The $700 Billion dollar financial bailout doesn’t exclusively and directly deal with real estate, but it is on most people’s minds so I thought I would include a note that at least comments on where the process goes now that the Bill got defeated.

There are so many issues being addressed, many of which are quite complicated, so here is a simplified version of the likely possibilities that we’ll see in the next few days.

Bank Rescue Plan Defeated: What’s Next?

Lawmakers are expected to continue negotiations after the U.S. House of Representatives’ surprise defeat yesterday of a $700 billion rescue plan, which sent shockwaves through Wall Street. (See Record Stock Plunge After Rescue Plan Fails)

“What happened today was not a failure of a bill, it was a failure of will,” said Banking Committee Chairman Chris Dodd, D-Conn. “Our hope is that cooler heads will prevail, people will think about what they did today and recognize that this is not just scare tactics, it’s reality.”

Here’s what could happen next:

• The bailout plan could get revived when Senate leaders reconvene on Wednesday. Senate leaders who backed the plan could debate it, which would then give a nudge to the House when it returns to Washington on Thursday.

• The proposed rescue plan by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke could be abandoned altogether and a bill that has more Republican support could be proposed instead—although this is viewed as unlikely.

• The existing plan may be tweaked and include more lawmakers from one of the parties to garner greater bipartisan support. For example, proponents will aim to sway moderate Republicans who would be likely to flip after winning some concessions on the legislation. Also, Republicans in California and the Southwest could feel pressure to back the government’s rescue plan since their residents are particularly facing a slumping housing market.

Source: Reuters, Patrick Rucker (09/29/08)

Posted by Carter Brown

This article, written by a commercial mortgage broker, describes his standards for choosing the clients he wants to work with. It offers potential commercial borrowers some insight into how to relate to mortgage brokers.

Mortgage Brokers - The Difference between Mediocrity and Excellence

By Jeff Rauth

Of course there’s a lot that goes into being a successful commercial mortgage broker like marketing, contacts, sales skills, technical knowledge of the industry, market knowledge, bank contacts, proper administration set up, etc so I’m not trying to over simplify the issue; but in general why are there commercial mortgage brokers that make seven figures incomes and many that can’t break $100,000 per year?

The most important component to this, I believe, is the quality of the deals that the commercial
mortgage broker DECIDES to work on. For many this may seem a little contrary to their fundamental “sales” outlook that operate under a more reactive basis and work on any or all loans that cross their desk. Perhaps they’re not that busy and work on weaker loan requests. But successful commercial mortgage brokers are empowered.

Excellent commercial mortgage brokers are extremely careful and selective on which borrowers and which deals they will work on. If they don’t like the deal they won’t work on it. If they don’t think they will get multiple transaction out of the borrower they’ll be less interested in working with that borrower. If they feel a borrower is just shopping them they walk or convince the borrower to take them seriously. Again, for whatever reason, they will pass on the loan request and invest their time into deals that are not only doable but will serve their long term goals.

One component to this is being excellent at screening loan requests. What’s happening here is the commercial mortgage broker is trying to determine, before they put a lot of time into the deal, if they can close it and how competitive they will be with their existing contacts. Think of it like trying to predict the future. Of course if the commercial mortgage broker doesn’t think they can close it, or won’t be that competitive, they won’t work on it. Again this is all about protecting their time. Is it a fundable deal? They know, without having to put weeks into shopping banks, where to place the loan. They determine within a half hour if they like the deal or to walk from it. They know how to review borrower’s tax returns and financials as this is what underwriting is going to look at when they consider the loan request. Questions like: What’s the Net Operating Income? Can we hit the required Debt Coverage Ratio’s? How are the business trends, etc? Have to be answered satisfactorily. We see many newer commercial mortgage brokers that submit loan requests that have no chance of closing because the cash flow is underwater. If the broker knew how to review tax returns they wouldn’t have bothered to work on the file from the beginning! (We wrote a training manual on how to prescreen
commercial mortgages, available on our website)

Can I get multiple deals from this borrower and are the loans fat? The ideal client is one that
purchases or refinances multiple loan per year and will have some loyalty. Will they sign my exclusive broker fee agreement? Rather than spending your time prospecting, you’re submitting packages and negotiating deals. Rather than sending mailers to commercial real estate brokers, you’re reviewing term sheets and scheduling closings.

Again there’s a lot that goes into being an excellent commercial mortgage broker but one of the biggest factors is how the broker chooses to spend his time and which deals he chooses to work on, or to run from.

Manhattan has had a reasonably healthy housing market through the national housing crunch but now it appears that some of the more recent turmoil in the economy is having an affect on the housing markets there. This could affect values for both single family and multi family housing in Manhattan.

MANHATTAN WON’T AVOID PROPERTY CRUNCH

Wall Street Journal – September 22, 2008 – by Liam Denning

When it comes to property prices, that strip of rock just south of the Bronx is often perceived as invincible. Across the U.S., house prices have fallen 19% from their peak, according to the S&P/Case-Shiller Home Price index. New York City, as a whole, is down 10%.

Meanwhile, on planet Manhattan, the median price of an apartment rose above $1 million for the first time in the second quarter of 2008, according to Miller Samuel, a real-estate appraiser.
Even in Gotham, reality bites eventually.

Three big problems are likely to hit in 2009.

First up: Job losses on Wall Street. In 2006, the most recent full year of New York State Department of Labor data, finance and insurance companies employed 15.7% of Manhattan’s workers. They earned an average of $269,000, more than 2.5 times the average private-sector wage. Property prices will suffer from slashed bonuses and submarine stock options, not to mention the pink slips.

Wall Street’s woes also mean tighter credit. The Federal Reserve’s latest “beige book” survey of
financial conditions says this of a softening Manhattan condominium and co-op market: “A growing number of deals are said to be falling through, due to difficulty in getting financing — largely at the middle of the market.”

The third headwind is a stronger dollar. Jonathan Miller, Miller Samuel’s president, estimates one in three new apartments are sold to foreigners, primarily Western Europeans.

This report from the Multi Family World 2008 Conference describes some of the characteristics that apartment owners should be aware of in renting to echo boomers.

Audience Urged to Recognize the Characteristics of the Echo Boomers

Published: September 22, 2008 in “Multi-Housing News”

By Keat Foong, Executive Editor

Denver–Panelists speaking at a session at Multi Housing World 2008 Conference and Exhibition encouraged the audience to recognize the characteristics of the children of the Baby Boomers and target their marketing appropriately.

The title of the session was “Reader’s Choice: Apartments Benefit During Downturn.”

Moderator Jennifer Cox Cyphers, president of Multifamily Edge, The Cyphers Group, noted that there are 70 million Echo Boomers who will be in the market over the next 10 years.

Echo Boomers are collegial, civic minded, collaborative, have good manners and are close to their parents, said Jeffrey Adler, chief property operations officer at Apartment Investment and Management Co. (AIMCO). AIMCO tries to facilitate a sense of community for this target group, he says. These consumers also want a private “funky,” and not necessarily a corporate, experience, he noted.

David Lynd, COO of The Lynd Company, noted that today’s Generation Y renters do not like guest cards. They are used to buying online. Hence a lot of customer services have been pushed to the Internet. For example, site-specific portals should be provided.

“The Echo Boomers are coming,” said Heather Campbell, marketing director of RedPeak Properties. Campbell said this group of consumers has a strong shopping appetite and is projected to outspend their parents by 2015.

However, they are also likely to opt for smaller units, are worried about their retirement and are good savers. Because they are marketed to their whole lives, they are not as brand loyal. The apartment company needs to start building loyalty with them “by letting them know they matter,” Campbell pointed out.

A large part of chasing short sales is educating the homeowners and serving as a type of consultant helping them understand the process. Many homeowners in default have never heard of a short sale and will rely on you to walk them through the process.

Below is an interesting twist to the short sale process. This doesn’t mean all lenders are taking this approach but it is something you need to consider when dealing with homeowners and lenders. Find out if the homeowner is willing to do the deal even if they are going to have some ongoing responsibility with the balance due. Don’t be turned away if they are not as you can still submit an offer to the bank for their review. At the end of the day the bank does not want the property back and there is always the chance they will accept your offer – but you have to make it.

Banks: No Exceptions for Short Sales

Increasingly, sellers seeking short sales are encountering a new twist.

Lenders are agreeing to let some short sales go through, but they want the home owners to sign a note promising to pay some or all of the balance due – debts that could burden borrowers for the rest of their lives.

Moody’s Economy.com estimates that about 10 million home owners have negative equity, a condition known colloquially as being upside down or underwater. By next June, the forecasting company expects the total to rise to 12.7 million — a quarter of all home owners who have mortgages.

“The first wave of foreclosures involved a lot of investors who just disappeared,” says Lance Churchill of Frontline Seminars, which teaches real estate practitioners how to negotiate with lenders on short sales. “Now, home owners with jobs and assets are underwater and want to sell. The banks want as much as they can get, today or in the future, and the owners want to get away clean.”

If the lender does a short sale without extracting anything from the seller, everyone in the country who is upside down could try to wiggle out from under and banks will take a fresh wave of hits. But if the lender pushes too hard, the borrower will default, leaving the bank in worse shape.

Source: The New York Times, David Streitfeld (09/18/08)

The credit markets are a mess, banks are failing, lending institutions are further tightening lending requirements and it is becoming quite difficult to get loans for investments. Sounds bad doesn’t it? Don’t let this get you down; even when the credit market is good investors should be looking for creative and alternate ways of funding investments. Even if you can get a bank loan for an investment doesn’t mean that is the best route to take.

One such alternate and creative way of buying a home is on a rent-to-own strategy which is basically the same thing as a lease option strategy. It is a low risk approach to buying real estate with many benefits to both the buyer and seller. In addition to the buyer advantages listed in the note below, the buyer is not obligated to purchase the property. Many investors are concerned home values will continue to decrease but if the value of the home decreases below what your option price is you can simply walk away. If you would have purchased the property outright and the value decreases you are stuck with the asset because you own it. That is not the case with a rent-to-own.

Rent-to-Own Gaining Favor Once Again

Rent-to-own options are becoming popular again after falling out of favor during the last couple of decades when mortgages were easy to get.

The advantages of rent-to-own to buyers include a way around poor credit, an opportunity to rebuild credit worthiness and a way to try out homeownership without making a costly commitment.

For sellers, it offers cash flow from properties that might otherwise just be sitting there.

In some parts of the country, like Florida, rent-to-own arrangements are fairly commonplace, but in other parts of the country developers are only beginning to experiment with this form of purchase.

In the Boston area, Economic Development Financing Corp. (EDFC) and Trinity Financial are two affordable-home developers that have introduced experimental rent-to-own programs. Eric Gedstad, spokesman for MassHousing, a state agency that finances housing construction, says his agency is supportive.

“As the lender, we are gratified that the developer has cash coming in. It makes sense for potential homeowners. The more time that goes by the better the opportunity for someone to repair his credit.”

Source: Boston Globe, Robert Preer (08/31/2008)

posted by Carter Brown

I get asked all the time “where do I find good deals”? My response is always the same, “anywhere and everywhere”. I don’t say this flippantly either. I do believe investors need to be finding potential deals anywhere they possibly can and the more creative the better. It doesn’t hurt to dig around and ask questions and look into opportunities that might be a little off-the-beaten-path.

One such opportunity is with unfinished homes. Many unfinished homes are sitting on the market because the builders have run out of money or don’t want to spend any more money on a property they know they won’t be able to sell. While the note below mentions some obstacles you may encounter buying unfinished homes, it is nevertheless worthwhile to talk to the builders and see what opportunity may exist.

Unfinished Homes Can Be a Great Find

A small number of buyers are acquiring homes that the builder hasn’t completely finished so they can do the job themselves, and save money in the process.

For ambitious do-it-yourselfers, it sounds like a great deal. But finding an unfinished new home that a builder will sell isn’t as easy as it might sound, even though builders are awash in unsold inventory.

Builders say they’re reluctant to sell unfinished homes because it can be difficult to get an occupancy permit, even a temporary one, from a municipality unless the property is complete.

Plus, subcontractors likely will object to such an arrangement. There’s also the question of liability. Who’s responsible if the buyer gets hurt while working on the property?

Nonetheless, if you get this kind of request from a potential buyer, it doesn’t hurt to talk to the builder, says Don Augustin, vice president of Kenneth James Builders in the Chicago area.

“The way things are right now, you have to do above and beyond what you normally do because you don’t just want a house sitting there,” says Augustin.

Source: Chicago Tribune, Mary Ellen Podmolik (09/05/08)

Posted by Carter Brown

A VERY RECENT (TODAY) ARTICLE ABOUT FALLING INTEREST RATES FOR MORTGAGE LOANS AND PERDICTING FURTHER RATE DECREASES AS A RESULT OF THE TAKEOVER OF FANNIE MAE AND FREDDIE MAC

Mortgage Rates Decline Over Labor Day Week but Real News Should Come this Week

MORTGAGE NEWS DAILY – SEPTEMBER 10, 2008

The average mortgage rates reported below result from surveys that concluded two or three days before the federal takeover tsunami hit the market. A decline in rates is one frequently stated hope from the conservatorship of the two GSEs and some sources already reported that rates on the 30-year fixed rate mortgage (FRM) almost immediately dropped - one report said from 6.55 percent to 6.2 percent.

In the case of the Mortgage Bankers Association there is always a significant time lag between the end of data collection for its Weekly Mortgage Applications report and the release of results and we delay our own weekly summary because that report also contains important information on mortgage activity and the distribution of applications among purchases and refinances. However, due to circumstances over the last four days, we will report on Freddie Mac’s Primary Mortgage Market Survey for this week as soon as it is released on Thursday.

Freddie Mac reported that mortgage rates for the week ended September 4 were generally lower than the previous week. The 30-year FRM averaged 6.35 percent with 0.7 points compared to 6.40 percent with 0.6 point a week earlier. The 15-year FRM carried an average rate of 5.90 percent down from 5.93 the previous week. Fees and points were unchanged at 0.6 point. Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) were at 5.97 percent with 0.6 point. During the week ended August 28 the hybrid rate was 6.03 percent, also with 0.6 point. The one-year ARM dropped from 5.33 percent to 5.15 percent with 0.7 point.

“Mortgage rates eased a bit over the holiday-shortened week following release of economic data that suggest consumer spending may slow,” said Frank Nothaft, Freddie Mac vice president and chief economist. “The economy grew at an upwardly revised 3.3 percent pace in the second quarter, boosted by the smallest trade deficit in eight years, and residential fixed investment slowed growth by 0.6 percent, the least amount since the same period a year ago.
“However, personal income fell 0.7 percent in July, the first decline since August 2005 and will likely slow consumer spending in the third quarter.”

The MBA survey also revealed across-the-board rate declines. The 30-year FRM decreased from 6.39 percent to 6.06 percent with points, including the origination fee, increasing slightly to 1.02 from 1.00 while the other fixed rate mortgage, the 15-year, declined an average of 23 basis points to 5.73 percent with points decreasing to 0.98 from 1.03. The one-year ARM averaged 7.0 percent with 0.30 point, down from 7.11 percent with 0.35 point.
Mortgage volume as measured by the number of applications increased 9.5 percent on a seasonally adjusted basis which included an adjustment to account for the Labor Day-shortened week. On an unadjusted basis volume was down 13.6 percent. Applications dropped 24.4 percent compared with the same Labor Day week in 2007.

Refinancing as a share of all mortgage applications increased to 36.3 percent from 34.0 percent a week earlier while the market share of ARMs continued to decline, representing only 6.4 percent of all applications compared to 6.6 percent a week earlier.
________________________________________

This is a commentary on the takeover of Fannie Mae and Freddie Mac by the Federal Government. While it is too early to know about the eventual impacts many experts are positive in their outlooks and so far the action seems to be leading to lower mortgage rates.

Industry Observers Agree Fannie, Freddie Takeover Was ‘Necessary,’ But Could Pose Long-Term Negative Impact on Multifamily

Published: September 08, 2008 in MULTI-HOUSING NEWS

By Anuradha Kher, Online News Editor, MHN and Eugene Gilligan, Senior Editor, CPN

Washington, D.C.–The U.S. government’s takeover of Fannie Mae and Freddie Mac is a necessary step to stabilize the U.S. housing market, according to multifamily industry experts who are still examining the ramifications of the announcement.

The takeover will go a long way toward solving what Stuart Saft, partner in the law firm of Dewey & LeBoeuf, called a “Catch 22” that has been bedeviling a critical part of the economy— housing. Real estate, being an illiquid asset, needs a steady stream of capital inflows, Saft points out. The credit freeze-up has meant that home prices have fallen, thus causing lenders to be much more cautious on their home lending and starving the sector of capital.

The takeover should help the multifamily securitization market get back on track, Saft predicts. But, he doesn’t expect that market to quickly reach the securitization levels of 2006, for example.

Brian Harris, Moody’s senior vice president, tells MHN, “The fact that they can ensure availability of financing is the most significant impact, and a positive one at that, that the takeover will have on multifamily.”

The takeover presents a “good news, bad news” dichotomy, says Paul Fried, principal of AFC Realty Capital. Jerry Howard, CEO of the National Association of Home Builders (NAHB), agrees.

“My reaction is ‘What a disappointment,’” Fried says. “It’s another bailout of a financial institution. Twenty years after the FDIC and the RTC, we’re back there again.”

Fried does see a silver lining, however. “We may have a bottom benchmark, and the markets may begin to repair themselves,” he notes.

Howard tells MHN, “In the short-term, this is good; the markets, national and international, have reacted favorably to this move, interest rates are down and this move seems like it might turn things around for the economy. But in the long-term, this could negatively affect multifamily. The portfolio of Fannie Mae and Freddie Mac is expected to shrink with this move and it cannot be predicted where multifamily will land up in the process.”

Howard says that there will be changes in the role and make-up of the two companies and in the process, some sector could be ignored. “This could create a vacuum and we don’t know if there is anything else to fill it,” he says.

Fried adds that the takeover may dispel some myths about the relative safety of multifamily investments

in comparison to other sectors, saying that multifamily investment has always been regarded as a “safe harbor” investment, due in large part to the implicit guarantee that the U.S. government would not let Fannie or Freddie fail.

“It shows that investors were making riskier investments than they should have been making,” he says.

Saft believes that talk of eventually making the GSEs smaller is a positive. He says he proposed
creating a third GSE to the Treasury Department “to take the pressure off Fannie and Freddie.” He says the creation of five or six GSEs would create competition in the marketplace, comparing it to the breakup of AT&T in 1982. He says increased government oversight of the GSEs is a given, and Fried seconds that. “A big set of guardrails will be put in place,” he says.

Whatever the case, Howard advises borrowers to get back into the market now. “The interest rates are down so it’s time. Spreads have come down already and they will come down more, eventually settling at the rate prior to the crisis,” he says.

Doug Bibby, president of the National Multi Housing Council (NMHC) issued a statement, saying, “The impact of the Treasury Department plan on the apartment sector remains to be seen as the details are worked out, but we are optimistic that there will be little to no disruption in the companies’ multifamily operations.”

He went on to say that the government action is directly related to the companies’ single-family
investments and their efforts to weather the ongoing decline in that sector. “The multifamily sector, on the other hand, remains strong and is actually producing profits for the firms that are helping rebuild their capital reserves. As a result, we expect them to remain active in the multifamily market.”

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