Panelists
A. Wesley Schuneman
Founder, Ultimate Funding Group Mortgage Brokerage

Kevin Feakes
Mortgage Banker, First National Bank; Residential Mortgage Lending

Ken West
VP Commercial Lending Mountain Plains Farm Credit Services

Q: Are lending standards currently too tight or not tight enough compared to 1985?
A: (Kevin) Contrary to what you’re hearing in the media, it’s still relatively easy to get a mortgage loan right now.
A: (Wes) Underwriting guidelines will continue to get tighter. We have a few more years of tightening.  The industry will overcorrect before the pendulum will swing back the other way.
A: (Ken) Agriculture loans are underwritten in a much different way than residential. Loans are still widely available for agricultural buyers.   

Q: What is your firm doing to prepare for another significant drop in home values?
A: (Ken) Requiring more downpayment.  The lenders I work with learned from the S&L bailout.
A: (Wes) We’re close to the bottom here in Denver. We have a decent market. I’m not expecting further, drastic price declines.
A: (Kevin) We’re preparing for more LTV changes from lenders.

Q for Wes: What does the future look like for the mortgage broker?
A: from Wes: Higher standards and raising the barrier to entry will be good for the industry. The mortgage brokerage industry needs a cleansing.  I anticipate further erosion in the number of licensed mortgage loan originators.
A: from Kevin: I’m more hopeful than Wes. Competition is good for the industry. Fewer players isn’t necessarily a good thing for the consumer. You may see some former brokers shifting to a bank during these times, and then back to being a broker in the future.

Q: On short sales, Kevin, why are banks taking so long approving short sales and is there any hope for getting answers faster from loan servicing?
A: Loan servicing does not have an efficient system in place to process the overwhelming number of requests for a short sale.  It’s going to take time to work out all the short sales and foreclosures. 
A: It would be better if all the foreclosures right now were HUD REOs because HUD has a good system of disposing of their REOs.

Q: Why haven’t banks embraced auctions as a way to dispose of their REO inventory?
A: The systems in place right now are for the banks/asset management companies to reach for a Realtor first, and to try and sell REOs using systems that are already in place (MLS) to reach potential buyers.

Follow up Q: Why aren’t banks wanting to move their REOs? Why list the home for month after month? Why are banks holding on to their REOS?
Panelists did not know. Jillayne’s answer:  It is possible that the banks are trying like mad to spread out their losses over many months/quarters. It is also possible that if a bank quickly disposed of their REO inventory and had to claim the losses, that a bank’s insolvency would become more transparent to regulators.  It is also possible that there is such a huge backlog of inventory, that it’s a time/resource backlog issue. 

Q: Should FICO scores be completely tossed out, returning us to a world where real humans touch each file?
A: (Wes) The idea of using any kind of scoring system at all isn’t inherently “bad.”  It’s when we use ONLY the score to make a lending decision.  A borrower’s entire picture must be taken into consideration. Credit, Capacity, Character, Collateral.
A: (Kevin) Some of the loans with growing default rates are the loans with GOOD credit scores, but the homeowner went “stated income.”  Stated should go away forever.  Well, maybe not forever. If it comes back, then it should come back with a much lower loan to value.

Q for Ken: Are land values falling and if so, how is your firm preparing for this?
A: We’re just now seeing the bubble start to top out in land values.  The value of corn is dropping now because gas prices have gone down.  (Jillayne here.  At lunch, there was talk about many ethanol companies recently filing bankruptcy.) The average age of the farmer is getting up there and it’s difficult to attract young people to a life of farming. A young person can’t buy into a farm when land values were climbing. When we see the land bubble start to pop, watch for much higher downpayment requirements; 30 to 35% down.

Q: I’m hearing stories of homeowners who have not made a mortgage payment in 5,6, 7+ months and have not heard anything from their bank.
A: Unanimous in that these must be isolated incidents. Foreclosures are proceeding forthwith from their vantage point.

Q: What is your company doing to help your employees with ethical dilemmas such as when personal self interests conflict with duties to the client?
A: (Ken) We offer group bonuses (no individual bonuses) and bonuses are not driven based on volume. No one is on commission.
A: (Kevin) We have a very diligent compliance department and compliance systems in place with an extremely rigorous interview and hiring process which includes background checks and full body cavity searches.  (That last part was just a joke from me.)
A: (Wes) We have a strict code of conduct at our company that all employees are required to abide by.

Q: As a fiduciary, how are you counseling an FHA, 3.5% down homebuyer when faced with continual falling home values:
A: (Wes) I am completely honest as to what’s going on in the market and I let the client decide.
Jillayne here. Note, Wes believes the Denver market is near the bottom.

Q: When do you foresee a recovery?
A: 2013
A: It’s too soon to call the bottom

Interesting story: Ken said that a farm was recently purchased at an auction by a hedge fund.  There were other high bidders who were farmers but the hedge fund came in high bidder. They speculated that the hedge fund was trying to diversify assets into commodities and bought the land for the value of the corn. 

Thanks to Wendy and Matt from the National Auctioneers Association/Marknet Alliance for having me out to their convention today!

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Q&A with the Banker Panel at the National Auctioneers Association

• Follow the Money…
• Countrywide: SuperBad
• The Housing Crisis is Like Hurricane Katrina
• Barclays North: “It’s a matter of cash flow”
• To Catch a Predator

Tanta, who blogged at Calculated Risk, taught me quite a bit about the other side of mortgage lending; securitization, the secondary market, auditing, and mortgage humor.  I asked Tanta once if I could distribute something she wrote to my students.  She gave me carte blanche to distribute anything she had written, for educational purposes. Tanta was widely read and quoted by people such as Dr. Paul Krugman and the Federal Reserve. From CR:

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!”:

Tanta’s Compleat Ubernerd blog posts live on, for those who dare to learn.

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Vive Tanta

• The Federal Reserve and Mortgage Rates
• Fed drops discount rate 1/2 point
• Interview with Manhattan’s Property Grunt
• Banker, Broker, Consumer Lender or Credit Union? Part 4
• There’s No Love for the Subprime Borrower

1. When will you begin to lend again to borrowers who are other than prime?

2. What will happen if/when the FDIC runs out of money?

3. How are local, state-chartered banks preparing for the coming loan losses in the commercial and development sector?

4. How are loan modifications performing at your institution?

5. What do FHA delinquencies look like at your institution?

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Questions for a Panel of Bankers

• Indymac Bank Taken Over by the FDIC
• Are Washington Consumers Safer Working with DFI Regulated Lenders?
• Commercial Real Estate Transaction Using Your IRA
• Banker, Broker, Consumer Lender or Credit Union?
• Understanding the Basis for Prepayment Penalties

For those that want to hear that the market is doing much worse than expected, I give you Detroit.  I heard on the news yesterday that home prices in Detroit have rolled back 8.5 years.  That is much worse than “expected”.  For those that want to hear that the market is doing much better than expected, I have to say “jury’s still out” on that one, as the down market has not yet completed its “expected” cycle. 

Yes, real estate prices always go up.  But when did real estate professionals en masse start thinking that meant it looked like the chart below?  It DOES NOT!

 
Housing Prices do not go up in a straight line!.  I can honestly say that 20 years ago the only agents I met who thought this way were the salesmen vs. the professionals…and they were few. The first time I overheard an agent at an Open House talking to a first time home buyer explaining the real estate market in terms of “AWAYS GOING UP!” and drawing a chart like the one above for them, I thought “What an Idiot!” 

It is only in the last couple of years that I have seen MOST of the professionals, and consequently the general public, setting the unrealistic expectations noted in the chart above.  Many of those professionals have left the business, and more will follow.  For the benefit of those who will continue in the industry, and for the public at large, lets get back to basics and set our expectations properly. First you set realistic expectations based on an Annual Cycle of Real Estate markets.  The one below is primarily for single family residential housing.  Not condos, not multi-family, not commercial - Single Family Residential Housing Market.

When home prices increase from year to year, most of that appreciation happens from March through July.  Even when home prices decrease from year to year, prices are still expected to be up from March through July vs. January and November.  THAT is the expectation.
Think of it this way, retail sales are expected to be higher in November and December than in February.  They may not go up as much as expected, and that is not good.  But if sales in November are lower than in February, that’s really bad.  So up vs. down is NOT the barometer…it is up when expected to be up, down when expected to be down…and then it is all a matter of degree.

If you heard a store owner who only sells Christmas Ornaments complaining that his April sales were lower than his Nov/Dec sales, what would you think?  That’s how I scratch my head when I hear someone saying “I’m waiting for the lowest possible prices, so I’m going to buy a house in May or June.  Does not compute!  I’m not saying it could never happen, I’m just saying that is not an appropriate expectation.  As long as you are willing to wait until 4th Quarter of 2009 or even 2010…fine.  But if you are determined to buy within 12 months, wanting the lowest price and wanting to buy in June is not a match.  You will likely get a better house if you wait until May…but not a better price.  Again, not impossible…just not likely.  Go back and study the graph above before we move to broader market descriptions.

For this next part, different people will have different market theories.  Mine are primarily based on a “7 steps forward, 3-5 steps back” theory, that I attribute to having entered my head via Alan Greenspan many years ago.  Nationally the market started moving up past it’s previous peak in 1998.  Consequently the expectation would be for it to go down in 2005.  When it did, people freaked out while I said “DUH”. 

The market performed as expected.  But when professionals don’t know what to expect, they react inappropriately, which creates an unexpected market condition.  It’s like playing a sport where half of your team is not performing their role “as expected”…it throws the whole game off.  When your quarterback starts throwing to the guy in the wrong colored Jersey…all hell breaks loose.  As a real estate agent, you are the quarterback, time to learn the plays.  The people in the stands have a harder time betting on the game, when the quarterback is messing up the plays to the degree that we as professionals have been screwing up.  STOP sending GOOD NEWS! C-R-A-P.  This is NOT an industry based on consistent and continual “Good News”!  STOP wishing ONLY for Good News, and blaming market conditions on the purveyors of “bad news”.  Get Real - Real Fast…or suffer the consequence.

Another analogy.  The market went down when the Dow hit 14,000.  If most people said “DUH”, there wouldn’t have been panic selling.  Yes the market still would have gone down, but the market loses all semblance of sanity when expectations are set at unrealistic levels.  Momentum created by panic forces markets out of their natural cycle.  That is true both on the up side and on the down side.  The Dow was supposed to go down when it hit 14,000…in fact it should have gone down when it hit 12,000.

This is my expectation of the housing market.  Yours may differ.  Lacking an informed and valuable opinion from the professionals, the public will start imposing their own opinions like “markets should only increase at the same level as median income.”  That is not correct BUT professionals have no one to blame but themselves for all of the Bubble Blogs.  When professionals started lying both to themselves and to the public, the public had to move in a different direction.  You hate Bubble Blogs, you say?  Well then stop acting like you don’t have a freakin’ crystal ball!  If you don’t like the public not relying on your opinion…well then go get yourself an opinion!  OK, here’s mine.  Beyond the Annual Cycle above for single family homes, there is the YOY expectation in a long term cycle.

Home prices up for 7 years; down for 3-5

Now let’s define what a Housing BUBBLE is.  A housing bubble is when the market outperforms expectations…not when it goes UP.  A housing slump is when the market underperforms expectations…not when it goes DOWN.  Bubbles ALWAYS burst.  That is why you need to know the degree to which the market should go up (like Christmas Ornament sales in November and December) so that you know when you are entering a bubble zone.

I learned this many years ago…so long ago I don’t know where.  A market will ALWAYS reach and surpass a  level it has previously achieved.  It’s not a matter of IF…it’s a matter of WHEN.  If it happens too quickly, the downside of the cycle will hit harder.  If it happens as expected, the people betting on that expectation will do well.  We want to be a Country that always does WELL…not that always goes UP beyond normal market expectations and never, ever goes down.

Once you set a realistic expectation, you can predict markets.  When the market moves outside of predictable levels, you know you are in a bubble or a slump.  If you think every batter is supposed to hit a home run…you will spend your life in misery and disappointment.  If you expect the batter to always hit a home run…one day he will hit you instead of the ball.

Real Estate Prices are supposed to stop going down, nationally that is, somewhere between 2009 and 2011.  They were supposed to go up from 1998 to 2005 and down from 2006 through 2009 - 2011.  The degree they went up was “bubbled” by the loose lending practices in the latter part of the up cycle.  First that bubble must pop, as it did, and now we’re looking for the end of the down cycle.  If the government wants to make sure the down cycle is only 3 years and not five, then they have to do something to cause interest rates to stay at or below 5.75%, even if that is an artificial stimulus level.

No one can, nor should anyone try to, force the market to be always up.  That kind of talk is for salesmen, not professionals.  If you don’t want to hear ANY bad news, ever.  If you don’t understand that there should be at least 3 years of “bad news” following a consistent 7 year trend of “good news”, please go do something else for a living.  That’s like a lawyer who tells everyone they can win a case, cause they get paid whether the client wins or loses.  That’s like a doctor ordering MRI’s every week for a hypochondriac, because he makes money whether the patient is sick or not. 
Don’t want to be compared to a Used Car Salesman?  Then stop acting like one.

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Is the housing market performing “as expected”?

• Bubble blog roundup
• Home Value Update from the Local Papers
• Whose priority is it?
• Seattle Real Estate - 2008
• Seattle Real Estate Market - King County

I’m off to lock in some interest rates…bye for now!  Oh yeah, there will not be a Friday rate post due to the Thanksgiving holiday.  I will be posting rates that I’m quoting live via Twitter–you can check out the feed by visiting Rain City Guide’s Mortgage Information page.

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Mortgage Rates Dip to Low 5’s

• Mortgage rates heading up
• Mortgage Rates for Friday Morning
• A Word on Friday Rates
• Friday Rates are Improved
• Mortgage Rates Rising with Inflation

I’m making up the goofy photo titles as I go

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More Seattle Photos by Mike Santoro

• Seattle Night Shot
• Christmas Neighborhood Round-up….
• Seattle Neighborhood Roundup…. It’s beginning to look a bit like….
• What is a .25 bathroom?
• New Guest Blogger: Galen Ward

From Inman News:

The deal was announced on a Friday. The following Monday, LandAmerica detailed record third-quarter losses and said the company was in violation of financial debt covenants of its note-purchase agreement and credit agreement (see story).

LandAmerica said it was in discussion with creditors to obtain waivers. If not waived, the covenant violations “constitute an event of default under the agreements, giving the lenders the right to declare all principal and accrued interest payable immediately,” LandAmerica said at the time.

LandAmerica’s public statement, which is in a question and answer format clearly states that their ability to pay claims is adequately covered by the reserves.   Locally, LandAmerica has joint ventures with Commonwealth of the Puget Sound  (Windermere), Rainier Title (John L. Scott and Coldwell Bank Bain) and Northpoint Title.   From the statement:

“What about other LandAmerica entities?

LandAmerica is comprised of many separate legal subsidiaries with separate profit and loss statements.  Some entities are performing well and others are not performing well.  We are working closely with the Nebraska Department of Insurance, which is where major underwriters are domiciled, to resolve our situation in a way that benefits our policyholders.”

This leaves a bigger question of what percentage of ownership does LandAmerica have in these joint ventures and what will happen to these ownership shares?

“What is the financial viabililty of LandAmerican underwriters?

The LandAmerica underwriters, Lawyers Title and Commonwealth have over $300 million in combined statutory surplus.  And we have some of the industry’s most stringent requirements for reserves in place to protect our policyholders.  The LandAmerica underwriters’ claims reserves are backed by over $1.1 billion in cash and investments.”

Reserves are mandetory…what about operating expenses?

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Fidelity Title Calls Off the LandAmerica Merger

• So you’ve decided to buy property with a friend…
• Title and Escrow. What do they do?
• Title Insurance 101: What is Involved in Issuing a Title Insurance Policy?
• Title Insurance: Kickbacks, Competition & Pricing
• The condo public offering statement/resale certificate

Now for proofs that people are buying at 2005 levels, even though sellers are not thinking about selling at those levels, to the same degree.

Let me explain what you are looking at in the graph above.  In 2001, 83% of buyers were paying under $500,000.  Economic models must hold something at a constant, in order to provide meaningful results.  What I have held as a constant are the properties themselves.  As we move through the years, only properties (condo and single family) built as of the end of 2001 are included, so we can see what people are paying for those same homes. Also, you have to look at a sample small enough to evaluate, in this case I used Bellevue which I feel is a large enough sample with somewhat cohesive property types in the sampling.

By 2005, only half of buyers could pay under $500,000 to buy those same properties vs 83% in 2001.  The most dramatic change YOY was in 2006 vs. 2005 when the % dropped from 68% to 51%.  Now look at the last two columns.  We’re back to 2005 with 67% of people being willing and able to buy these same homes for $500,000 or less.  In fact the % may end up being more than that, given pendings are based on asking prices vs. sold prices.

The last column shows that only 44% of people who have not sold their homes, and are still trying to sell them, are pricing at the levels that people are willing to pay.

It’s quite possible that by year end the statistics will show 2004 levels, but I expect that to correct back to 2005 through the 3rd quarter of 2009.  Last quarter of 2009 is anyone’s guess at this point.  Not enough data to predict that far out.  Many of the current pending sales are bank owned and short sale properties.  While some may consider that to be a relevant factor, it is not one I expect to change over the next 12 months.  There will be at least as many, if not more, opportunities to buy at the lowest price levels over the next 12 months.

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Sunday Night Stats - Buying at 2005 Prices

• Sunday Night Stats - Prices Dropping
• October King County Home Prices at 10/2005 Level
• Sunday Night Stats + 1st Quarter YOY
• Sunday Night Stats - 5 Year Hold
• Sunday Night Stats - Volume is Stabilizing

Clear Seattle Night, taken from Kirkland

I’ve never been able to take a night shot off my balcony, but Mike Santoro had his super digital camera with him and took this one for me.  Enjoy!

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Seattle Night Shot

• More Seattle Photos by Mike Santoro
• Night shots
• Blogging is one great big Come As You ARE Party!
• The Importance of Using the Digital Darkroom…
• If anyone ever writes a real estate survival kit….

ALERT: if you are planning on closing a mortgage with loan amounts of $417,001-$567,500 by the end of the year, please check in with your mortgage professional.  Some lenders are beginning to either pull out of that market or repricing that segment in advance of new loan limits.  It’s an odd limbo time for lenders as they try to wrap up the jumbo conforming market to be able to deliver the loans in time to Fannie or Freddie before the lower loan limits go into effect.  No lender wants to have a loan over $506,000 (for our tri-county area) if Fannie and Freddie will no longer buy it.

Conforming Mortgage Rates (loan amounts up to $417,000 for 1-unit properties).  The conforming rate quote below is based on owner occupied with a mid-low credit score of 720-739, “full doc” purchase with a sales price of $500,000 and a loan amount of $400,000.  This scenario includes reserves (taxes & insurance) not being waived.   Rates quoted are priced based on a 45 day lock with no prepayment penalties on any of the rates quoted below.   

30 Year Fixed @ 1 Pt: 5.625% (APR 5.775%)  0.25% to rate

30 Year Fixed with 10 Year Interest Only @ 1 Pt: 7.000% (APR 7.155%)

15 Year Fixed @ 1 Pt: 5.375%  (APR 5.626%) 0.125% to rate

5/1 ARM - LIBOR @ 1 Pt:  5.375%  (APR 6.943%)  0.125% to rate

Conforming-Jumbo/High Balance Rates.   Pricing is based on the same criteria above except where the loan amount is $417,001 - $506,000 for properties in King, Snohomish or Pierce Counties; specifically priced for a sales price of $625,000 and a $500,000 loan amount.  

30 Year Fixed @ 1 Pt: 6.000% (APR 6.147%) 

FHA.  Pricing based on credit score of 620 or better and loan amounts up to $362,790 for FHA in King, Snohomish and Pierce Counties.  

30 Year Fixed @ 1 Pt: 6.000% (APR 6.685%)  0.25% to rate

FHA-Jumbo. Pricing based on loan amounts from $362,791 - $567,500 for King, Snohomish and Pierce Counties.  

30 Year Fixed @ 1 Pt:  Pt: 6.500% (APR 7.185%)  0.125% to rate

VA.  Pricing based on credit scores of 620 or better based on loan amounts up to $417,000.   VA loan amounts over $417,000 are also available.  

30 Year Fixed @ 1 Pt:  6.125% (APR 6.244%).  0.25% to rate

Non-owner occupied/Investment Property.  Pricing based on 30% down payment with a $400,000 sales price and credit scores between 720-739.

30 Year Fixed @ 1 Pt:  6.875% (APR 7.165%).  0.25% to rate

Prime Rate (what HELOCs are based on):  4.00%   

12 Month LIBOR(what a majority of ARMs are based on): 2.705% per WSJ.   0.045% change compared to last Friday’s rate post.

This is just a small sample available of rates and products.  Rates are as of Friday, November 21, 2008 at 1:30 p.m. and may change at any time.  Available programs may change at anytime as well.    Check out RCG’s new Mortgage Info page for live rate quotes via my Twitter feed.

This is not a guarantee nor is it a commitment of interest rate.

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Rain City Mortgage Rates

• Friday’s Rates
• Friday Rates
• Friday’s Rates
• Mortgage Rates on a Friday Afternoon
• Friday’s Rates