Another Example of why Fannie and Freddie don’t like condos……

Here are two more examples of why Fannie and Freddie are not very excited about condos:

• Example #1 we have a 216 unit condo complex with only 1 occupied unit.    That means that for an association who’s budget is $86,400 per month ($400 x 216 units – strictly an example), they are taking in $400 per month.    That’s an $86,000 shortfall.  Per month.   What are the odds they can continue to do that?
• Example #2 we have an 850 unit condo complex with about 43% of the units occupied, but only 13% of them are owned.   The rest are all rented.   Do you think the 13% who bought their units are excited about sharing the project with tenants who “historically” don’t take as good of care of the property as owners do?   Using the same $400 per month budget for association fees, that condo project is only taking in $43,600 per month.    That puts them on a $296,400 per month shortfall.    Per month.   What are the odds that they can continue to do that?

These are just two of the type of condo problems that are making Fannie and Freddie very leery of condo projects.   So, if you are thinking of taking advantage of the deals in real estate out there and looking at buying a condo, do your homework first.    Here’s a quick overview of the main points to look at:

• What percentage are owner occupied first or second homes rather than rentals?  (The goal is 90%)
• If there are rentals allowed, do they allow weekly or daily rentals (if so, the answer is no from Fannie and Freddie)
• Does any one entity own more than 10% of the total project (in terms of completed units?)
• Is the association’s annual budget showing a deficit (see above).  If so, the answer is no.

Those are by no means the only issues that need to be addressed, but if you can clear those four, then you have a big clue as to whether it will work or not.

If you find a condo project that doesn’t meet Fannie and Freddie’s guidelines, what can you do?   It’s pretty simple.   You need to find a portfolio lender who doesn’t follow Fannie and Freddie’s guidelines.

K

Calculated Risk: Vacant High Rise Condo Units

A couple of articles about vacant or near vacant high rise condo towers in Florida …

From the News-Press: Sole occupant of 32-story Fort Myers condo wants out

Victor Vangelakos is the only buyer to take possession of his unit in the 32-story Tower 1 of the Oasis high-rise project in downtown Fort Myers.

Apparently the original plan was to build 5 towers with a total of 1,079 units. That is about 216 units per tower, and all but one unit are vacant in Tower 1. Tower 2 appears to have few lights on too.

And from the WSJ on the 850-unit Everglades project in Miami: BofA Lawyers Rebuked in Cabi Case

Only 109 or about 13% of the Everglades’ 850 units have sold, according to CondoVultures.com. However, as of last month, the developer has rented about 260, or about 30%, of the units, in what it calls a “deferred purchase program.”

That sounds like another 480 vacant units.

Many of these high rise condo towers are part of the “shadow inventory” because the units do not show up on either the new home sales or existing home sales reports (unless they are listed in the MLS). For some areas – like South Florida and Las Vegas – this is a significant part of the inventory.

You know, 20 years ago, we didn't need Straight Talk in the mortgage world.   Everyone did the right thing and everything moved along......

Now we do.   Would you like to work with a lender who will tell it to you straight?    Would you like to have someone looking out for what's best for you?

Would you like to work with a lender who has to blog under a pen name - because their bank doesn't like what they are saying?

If so, call us at 330-536-3623 or send an e-mail to info@straighttalkaboutmortgages.com and we'll have one of our team of lenders get back to you, typically within 4 hours during normal week days.

Kenny H.

I love it! Two of my top 10 financial writers disagree!

This makes me smile.   Bill at Calculated Risk and Barry Ritholtz  are two of the financial writers who I follow quite closely and who I’ve learned a lot from over the past few years.   So, I have to chuckle when I read that the two of them don’t agree about what the housing starts information means.

Let me lay it out:

Barry says:

• Anyone who says we’re at a bottom in real estate is nuts.  (Okay I’m paraphrasing but he is rather blunt)
• There’s not a chance we’re going to “flashback” to a healthy market any time soon.

Bill says:
Well, just read below what Bill says, and then tell me.    What do you think?

(Hint – I’m with Bill on this one.)

Calculated Risk: Ritholtz: “Why are people calling a bottom for Real Estate?”

A few quick points:

# If single family housing starts bottomed in January, on a seasonally adjusted annual rate (SAAR) basis, the 12 month moving average of unadjusted data won’t bottom until October or so (depending on the shape of the recovery). Using this method adds a lag to the analysis.

# Barry also conflates calling a bottom in housing starts with: 1) “a bottom in Real Estate” and 2) “a snap back”.

First, there will probably be two bottoms for Residential Real Estate. The first will be for new home sales, housing starts and residential investment. The second bottom will be for prices. For more on this, see: More on Housing Bottoms

Most people think prices when they hear the word “bottom”, and the bottom for prices usually trails the bottom for housing starts – sometimes the two bottoms can happen years apart!

Second, looking for a bottom in housing starts doesn’t imply “a snap back” in activity. As I noted yesterday, “I expect starts to remain at fairly low levels for some time as the excess inventory is worked off.”

Barry Ritholtz, Calculated Risk, Housing Starts, Housing Bottom

$1 Trillion Stimulus Plan?

Calculated Risk provides some much needed perspective on how the numbers have chnaged since it first started in August of 2007……

From the WSJ: Meatier Stimulus Plan in Works

Obama aides and advisers have set $600 billion over two years as “a very low-end estimate,” … The final number is expected to be significantly higher, possibly between $700 billion and $1 trillion over two years.

Remember when $1 trillion was a big number?

It seems like ages ago (Dec 2007) that I wrote this:

If every upside down homeowner resorted to “jingle mail” (mailing the keys to the lender), the losses for the lenders could be staggering. … Not every upside down homeowner will use jingle mail, but if prices drop 30%, the losses for the lenders and investors might well be over $1 trillion (far in excess of the $70 to $80 billion in losses reported so far).

And the WSJ called it “the big number” (Dec 27, 2007):

The global race is on to find the best phrase to describe the housing and credit mess. The U.K.’s Telegraph quotes an economist who says it “could make 1929 look like a walk in the park” if central banks don’t solve the crisis in a matter of weeks.

The report cites the recent prediction from Barclays Capital that losses from the subprime-mortgage meltdown could hit $700 billion. That would top Merrill Lynch’s recent estimate of $500 billion. The Australian newspaper notes that a $700 billion “bloodbath” — potentially leading the U.S. economy into “the blackest year since the Great Depression” — would top the GDPs of all but 15 nations.

Back in the U.S., the Calculated Risk blog sidestepped the colorful language and went straight for the big number: “The losses for the lenders and investors might well be over $1 trillion.”

Now we’re talking “the big number” for a stimulus package.

Note: the Bush stimulus package, signed in February 2008, was for only $152 billion.

Calculated Risk: $1 Trillion Stimulus Plan?.

Two thoughts….

1. Our economy needs something because it’s not behaving well.

2. It’s going to be crucial that it’s done the way that provides a couple of main components:

• The greatest benefit for the least amount of dollars.
• The most likely long term benefit for the country.
• The highest likelihood that the government will benefit from the investment and reduce the amount that taxpayers have to pay.

Okay, three thoughts….

I wonder what the effect would be if rather than spending $1 Trillion (that’s $1,000,000,000,000) they instead just gave that money to the citizens of the country.   It seems to me that there would be three likely outcomes:

• Some people would spend it and that would stimulate the economy.
• Some people would use it to pay off debts and that would improve their financial situation and it would improve the financial situation of the places (banks etc.) who loaned them money.
• Some people would put the money in the bank (save it) and that would help them avoid the use of credit cards and it would help banks because it would increase the amount of their deposits.
• Some people would use it to make payments on their mortgage and that would decrease the number of delinquent mortgages and would reduce the amount of foreclosures and help the housing market
• Some people would take the funds and use it as downpayment on a new house.   That would help the housing market.

What do you think?

Tom Vanderwell

Retail Sales

I love the job that Calculated Risk does with their graphs.   It tells the whole story in pictures!

An Auto Deal?

The White House and top Democrats on Capitol Hill reached agreement in principle on a sweeping rescue package for the nation’s auto makers … The bill would provide short-term funds, expected to total about $15 billion …

[A]n auto czar … would bring together labor, management, creditors and parts suppliers to negotiate a long-term restructuring plan … if a company and its stakeholders can’t agree on a plan, the czar would be required to recommend one, including the possibility of a Chapter 11 bankruptcy reorganization.

Calculated Risk.

The Wall Street Journal has the story that a supposed deal has been reached.   I think a couple of key words have to be noticed:

• The White House and Top Democrats – this isn’t something that has been passed by Congress yet, so it’s not a done deal.
• It’s an agreement in principle, not an agreement on the details.
• I believe that they are using $15 Billion of the $25 Billion that was originally earmarked for helping them “upgrade” to more effecient cars.   It will be interesting to see what happens to the money that was originally going to come from.
• What is the government getting in return for $15 Billion?
• The real interesting part will be how the long term restructuring plan works out and what the implications that will have for the economy and the jobs picture.

Stay tuned, it’s not done yet.

Tom Vanderwell

House Prices and Interest Rates

Calculated Risk has a good analysis of the whole “4.5%” plan and why not only won’t it be achievable but it won’t provide the results that the government wants it to.

…...The WSJ article correctly noted that lower interest rates “increas[e] demand for homes”, but do they push up home values? The answer in the current environment is probably no.

However, housing is an imperfect market – house prices are sticky downwards and typically take several years to adjust (what we are seeing!) - so even though there is currently far too much supply, prices still have not fallen far enough to balance supply and demand…..

……An increase in demand from current renters deciding to buy, would probably only make a small dent in the huge excess supply. And house prices would continue to fall – so the goal of supporting house prices would not be met.

……In fact, it could be worse. Landlords, already struggling with high vacancy rates and falling rents, would probably lower their rents further and make the rent vs. buy decision more difficult again.

……So lower interest rates might not boost demand very much, it might just lead to lower rents.

Calculated Risk: House Prices and Interest Rates.

Read the entire article, but realize that if the government goes down that road, we are once again chasing a windmill and we aren’t going to accomplish the type of behavior that our economy needs…..

Tom Vanderwell

Sales Growth…..

Thanks to Eric Lewis for the comic and thanks to Calculated Risk for telling me about it!

A Sad Day for Finance Bloggers Worldwide…..

One of the first finance blogs that I ever had the chance to read and in my mind, one of the best, Calculated Risk, lost one of their writers in a battle with cancer today.   In honor of Tanta (Doris Dungey), I’m reposting the entire article about her and her passing.   While I never had the privelege of meeting her, I was one of many who benefitted from her wit and wisdom.   CR and her family and friends, you have my condolences.

Tom Vanderwell

My dear friend and co-blogger Doris “Tanta” Dungey passed away early this morning. I would like to express my deepest condolences to her family and friends.

Photo: Tanta in 2004 (from her sister Cathy).
From David Streitfeld at the NY Times: Doris Dungey, Prescient Finance Blogger, Dies at 47

The blogger Tanta, an influential voice on the mortgage collapse, died Sunday morning in Columbus, Ohio.

Tanta, who wrote for Calculated Risk, a finance and economics blog, was a pseudonym for Doris Dungey, 47, who until recently had lived in Upper Marlboro, Md. The cause of death was ovarian cancer, her sister, Cathy Stickelmaier, said.
…
Tanta used her extensive knowledge of the loan industry to comment, castigate and above all instruct. Her fans ranged from the Nobel laureate Paul Krugman, an Op-Ed columnist for The New York Times who cited her in his blog, to analysts at the Federal Reserve, who cited her in a paper on “Understanding the Securitization of Subprime Mortgage Credit.”

She wrote under a pseudonym because she hoped some day to go back to work in the mortgage industry, and the increasing renown of Tanta in that world might have precluded that. Tanta was Ms. Dungey’s longtime family nickname, Ms. Stickelmaier said.

From CR to Tanta’s many readers, fans and internet friends: Tanta enjoyed writing for you, chatting with many of you in the comments, and corresponding with you via email. She told me several times over the last few months how much she enjoyed discussing current events with you.

Tanta worked as a mortgage banker for 20 years, and we started chatting in early 2005 about the housing bubble and the changes in lending practices. In 2006, Tanta was diagnosed with late stage cancer, and she took an extended medical leave while undergoing treatment. At that time I approached her about writing for this blog, and she declined for a simple reason – her prognosis was grim and she didn’t expect to live very long. To her surprise, after aggressive treatment, her health started to improve and she accepted my invitation. When she chose an email address, it reflected her surprise: tanta_vive … Tanta Lives!

Armed with a literary background and extensive knowledge of the mortgage industry, Tanta wrote about current events with deep insight and wit. Here is the introduction to one of her posts in 2006: Let Slip the Dogs of Hell

I still haven’t gotten over the fact that there’s a “capital management” group out there having named itself “Cerberus”. Those of you who were not asleep in Miss Buttkicker’s Intro to Western Civ will recognize Cerberus; the rest of you may have picked up the mythological fix from its reprise as “Fluffy” in the first Harry Potter novel. Wherever you get your culture, Cerberus is the three-headed dog who guards the gates of Hell. It takes three heads to do that of course, because it’s never clear, in theology or finance, whether the idea is to keep the righteous from falling into the pit or the demons from escaping out of it (the third head is busy meeting with the regulators).

Tanta wrote a number of posts detailing the inner workings of the mortgage industry. These posts covered a wide range of topics, from mortgage servicing, to everything you want to know about mortgage backed securities (MBS), to reverse mortgages. She called these posts “The Compleat UberNerd” and in typical fashion she noted:

An “UberNerd” is someone who is compelled to understand how things work in grim detail, even if the things in question are tedious in the extreme …”

Tanta liked to ferret out the details. She was inquisitive and had a passion for getting the story right. Sometimes she wouldn’t post for a few days, not because she wasn’t feeling well, but because she was reading through volumes of court rulings, or industry data, to get the facts correct. She respected her readers, and people noticed.

Felix Salmon at Condé Nast Portfolio.com, wrote on Nov 7, 2007 wrote:

“Tanta is one of the best financial writers in the world, and explains complex ideas with wit and great clarity.”

Paul Krugman at the NY Times complemented Tanta several times, recently writing:

“The great thing about this age of blogs is the way people who really know something about a subject can quickly weigh in, without being filtered through Authority.”

Even researchers at the Federal Reserve referenced Tanta’s work: From Adam Ashcraft and Til Schuermann: Understanding the Securitization of Subprime Mortgage Credit, credit on page 13:

Several point raised in this section were first raised in a 20 February 2007 post on the blog http://calculatedrisk.blogspot.com/ entitled “Mortgage Servicing for Ubernerds.”

Tanta was also extremely funny. She introduced the Muddled Metaphor Index (MMI) and Excel Art featuring the Mortgage Pig, and she was the originator of a number of phrases in use today, like “We’re all subprime now!”

This is a very sad day and I know many of you are in shock. Tanta was our teacher. She generously shared her knowledge with all of us. I doubt she knew how many lives she touched; her insights, spirit and passion lives on in her writings – and in all of you.

Tanta Vive!

P.S. please post or email me your thoughts and remembrances, and I’ll post some of them. Please no tips – I’ll post a charity of Tanta’s choice soon. All my best to everyone on this very difficult day.

Now this is good news……

NEWSWEEK: What are your thoughts on the team Obama assembled?

Nouriel Roubini: The choices are excellent. Tim Geithner is going to be a pragmatic, thoughtful and great leader for the Treasury. He has experience at the Treasury and the IMF [International Monetary Fund], then the New York Fed. I have great respect for both Geithner as well as Larry Summers. I think both of them in top roles in economics in the administration were good moves. I think very highly of them both.

Calculated Risk: Roubini: Geithner and Summers “Excellent Choices”.

Dr. Roubini has a reputation as:

1. One of the most accurate economists in the last 5 years.
2. One of the most negative econommist in the last 5 years.

So when he says that Geithner and Summers are good people for a tough spot, that makes me feel a bit better.

Tom Vanderwell

October 2008 Existing Home Sales

Take a look at the graph that I got from Calculated Risk.

The thing that struck me about it is that the only month in the last 4 years where there was a year over year improvement was September of 2008.   All of the rest were down from the year before.

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