penalty for waiting."

Some REITs, such as warehouse owners ProLogis and AMB Property Corp., have run private funds for years. They often have focused on properties that the REIT itself develops. Vornado's fund would have a broader mandate, and it is structured like a classic real-estate "opportunity fund" that seeks out good buys across regions and property types.

Mr. Dohrmann said some institutional investors, notably sovereign-wealth funds and a few large endowments, still have money to invest. And he argued that an opportunity fund is the best structure to invest in distressed real estate, which may not generate cash flow for years.

Yet Vornado faces a tough fund-raising environment. Many pension funds and endowments doubled down on highly leveraged real-estate "opportunity funds" during this decade's boom. Those are now posting dismal returns, leaving many institutional investors skittish.

Michael Restuccia, chairman of the San Joaquin County Employees' Retirement Association in California, said the pension fund isn't looking to commit new money to real estate. The fund had $136 million invested in real estate at the end of 2008, and Mr. Restuccia isn't happy with the results. "I'm very disappointed with all of these real-estate funds," he said. "I'm not so sure that I have enough confidence that somebody's going to be able to go out there and convince me that they're getting such a great buy."

In deciding to focus on properties in Washington and New York, Vornado has picked two markets that tend to be resilient over the long term, but are performing very differently in the current recession. The Washington office market in the past year has held up better than in most U.S. metropolitan areas, according to research firm Reis Inc. Average rents there rose 0.9% in the past 12 months. New York, meanwhile, saw a 14.9% decline in rents, worse than any other office market in the country.

Write to Anton Troianovski at anton.troianovski@wsj.com

San Francisco Chronicle: Chase: 138k mortgages modified in past 3 months
06/30/2009
Chase today announced it has approved 138,000 trial mortgage modifications in the past three months. Of the mortgage modifications approved, Chase said 87,100 were through Making Home Affordable. 

NOTE:  Interesting article.  Always contact your bank, attorney and CPA when considering a modification, short sale or walking from your property.  - Eisrael 831-809-8266