Oregon economy climbs higher, by Suzanne Stevens, Portland Business Journal

Oregon‘s economy showed continued growth in February, led by employment services payrolls, strong U.S. consumer sentiment and an increase in the interest rate spread.

The University of Oregon Index of Economic Indicators rose 0.7 percent to 91.3 in February from January. The index has a benchmark of 100 set in 1997.

While unemployment claims edged up, they remain well below 2010 levels and overall labor market trends are strong. Employment services payrolls, largely temporary employment, were up 3.2 percent and non-farm payrolls were also up, adding about 9,800 new jobs last month. Since October, the Oregon economy has added about 5,900 jobs each month.

Other Oregon data reflected in the UO Index include:

Initial unemployment claims rose slightly to 8,551 in February, up from 8,487 in January.
Residential permits inched up to 629 from 627.
U.S. consumer confidence rose to 73.1 from 71.2.
New manufacturing orders for non-defense, non-aircraft capital goods dipped to 39,402 from 39,728.
The interest rate spread between for 10-year treasury bonds and the federal funds rate widened to 3.42 from 3.22, a signal of investor confidence in the U.S. economy.
The index has continued to climb since October 2010, when it was 88.9.

Read more: Oregon economy climbs higher | Portland Business Journal

The Problem In 2010 Is Underwriting, by The Mortgage Professor

Borrowers today are paying for the excesses of yesterday. During the go-go years leading to the crisis, underwriting rules became incredibly lax, and now they have become excessively restrictive.

My mailbox today is stuffed with letters from borrowers who are being barred from the conventional (non-FHA) market by mortgage underwriting rules that have become increasingly detailed and rigid. In many cases the rules leave no room for discretion by the loan originator, and where there is discretion, originators are often too frightened to use it because of the heightened risk of having to buy back the mortgage or incur other penalties.

Fannie Mae and Freddie Mac are the major source of the problems, but the large wholesale lenders who acquire loans from thousands of small mortgage lenders and mortgage brokers have their own rules which in many cases are even more restrictive than those of the agencies. Before the financial crisis, compliance with underwriting rules was subject to casual spot checks. Today, every loan is carefully scrutinized, and those that don’t past muster must be repurchased by the seller. The loss on a buyback wipes out the profit on about 8 loans of the same size.

 The Affordability Requirement Is a Curse


The most important of the underwriting problems involve income documentation. The abuses that arose during the go-go years before 2007 had such a major impact on the mindsets of lawmakers, regulators and Fannie/Freddie that an affordability requirement has become the law of the land; all loans must be demonstrably affordable to the borrower. I have already written about the absurdity of this requirement, which makes ineligible many perfectly good loans to good people – such as the lady with a lot of equity and perfect credit who wants to borrow the money she needs to stay in her home for a few years before she sells it.

The affordability requirement imposes an especially heavy burden on self-employed borrowers, who face the greatest difficulty in proving that they have enough income to qualify. Prior to the crisis, a variety of alternatives to full documentation of income were available, including “stated income,” where the lender accepted the borrower’s statement subject to a reasonableness test and verification of employment.

The Self-Employed Are Back to Square One 


Stated income documentation was designed originally for self-employed borrowers, and it worked very well for years. Then, during the go-go period preceding the crisis, the option was abused. Instead of curbing the abuses we eliminated the option, which is akin to outlawing knives after an outbreak of hari kari. Rejection of loan applications by self-employed borrowers with high credit scores and ample equity are now commonplace. This letter is typical.

“We were pre-approved, found a home for less than the amount approved, paid for appraisal, inspection, earnest money, title company, then a few days before closing the lender told us they cannot honor the approval because our business income was 40% lower in 2009 than 2008…can they do this?”

In this case, I have not been able to determine whether there was a rule change — from using the average of the two years to using the lower of the two years — or whether it was the interpretation that changed, but the result is the same: rejection. Before the crisis, this home purchase would have been saved by using stated income documentation.

Note that in this particular case, the cost of rejection to the buyer was raised by the incompetence of the lender. Allowing the buyer to proceed almost all the way to a closing before checking their tax statements is inexcusable. Any home buyer whose income is business-related should be sure to get their income approved before putting down earnest money and incurring other mortgage expenses.

 The Robotization of Underwriting


Loan underwriting, the process of deciding whether a loan application should be approved or rejected, used to be a profession that demanded a high level of discretion and judgment. That is no longer the case, as illustrated by this letter.

“My wife recently applied in her name only for a mortgage to purchase a single family home which will be our residence. She earns a $70,000 salary that is more than enough to cover the mortgage and has a credit score of 800. We have no debt.


I work from home trading stocks. In the market crash 08/09 I sustained losses in my trading account of $90,000. We file our taxes jointly. Today my wife’s application was refused citing Fannie/Freddie guidelines that state that tax losses must be deducted from her income…We are stunned…”
This case is typical of many that used to involve a judgment call by the underwriter. The issue is whether the husband’s capital loss actually indicated a potential threat to the ability of his wife to service the mortgage. If the husband had $400,000 in his trading account, for example, the plausible judgment would be that such a threat was remote and the loan should be approved. But in this case, the underwriter did not explore the circumstances — the rejection was automatic based on the rule. With no alternative types of documentation available, the loan was not made.

Why didn’t the underwriter use the judgment for which he is presumably being paid? He acted like a robot instead of an underwriter because his employer had instructed him to stay within the letter of the rules. The risk from making a judgment call that turns out to be mistaken has become so high that lenders find it more prudent to avoid such calls altogether.

The Lowest Rates Are Available to Few 


In addition to curtailing unduly the number of potential borrowers who qualify for loans, the current policies of Fannie and Freddie have shrunk the number of acceptable borrowers who qualify for the best prices to a very small group. To get the lowest rate possible on a mortgage sold to Fannie Mae, the borrower must have a credit score of 740 and a ratio of loan to property value of no more than 60%. The property must be single family but not manufactured, and in an area not subject to an “adverse market delivery charge.” The mortgage cannot have an interest-only provision, and any second mortgage has to be included in the 60% limit noted above.

Fannie and Freddie are working at cross purposes to the Federal Reserve. The Fed is trying to counter economic weakness by forcing down long-term interest rates, including those on prime mortgages, to all-time lows. Fannie and Freddie have made it increasingly difficult for potential borrowers to qualify, and cut the number who qualify for the very best rates to a trickle.

Thanks to Jack Pritchard for helpful comments.


CoreLogic Home Price Index Spells Top Five Trouble for the Greater Northwest Real Estate Market, by Portland Housing Blog

We all know by now that the Northwest region of the country was late to the housing bubble. CoreLogic’s latest report shows that NW states such as Idaho, Oregon, and Washington are showing up late to the bust, and we are now leading the way when it comes to declining prices.

“CoreLogic (NYSE: CLGX), a leading provider of information, analytics and business services, today released its Home Price Index (HPI) that showed that home prices in the U.S. remained flat in July as transaction volumes continue to decline. This was the first time in five months that no year-over-year gains were reported. According to the CoreLogic HPI, national home prices, including distressed sales showed no change in July 2010 compared to July 2009.

June 2010 HPI showed a 2.4 percent* year-over-year gain compared to June 2009. 36 states experienced price declines in July, twice the number in May and the highest number since last November when prices nationally were still declining.”


“The top five states with the greatest depreciation, including distressed sales, were Idaho (-12.6 percent), Alabama (-9.7 percent), Utah (-5.6 percent), Oregon (-4.8 percent) and Washington (-4.3 percent).”


“Excluding distressed sales, the top five states with the greatest depreciation were: Idaho (-9.9 percent), Michigan (-6.7 percent), Arizona (-5.6 percent), Nevada (-4.8 percent) and Oregon (-3.8 percent).”


Whether your sale is distressed or you are holding out for bubble era pricing, it’s become obvious that if you are going to sell a property, you’re going to end up settling for an ever lower price the longer you wait to pull the trigger. Plan accordingly if you are trying to sell a home these days in the great Northwest. Sell now or be priced in forever!

If you’re a potential buyer? My best advice is that you keep your powder dry, pay off any existing debts, stop borrowing money, and save as much as you can. Real home prices in OR, WA, ID have nowhere to go but downward as the pool of greater fools has all but evaporated at this juncture. Prudence takes immense patience in today’s real estate game.

The days of EZ bank loans are long gone. All that matters now are savings and real wages when it comes to buying real estate. When the cost of capital funds are cheap, the capital asset appreciates in value. When the cost of capital funds become expensive, the capital asset declines in value. We are in the midst of a generational shift in that equation.

Equity’s a cold hard bitch when it turns negative…




The U.S. Needs a New and Improved New Deal, by MARK THOMA, The Fiscal Times


This recession has been particularly unkind to labor markets, and indications are that a full recovery of employment is still years away. But even after the recession finally ends, worrisome structural trends that were present before the recession began will continue to cause considerable uncertainty for working class households.

The rapid pace of structural change in recent years due to technological innovation and globalization has increased the risk of worker displacement in a wide variety of industries.  Additional factors such as the decline in employer support for health care, the decline in employer-provided pensions, threats to Social Security, stagnant wages, and highly flexible labor markets compound the uncertainty.


The social contract of bygone days has faded
in the face of globalization and other pressures.

There was a time when employers provided employment, health and retirement security in return for employee loyalty, but the social contract of bygone days has faded in the face of globalization and other pressures.

President Obama, Congress and most Americans are very focused on the problems arising from the current recession, and that’s understandable. But the structural issues that are generating so much additional uncertainty for working-class households should not be ignored. 

A New New Deal
What the country needs is a “new and improved new deal” that reduces the risks associated with structural change, and does a better job of preventing and easing cyclical downturns. The original New Deal,  shaped by the experience of the Great Depression, was designed to overcome problems associated with large cyclical fluctuations in the economy. The “three Rs”  that served as its guiding principles – relief, recovery and reform – reflected this emphasis. We also see the focus on cyclical problems in the development of monetary and fiscal policy tools as countercyclical stabilization devices, and in the automatic stabilizers that have been built into the economy.

Both monetary and fiscal policy have helped to ease the cyclical downturn we are experiencing, but as our present experience makes all too clear, we can do better. Part of a new and improved new deal should focus on doing more to prevent problems before they occur and limiting the damage when cyclical downturns do occur despite our efforts. There’s little doubt that inadequate regulation by monetary authorities before the most recent financial crisis allowed problems to occur, and fiscal policy in particular could have been used more effectively to offset the downturn.

But the core of a new and improved new deal should be to ease the uncertainties associated with structural change. On average, technology and globalization make us all better off, but the distribution of the costs and benefits from this type of change does not guarantee that every individual will be a net beneficiary.

If you are one of the people who loses a job or has skills made obsolete because oftechnology or globalization, the change does not work in your favor. We often rely upon the idea that the winners could fully compensate the losers and still have something left over, and then use this to justify support for these kinds of policies. But it’s rare for this compensation to actually take place. Hence, it’s understandable why some groups are not so supportive of unbridled structural change.

Maintaining flexibility is the key to responding to shocks that hit the economy – the faster we can adjust efficiently the better – but this flexibility is also a big source of uncertainty for labor markets. So how do we balance the desire for flexibility with the desire for security? That is, how do we achieve “flexicurity?” 

Taking steps to reduce the costs of changing jobs is a start. More government help matching workers and jobs along the lines that have been so successful in Denmark would be beneficial, as would enhanced portability for health insurance, tax credits for workers willing to relocate, effective job retraining programs, wage insurance, and unemployment compensation linked to industry or region-specific conditions. Anything that reduces the cost of changing jobs without unduly inhibiting the desire to look for employment would help.

More generally, the insecurity that working class households face could be reduced by enhancing Social Security to compensate for the loss of employer-based retirement programs, by making health care truly universal, by improving support for childcare – expanding preschool has multiple benefits – and through other social programs recognizing that workers have responsibilities that go beyond the workplace. Implementation of international labor and environmental standards wouldn’t hurt either. The fact that multinational corporations have rendered traditional national borders obsolete makes country-by-country approaches to many problems, including this one, difficult, if not impossible. Coordinated responses across countries are needed, but those types of policies are unlikely in the immediate future.

The various shades of populist revolt we are seeing are due, at least in part, to worries about the future. Working class households want and need more security. If we want to maintain a flexible and dynamic economy that can make the transitions necessary to remain competitive in a world economy, but still be compassionate toward those who end up paying the costs of that flexibility, we need to enhance our social protections so that the adjustment costs are more equitably distributed.

As members of Congress reconvene, I would like to see them address our present problems through another round of stimulus directed specifically at job creation. Unfortunately, I don’t hold out much hope that Congress will do much along these lines. But it’s still possible for Congress to do something important for workers by beginning work on reducing the uncertainty associated with structural change. Concerns about how to pay for new initiatives will make progress difficult, but workers will benefit greatly if Congress and the administration somehow manage to ease the uncertainties that arise from our need to remain competitive in an ever-changing global environment.

Facing Foreclosure? What To Do Right Now, by Jerry DeMuth, HouseLogic.com

If you’re facing foreclosure, don’t panic: Take steps right now to save your home or at least lessen the blow of its loss.

A record high 2.8 million properties were hit with foreclosure notices (http://www.realtytrac.com/contentmanagement/pressrelease.aspx?channelid=9&accnt=0&itemid=8333) in 2009. That’s the bad news. The good news: About two-thirds of notices don’t result in actual foreclosures, says Doug Robinson of NeighborWorks, a nonprofit group that offers foreclosure counseling.

Many homeowners find alternatives to foreclosure by negotiating with lenders, often with the help of foreclosure counselors. If you’re facing foreclosure, call your lender right now to determine your options, which can include loan modification, forbearance, or a short sale.

Foreclosure process takes time

The entire foreclosure process (http://portal.hud.gov/portal/page/portal/HUD/topics/avoiding_foreclosure/foreclosureprocess) can take anywhere from two to 12 months, depending on how fast your lender acts and where you live. Some states allow a nonjudicial process that’s speedier, while others require time-consuming judicial proceedings.

Once you miss at least one mortgage payment, the steps leading up to an actual foreclosure sale can include demand letters, notices of default, a recorded notice of foreclosure, publication of the debt, and the scheduling of a foreclosure auction. Even when an auction is scheduled, however, it may never occur, or it may occur but a qualified buyer doesn’t materialize.

Bottom line: Foreclosure can be a long slog, which gives you enough time to come up with an alternative. Meantime, if your goal is to salvage your home, think about keeping up with payments for homeowners insurance and property taxes. Otherwise, you could compound your problems by getting hit with an uncovered casualty loss or liability suit, or tax liens.

Read the fine print

Start by reviewing all correspondence you’ve received from your lender. The letters–and phone calls–probably began once you were 30 days past due. Also review your mortgage documents, which should outline what steps your lender can take. For instance, is there a “power of sale” clause that authorizes the sale of your home to pay off a mortgage after you miss payments?

Determine the specific foreclosure laws (http://www.foreclosurelaw.org) for your state. What’s the timeline? Do you have “right of redemption,” essentially a grace period in which you can reverse a foreclosure? Are deficiency judgments that hold you responsible for the difference between what your home sells for and your loan’s outstanding balance allowed? Get answers.

Pick up the phone

Don’t give up because you missed a mortgage payment or two and received a notice of default. Foreclosure isn’t a foregone conclusion, but it’s heading in that direction if you don’t call your lender. Dial the number on your mortgage statement, and ask for the Loss Mitigation Department. You might stay on hold for a while, but don’t hang up. Once you do get someone on the line, take notes and record names.

The next call should be to a foreclosure avoidance counselor (http://www.hud.gov/offices/hsg/sfh/hcc/fc/) approved by the U.S. Department of Housing and Urban Development. One of these counselors can, free of charge, explain your state’s foreclosure laws, discuss alternatives to foreclosure, help you organize financial documents, and even represent you in negotiations with your lender. Be wary of unsolicited offers of help, since foreclosure rescue scams (http://www.houselogic.com/articles/avoid-foreclosure-rescue-scams/) are common.

Be sure to let your lender know that you’re working with a counselor. Not only does it demonstrate your resolve, but according to NeighborWorks, homeowners who receive foreclosure counseling are 1.6 times more likely to avoid losing their homes than those who don’t. Homeowners who receive loan modifications with the help of a counselor also reduce monthly mortgage payments (http://www.nw.org/newsroom/pressReleases/2009/netNews111809.asp) by $454 more than homeowners who receive a modification without the aid of a counselor.

Lender alternatives to foreclosure

Hope Now (http://www.hopenow.com), an alliance of mortgage companies and housing counselors, can aid homeowners facing foreclosure. A self-assessment tool will give you an idea whether you might be eligible for help from your lender, and there are direct links to HUD-approved counseling agencies and lenders’ foreclosure-prevention programs.

There are alternatives to foreclosure that your lender might accept. The most attractive option that’ll allow you to keep your home is a loan modification that reduces your monthly payment. A modification can entail lowering the interest rate, changing a loan from an adjustable rate to a fixed rate, extending the term of a loan, or eliminating past-due balances. Another option, forbearance, can temporarily suspend payments, though the amount will likely be tacked on to the end of the loan.

If you’re unable to make even reduced payments, and assuming a conventional sale isn’t possible, then it may be best to turn your home over to your lender before a foreclosure is completed. A completed foreclosure can decimate a credit score, which will make it hard not only to purchase another home someday, but also to rent a home in the immediate future.

Your lender can approve a short sale, in which the proceeds are less than what’s still owed on your mortgage. A deed-in-lieu of foreclosure, which amounts to handing over your keys to your lender, is another possibility. The earlier you begin talks with your lender, the more likelihood of success.

Explore government programs

The federal government’s Making Home Affordable (http://www.makinghomeaffordable.gov/) program offers two options: loan modification (http://www.houselogic.com/articles/making-home-affordable-modification-option/) and refinancing (http://www.houselogic.com/articles/making-home-affordable-refinance-option/). A self-assessment will indicate which option might be right for you, but you need to apply for the program through your lender. A Making Home Affordable loan modification requires a three-month trial period before it can become permanent.

Fannie Mae and Freddie Mac have their own foreclosure-prevention programs as well. Check to determine if either Fannie (http://www.fanniemae.com/loanlookup) or Freddie (http://www.freddiemac.com/mymortgage) owns your mortgage. Present this information to your lender and your counselor. Fannie and Freddie also have rental programs under which former owners can remain in recently foreclosed homes on a month-to-month basis.

The federal Home Affordable Foreclosure Alternatives (https://www.hmpadmin.com/portal/programs/foreclosure_alternatives.html) program, which takes full effect in April 2010, offers lenders financial incentives to approve short sales and deeds-in-lieu of foreclosure. It also provides $3,000 in relocation assistance to borrowers. Again, talk to your lender and counselor.

Multnomahforeclosures.com: Bank Owned Property List Update for August 2010

August REO list for bank owned property has been added to Multnomahforeclosures.com . REO lists for Clackamas, Multnomah and Washington County has been addd to the site. The homes listed in these files were deeded back or returned to the investor or lender due to the finalizing of the foreclosure process. Many of these homes may already be on the market or will soon will be. It would not be a bad idea to contact the new owner of these properties and find out what their plans are when it comes to their future ownership of the property.

Multnomah County Foreclosures

Is this the Right Time for the Fed to go Negative?, by Willem Buiter, Wsj.com

Ben Bernanke, chairman of the Federal Reserve Bank, has a lot more tools for supporting U.S. economic activity through expansionary monetary policy than he discussed in his Jackson Hole speech, which alluded only to more quantitative easing and credit easing—increasing the size and changing the liquidity composition of the Fed’s balance sheet.

Perhaps out of fear of resurrecting the moniker “Helicopter Ben,” Mr. Bernanke did not refer to the combined fiscal-monetary stimulus that (almost) always works: a fiat money-financed increase in public spending or tax cut. Treasury Secretary Tim Geithner can always send a sufficiently large check to each U.S. resident to ensure that household spending rises. By borrowing the funds from the Fed, there is no addition to the interest-bearing, redeemable debt of the state. As long as households are confident that these transfers will not be reversed later, “helicopter money drops” will, if pushed far enough, always boost consumption.

However, stronger consumer expenditure, while appropriate from a cyclical perspective—any additional demand is welcome—is not what the U.S. needs for long-term sustainability and structural adjustment: to raise the national saving rate, boost fixed investment in plant, equipment and infrastructure, achieve a trade surplus and shift resources from the non-tradable to the tradable sectors.

By way of illustration, an eight percentage point reduction in public and private consumption as a share of GDP could be compensated for by an increase in the trade surplus of five per cent of GDP and in non-housing U.S. fixed capital formation of three per cent of GDP. To achieve this, a much weaker real exchange rate and lower real interest rates are necessary. To pursue these objectives speedily a Federal Funds target rate of around minus three or minus four per cent may well be required right now, in our view. This brings monetary policy up against the zero lower bound (zlb) on nominal interest rates.

The zlb results from the existence of currency (dollar bills and coins) with a zero nominal interest rate. Even allowing for “carry costs” of currency (storage, safekeeping, insurance etc.), this makes it impossible for competing assets like government bills, to offer interest rates much below zero. Stimulating demand in the U.S. economy, while rebalancing the composition of demand and production in the desired directions, requires a much lower Federal Funds target rate than is feasible with the zlb in place.

To restore monetary policy effectiveness in a low interest rate environment when confronted with deflationary or contractionary shocks, it is necessary to get rid of the zlb completely. This can be done in three ways: abolishing currency, taxing currency and ending the fixed exchange rate between currency and bank reserves with the Fed. All three are unorthodox. The third is unorthodox and innovative. All three are conceptually simple. The first and third are administratively easy to implement.

The first method does away with currency completely. This has the additional benefit of inconveniencing the main users of currency—operators in the grey, black and outright criminal economies. Adequate substitutes for the legitimate uses of currency, on which positive or negative interest could be paid, are available.

The second approach, proposed by Gesell, is to tax currency by making it subject to an expiration date. Currency would have to be “stamped” periodically by the Fed to keep it current. When done so, interest (positive or negative) is received or paid.

The third method ends the fixed exchange rate (set at one) between dollar deposits with the Fed (reserves) and dollar bills. There could be a currency reform first. All existing dollar bills and coin would be converted by a certain date and at a fixed exchange rate into a new currency called, say, the rallod. Reserves at the Fed would continue to be denominated in dollars. As long as the Federal Funds target rate is positive or zero, the Fed would maintain the fixed exchange rate between the dollar and the rallod.

When the Fed wants to set the Federal Funds target rate at minus five per cent, say, it would set the forward exchange rate between the dollar and the rallod, the number of dollars that have to be paid today to receive one rallod tomorrow, at five per cent below the spot exchange rate—the number of dollars paid today for one rallod delivered today. That way, the rate of return, expressed in a common unit, on dollar reserves is the same as on rallod currency.

For the dollar interest rate to remain the relevant one, the dollar has to remain the unit of account for setting prices and wages. This can be encouraged by the government continuing to denominate all of its contracts in dollars, including the invoicing and payment of taxes and benefits. Imposing the legal restriction that checkable deposits and other private means of payment cannot be denominated in rallod would help.

In the other major industrial countries too (the euro area, Japan and the U.K.), monetary policy is constrained by the zlb. Conventional fiscal expansion with government debt-financed deficit increases would be ineffective or infeasible because of fiscal unsustainability. Like the Fed, the ECB, the Bank of Japan and the Bank of England therefore should lobby for the legislation necessary to eliminate the zlb. The euro area and Japan, which don’t suffer from deficient saving rates or undesirable current account deficits, could in addition stimulate consumption through helicopter drops of money—base money-financed fiscal stimuli.

All three methods for eliminating the zlb, although administratively feasible and conceptually simple, are innovative and unorthodox. Central banks are conservative. The mere fact that something has not been done before often is sufficient grounds for not doing it now. The cost of rejecting institutional innovation to remove the zlb could, however, be high: a material risk of continued deficient aggregate demand, persistent deflation and, in the U.S. and the U.K., unnecessary conflict between short-term stabilization and long-term sustainability and rebalancing.

—Willem Buiter is chief economist for Citi.

Obama Administration Awards Additional $1 Billion to Stabilize Neighborhoods Hard-Hit by Foreclosure, RisMedia

RISMEDIA, September 13, 2010—U.S. Housing and Urban Development Secretary Shaun Donovan awarded an additional $1 billion in funding to all states along with a number of counties and local communities struggling to reverse the effects of the foreclosure crisis. The grants announced today represent a third round of funding through HUD’s Neighborhood Stabilization Program (NSP) and will provide targeted emergency assistance to state and local governments to acquire, redevelop or demolish foreclosed properties.

“These grants will support local efforts to reverse the effects these foreclosed properties have on their surrounding neighborhoods,” said Donovan. “We want to make certain that we target these funds to those places with especially high foreclosure activity so we can help turn the tide in our battle against abandonment and blight. As a direct result of the leadership provided by Senator Chris Dodd and Congressman Barney Frank, who played key roles in winning approval for these funds, we will be able to make investments that will reduce blight, bolster neighboring home values, create jobs and produce affordable housing.”

The funding announced today is provided under the Dodd-Frank Wall Street Reform and Consumer Protection Act. To date, there have been two other rounds of NSP funding: the Housing and Economic Recovery Act of 2008 (HERA) provided $3.92 billion and the American Recovery and Reinvestment Act of 2009 (Recovery Act) appropriated an additional $2 billion. Like those earlier rounds of NSP grants, these targeted funds will be used to purchase foreclosed homes at a discount and to rehabilitate or redevelop them in order to respond to rising foreclosures and falling home values. Today, 95 cents of every dollar from the first round of NSP funding is obligated—and is in use by communities, buying up and renovating homes, and creating jobs.

State and local governments can use their neighborhood stabilization grants to acquire land and property; to demolish or rehabilitate abandoned properties; and/or to offer downpayment and closing cost assistance to low- to moderate-income home buyers (household incomes do not exceed 120% of area median income). In addition, these grantees can create “land banks” to assemble, temporarily manage, and dispose of vacant land for the purpose of stabilizing neighborhoods and encouraging re-use or redevelopment of urban property. HUD will issue an NSP3 guidance notice in the next few weeks to assist grantees in designing their programs and applying for funds.

NSP 3 will take full advantage of the historic First Look partnership Secretary Donovan announced with the National Community Stabilization Trust last week. First Look gives NSP grantees an exclusive 12-14 day window to evaluate and bid on properties before others can do so. By giving every NSP grantee the first crack at buying foreclosed and abandoned properties in these targeted neighborhoods, First Look will maximize the impact of NSP dollars in the hardest-hit neighborhoods—making it more likely the properties that communities want to buy are strategically chosen and cutting in half the traditional 75-to-85 day process it takes to re-sell foreclosed properties .

NSP also seeks to prevent future foreclosures by requiring housing counseling for families receiving home buyer assistance. HUD seeks to protect future home buyers by requiring states and local grantees to ensure that new home buyers under NSP receive homeownership counseling and obtain a mortgage loan from a lender who agrees to comply with sound lending practices.

In determining the allocations announced today, HUD, as it did with NSP1, followed key indicators for the distribution formula outlined by Congress. HUD is using the latest data to implement the Congressional formula. The formula weighs several factors to match funding to need in the 20% most distressed neighborhoods as determined based on the number and percentage of home foreclosures, the number and percentage of homes financed by a subprime mortgage related loan, and the number and percentage of homes in delinquency. To estimate the level of need down to the neighborhood level, HUD uses a model that takes into account causes of foreclosures and delinquencies, which include housing price declines from peak levels, and increases in unemployment, and rate of high cost and highly leveraged loans. HUD also considers vacancy problems in neighborhoods with severe foreclosure related problems.

In addition to a third round of NSP funding, the Dodd-Frank Wall Street Reform and Consumer Protection Act creates a $1 billion Emergency Homeowners Loan Program to be administered by HUD. This loan program will provide up to 24 months in mortgage assistance to homeowners who are at risk of foreclosure and have experienced a substantial reduction in income due to involuntary unemployment, underemployment, or a medical condition. HUD will announce additional details, including the targeted areas and other program specifics when the program is officially launched in the coming weeks.

For more information, visit www.hud.gov.

RISMedia welcomes your questions and comments. Send your e-mail to:realestatemagazinefeedback@rismedia.com.


Housing Doesn’t Need a Crash. It Needs Bold Ideas, Gretchen Morgenson, Nytimes.com

WE all know that most of us don’t tackle problems until they’ve morphed into full-blown crises. Think of all those intersections that get stop signs only after a bunch of accidents have occurred.

Better yet, think about the housing market.

Only now, after it has become all too clear that the government’s feeble efforts to “help” troubled homeowners have failed, are people considering more substantive approaches to tackling the mortgage and real estate mess. Unfortunately, it’s taken the ugly specter of a free fall or deep freeze in many real estate markets to get people talking about bolder alternatives.

One reason the Treasury’s housing programs have caused so much frustration among borrowers — and yielded so few results — is that they seemed intended to safeguard the financial viability of big banks and big lenders at homeowners’ expense.

For example, the government — in order, it believed, to protect the financial system from crumbling — has never forced banks to put a realistic valuation on some of the sketchy mortgage loans they still have on their books (like the $400 billion in second mortgages they hold).

All those loans have been accounted for at artificially lofty levels, and have thereby provided bogus padding on balance sheets of banks that own them. Banks’ refusal to write down these loans has made it harder for average borrowers to reduce their mortgage obligations, leaving them in financial distress or limbo and dinging their ability to be the reliable consumers everyone wants them to be.

Various proposals are being batted around to address the mortgage morass; one is to do nothing and let real estate markets crash. That way, the argument goes, buyers would snap up bargains and housing prices would stabilize.

Yet little about this trillion-dollar problem is so simple. While letting things crash may seem a good idea, there are serious potential complications. Here’s just one: Many lenders and some government agencies bar borrowers who sold their homes for less than the outstanding loan balance — known as a “short sale” — from receiving a new mortgage within a certain period, sometimes a few years.

For example, delinquent borrowers who conducted a short sale are ineligible for a new mortgage insured by the Federal Housing Administration for three years; Fannie Maeblocks such borrowers for at least two years. Private lenders have similar guidelines.

Such rules made sense in normal times, but their current effect is to keep many people out of the market for years. And as home prices have plunged, leaving legions of borrowers underwater on loans, short sales have exploded. CoreLogic, an analytic research firm, estimates that 400,000 short sales are taking place each year.

More can be expected: 68 percent of properties in Nevada are worth less than the outstanding mortgage, CoreLogic said, while half in Arizona and 46 percent in Florida are underwater.

“There is this perception that maybe we should let the market crash and then prices will level off and people will come out and buy,” said Pam Marron, a senior mortgage adviser at the Waterstone Mortgage Corporation near Tampa, Fla. “But where are the buyers going to come from? So many borrowers are underwater and they’re stuck; they can’t buy another home.”

There is no doubt that real estate and mortgage markets remain deeply dysfunctional in many places. Given that the mess was caused by years of poisonous lending, regulatory inaction and outright fraud — and yes, irresponsible borrowing — this is no surprise. Throw in the complexity of working out loans in mortgage pools whose ownership may be unclear, and the problem seems intractable.

The moral hazard associated with helping troubled borrowers while penalizing responsible ones who didn’t take on outsize risks adds to the difficulties.

STILL, there are real, broad economic gains to be had by helping people who are paying their mortgages to remain in their homes. Figuring out how to reduce their payments can reward responsible borrowers while slowing the vicious spiral of foreclosures, falling home prices and more foreclosures. And it just might help restore people’s confidence in the economy and get them buying again.

With that in mind, let’s recall an idea described in this space on Nov. 16, 2008. As conceived by two Wall Street veterans, Thomas H. Patrick, a co-founder of New Vernon Capital, and Macauley Taylor, principal at Verum Capital, the plan calls for refinancing all the nonprime, performing loans held in privately issued mortgage pools (except for Fannie’s and Freddie’s) at a lower rate.

The mass refinancing could have helped borrowers, while retiring mortgage securities at par and thus helping pension funds, banks and other investors in those pools recover paper losses created when prices plummeted. Fannie Mae and Freddie Mac could have financed the deal with debt.

In the fall of 2008, when Mr. Patrick and Mr. Taylor tried to get traction with their proposal, roughly $1.5 trillion in mortgages sat in these pools. Of that, $1.1 trillion was still performing.

Instead of refinancing those mortgages, however, the Washington powers-that-be hurled $750 billion of taxpayer money into the Troubled Asset Relief Program, which bailed out banks instead. Though one goal was to get banks lending again, it hasn’t happened.

Now, almost two years later, $1.065 trillion of nonprime loans is sloshing around in private mortgage pools, according to CoreLogic’s securities database. While CoreLogic doesn’t report the dollar amount of loans that are performing, it said that as of last June, two-thirds of the 1.6 million loans in those pools were 60 days or more delinquent.

That means one-third of the borrowers in these pools are paying their mortgages. But it is likely that many of these people owe more on their loans than their homes are worth and would benefit greatly from an interest-rate cut.

If Fannie and Freddie bought these loans out of the pools at par and reduced their interest rates, additional foreclosures might be avoided. The only downside to the government would be if some loans it purchased went bad.

The benefits of the plan could easily outweigh the risks. Institutions holding these loans would be fully repaid, a lot of borrowers would be helped and additional foreclosures that are so damaging to neighborhoods might be averted.

“Every program that the government has announced was focused on bad credits, but they were trying to fix a hole that is too big,” Mr. Patrick said. “The idea is to try to preserve the decent risks and not let them go bad.”

At the very least, this is a sophisticated and realistic idea that’s still worth considering.

Executives With Criminal Records Slip Through FHA Crackdown, Documents Show, By Brian Grow, Publicintegrity.org

A crackdown on reckless mortgage lenders by the Federal Housing Administration has failed to root out several executives with criminal records whose firms continue to do business with the agency in violation of federal law, according to government documents, court records and interviews.

The get-tough campaign has also been hamstrung because, even when the FHA can ban mortgage companies for wrongdoing or an excessive default rate, the agency does not have the legal power to stop their executives from landing jobs at other lenders, or open new firms.

After the collapse of the home loan market, the FHA launched an effort aimed at reducing losses on mortgages it insures by weeding reckless lenders out of the program.

But documents and interviews reveal that more than 34,000 home loans have been issued over the past two years by a dozen FHA-approved lenders that have employed people who were convicted of felonies, banned from the securities industry or previously worked for firms barred by the agency.

More than 3,000 of those loans, about 9 percent, were seriously delinquent or already a claim on the FHA insurance fund as of June 30. That’s nearly triple the rate for all loans made by FHA lenders over the past two years, about 3.4 million.

Compared with other regulators, critics of the FHA say it rarely cracks down on company executives. “In the securities industry, you bar people for life. You don’t see that a lot with the FHA,” says Mark Calabria, director for financial regulation studies at the Cato Institute.

Policing the cubicles and corner suites of FHA lenders is crucial because the agency, which encourages home ownership by insuring mortgages made by qualified lenders, has become a cornerstone of the U.S. housing market. Its portfolio of guaranteed loans has grown to $800 billion in March from $466 billion in fiscal 2008. The agency’s insurance program is financed by premiums paid by FHA borrowers, but taxpayers would be on the line if those funds are depleted.

The agency has long struggled to stop companies from slipping risky loans under its protective umbrella. It has done this in part by barring lenders if too many of their borrowers default. 
FHA Commissioner David Stevens has vigorously defended the agency’s bid to drop lenders with higher than average default rates or evidence of fraudulent loans. “No one can feign that we’re not all over fraud now, in this administration,” Stevens says. Since January, the agency has fined or withdrawn the approval of more than 1,100 lenders to issue federally-insured mortgages, according to records provided by the FHA.

But he added, “By no means do I think are we are out of the woods, yet. …There are going to be some of these guys who slip through.”

The internal watchdog at the Department of Housing and Urban Development, which oversees the FHA, says the agency has failed to systematically monitor the people making home loans. In recent Congressional testimony, he called for “a new mind-set at the FHA to know your participants and not just the entity.”

Legislation passed by Congress last year bars any individual from working for an FHA lender in a range of positions if convicted of a felony that “involved an act of fraud, dishonesty, or a breach of trust, or money laundering.” The law, which broadly addressed foreclosure prevention efforts and housing policies, also rendered an FHA lender ineligible if it employs a person convicted of an offense “that reflects adversely” upon the company.

According to HUD and FHA documents, court records and interviews, at least five convicted felons are now working for FHA lenders or worked for them in recent years.

Gregg S. Marcus, for example, was co-owner of a mortgage company called Gettysburg Funding Corp. when he pled guilty in 1998 to federal tax evasion in New York following an investigation of false loan applications at that company, according to court records. Marcus was sentenced to five years probation and fined $50,000. His business partner at Gettysburg Funding pled guilty to bank fraud.

Marcus went on to become executive director at another mortgage lender, Somerset Investors Corp. A HUD database shows Somerset remains an FHA-approved lender. The company’s status as an FHA lender did not change after a March 2010 audit by HUD’s Inspector General recommended Somerset return $2.8 million in insurance payments to the agency because of “significant underwriting deficiencies” in the firm’s loans. The government auditors, who had not set out to examine individual executives, didn’t identify Marcus as a convicted felon.

HUD officials declined to comment on Gregg Marcus and his criminal conviction. In a statement, HUD said that the president of Somerset recently certified that none of company’s employees “were currently in, or had been involved in, an investigation that could result or has resulted in a criminal conviction. If the information was false, the certification would be inaccurate and may warrant administrative action by HUD.”

Marcus and his wife, Randi, who is the president of Somerset, did not respond to certified letters requesting comment for this article. Phone calls and e-mails sent to Somerset were not returned.

While HUD says it tries to keep felons out of the FHA program, housing officials say they cannot bar other individuals just because they had previously worked for a banned lender.

“Termination of a lender does not specifically prohibit its principals and senior executives from seeking employment with approved lenders or forming a new company that may seek approval,” HUD said in a statement.

HUD’s own inspector general, Kenneth Donohue, warned at a Senate subcommittee hearing in May that FHA suffers from a “systemic weakness” by allowing these individuals to continue doing business with the agency.

“Without specific citations against individuals (FHA) could not link principals of a defunct company to those same individuals who would go on to form new entities,” Donohue said. “We see this type of maneuver too often and it makes the FHA program too easy a target for those intent on abusing the program.”

At least four FHA lenders employ executives who previously worked at companies banned from doing business with the agency, according to documents and interviews.

Lend America was banned by HUD last December after the Justice Department accused the company it of originating fraudulent loans insured by the FHA. Lend America’s chief business strategist, Michael Ashley, was barred from the FHA for life in March. But at least one of the firm’s other senior executives now works as a sales manager at a company currently approved to make FHA loans.

In another instance, a former senior executive with BSM Financial, an FHA lender based in Allen, Texas, has worked for two other FHA lenders since that company was barred from the program in 2009. The executive is currently a top official at another FHA lender in Texas, according to documents and interviews.

BSM had run into trouble in 2006 with auditors from HUD’s Office of Inspector General, who reported that “the lender approved mortgages on overvalued properties for borrowers that were less than creditworthy.” The auditors recommended BSM reimburse $2 million in losses on foreclosed homes, along with other penalties. In April 2009, BSM was banned from the FHA program because the firm never made the first payment required by a settlement agreement following the audit.

In a statement responding to questions about why the executives have been able to move between various FHA lenders, HUD says, “misconduct or poor performance by a company does not necessarily extend to its officers or employees absent evidence that the officers or employees participated in, directed, knew about or had reason to know about specific violations or misconduct.”

Stevens, the FHA commissioner, said his agency follows the principle of due process when deciding which individuals to bar.

“You can’t just throw someone out because you don’t like them,” he said. “They have to violate a law; they have to commit a crime.”

HUD officials acknowledge that most background checks on lender employees are generally limited to “principals” – individuals identified by FHA firms as senior executives or owners of the company.

Because HUD allows lenders to identify their own principals, firms sometimes do not disclose the senior role played by convicted felons.

According to the Justice Department lawsuit filed against Lend America, for example, its chief business strategist, Michael Ashley, had a 10-year history of state sanctions and a federal conviction related to a mortgage fraud scheme. The Justice Department alleged that he directly controlled sales at the firm. Yet Lend America never identified Ashley as one of its principals.

Home & Voices In This Corner FHA Chief Risk Officer expects better performance from newer mortgages, by Jon Prior, Housingwire.com

Bob Ryan is the first chief risk officer of the Federal Housing Administration. He was hired in October 2009. A recent increase in the FHA insurance premiums is stirring some controversy in the market as to when the policy changes will help the insurance fund.

Sheila Bair, chairman of theFederal Deposit Insurance Corp. said tighter, common-sense controls for mortgage lenders will help the housing market going forward.

For this edition of In This Corner, Ryan says the models for the policy were built on the forecast that recent FHA mortgages will stay current longer.

The FHA adjustments to its insurance premiums take effect Oct. 4. But is the increase in the monthly yield offset by the cuts in the upfront premiums?

No I don’t think it is. There is a net incremental increase embedded in there. People may have a different view of what the expected life of the new loan is, just as every investor has a potential view of what the prepayments are going to be of a particular loan is when they make an investment decision.

So there is some range of possibilities as far as how long that loan will go out. We use models to help us estimate. It’s a process we go through with the Office of Management and Budget (OMB) and its embedded in the budget process, so it’s pretty well vetted.

It would take three years to make up unless the increase could go into effect on post-closed loans, which it can’t. But the issue is that we would expect, on average, those loans would last a good bit more than three years. In fact, it would be a little bit more than double, to the seven to eight-year range. So if you were to do the arithmetic on that you’d see it would more than offset the decline in the upfront fee.

So, you’re expecting borrowers who receive mortgages written Oct. 4 and beyond to be paying premiums for at least seven years.

These loans will be current longer. There’s a lot of things that play into that, such as the mortgage rate environment. This is all embedded in future forecasting of interest rates, but that the general conventional wisdom is that rates will be more likely to rise than to fall. I’m not making a prediction, I’m just saying that’s what’s embedded in the yield curve.

And all these things conspire to mean that these loans will probably be out there for a long time.

With the rise in insurance premiums, how long will it take to get the FHA insurance fund back to a healthy level?

That’s an involved calculation. You would have to run through and make a bunch of other assumptions. This per rate increase has a large impact on accelerating the return to the 2% capital ratio.

All the other credit policy changes that we’ve announced, some of which have started to go into effect, all of those enforcement actions, have made lenders more aggressive at how they monitor the credit risk and the underwriting processes that they go through. That means that we’re getting higher credit scores and better quality loans. Those activities in combination are also going to contribute to the return to the capital ratio of above 2%.

The biggest contributor in the near term is going to be this premium increase.

Some have said that the FHA’s greatest strength has been its larger upfront fee and the lower monthly premiums. With the latest adjustments, is the FHA moving away from that?

There’s pros and cons to both the upfront and over-time fee. The biggest con to the over-time fee is right now we allow it to be financed into the balance of the loan. You’re taking that upfront premium, and you’re actually increasing the loan-to-value (LTV) ratio because you’re rolling it into the unpaid principal balance of the loan, and that defeats some of the purpose of it.

So I think we get a double benefit from lowering that upfront and increasing it over time. It’s also a little bit more borrower friendly, in that they would have to come out of pocket for more cash if they had to pay the full upfront amount out of cash.


purchase apps rise as refinance demand falls, by Thetruthaboutmortgage.com

Applications to purchase a home increased during the week ending September 3 as refinanceapps slid, according to the latest survey from the Mortgage Bankers Association.

That bucked an ongoing trend seen over the past few months in which refinance apps were surging and purchase apps were falling flat.

Overall, home loan demand decreased 1.5 percent from one week earlier, thanks to a 3.1 percent dip in refinance activity, offset by a 6.3 percent rise in purchase apps.

“Purchase applications increased last week, reaching the highest level since the end of May.  However, purchase activity remains well below levels seen prior to the expiration of the homebuyer tax credit, and is almost 40 percent below the level recorded one year ago,” said Michael Fratantoni, MBA’s Vice President of Research and Economics, in a release.

“On the other hand, refinance volume dropped last week for the first time in six weeks, but the level of applications to refinance remains close to recent highs, as historically low mortgage rates continue to draw borrowers into the market.”

The refinance share of mortgage activity fell to 81.9 percent of total apps from 82.9 percent one week earlier as mortgage rates inched off record lows.

The popular 30-year fixed averaged 4.50 percent, up from 4.43 percent, while the 15-year fixed rose to 4.00 percent from 3.88 percent.

Finally, the one-year adjustable-rate mortgage ticked up to 7.00 percent from 6.95 percent, and remains quite unattractive.

Oregon Home Prices OFHEO DATA: Oregon Economics Blog

The OFHEO has come out with its latest house price data. Remember that these cover much more of the US than the 20 cities of the Case-Shiller report, but are based home sales only with conventional mortgages. Anyway, we can see the data for Oregon cities, Oregon and the USA.

Here (a bit messy) is the raw data since Q1 of 2004:

Here (even more messy) is the quarter to quarter % change in home values:

Here is the overall depreciation (so positive numbers are bad in the sense that they represent loss of value) since Q1 of 2007 when the market in Oregon really turned:

Overall, it is bad, especially for Bend and Medford which are seeing collapses of California proportions, but overall the state is not doing too badly in relative terms.

Here is a nice picture from their summary report that shows the national picture. Oregon is the 35th best state in terms of home value appreciation (or limited depreciation):