President Obama is scheduled to arrive in Vegas tomorrow night. It is unclear whether he plans to meet with local officials, or apologize for his most recent round of Vegas-bashing. It’s probably a good bet he’ll say what a swell guy Senator Reid is. I wonder if anyone is taking odds on that.

Since the President is showing up in the foreclosure capital of America, I would like to hear what he’s got to really say about the fact that mortgage delinquencies are at an all time high. With Nevada’s unemployment rate higher than the national average, what would he like to say about job creation? Because let’s face it, there is no permanent solution to the mortgage and housing problem until people have reliable jobs.

Update: Mr. Goodman has indicated that he will accept an apology from Mr. Obama, as long as it includes buying him a martini. Mr. President, Mr. Mayor takes Bombay Sapphire.

Two little news bits for you.

First, the Senate has attached an extension of the $8000 first time buyers tax credit to a bill extending unemployment aid and passed it unanimously (some restrictions apply, of course). The House of Representatives still has to vote on such a proposal, but a compromise is already in the works and it seems likely they will go along. Update: A bill has passed and will likely soon be signed into law. I know I should be really happy about this, but I have reservations. First, how many qualified first time buyers are left? Second, by continually extending the credit, urgency is lost. Buyers are left wondering if Congress won’t pass a better deal next year! Finally, assuming that urgency is not lost, it adds froth to the market. We have roughly 15,000 pending sales in the Las Vegas Valley; you can’t tell me that’s a normal level.

The second item is undeniably good news here. Clark County wants to raise the fines for not keeping property in good condition. Currently, the fine is $50-200 per day and a maximum of $10,000. They want to raise it to $1000 per day for a maximum of 2 years.  We aren’t talking about mowing the lawn and stuff like that. We’re talking about truly neglectful property owners who allow their properties to become dumping grounds or unsafe places. While some say this is likely to be used against the elderly and the infirm, it will most likely be used against banks who allow foreclosed property to fall into ruin. If you have an opinion that you want heard on this matter, a vote is scheduled for November 17, 2009.

Interesting side note on our County Commission: one of our commissioners won’t be seeking re-election because he is running for Governor next year. His name is Rory Reid. Yes, he’s Senator Harry Reid’s son.

Hope everyone is planning on dropping by again for Friday Figures! Those who do will be rewarded with knowing more about the Vegas real estate market than most people.

Yesterday, the Obama Administration announced that the mortgage rescue program would now allow homeowners to refinance up to 125% of property value, up from 105%. This is a welcome change, even though it won’t help everyone. Nothing has been done to address the slow pace at which banks are processing applications.

This is an important development which will hopefully prevent foreclosures two ways. First, people who are unable to pay their mortgage and are somewhat (but not severely) “underwater” on their home value will be able to get refinanced. Second, it will give the opportunity for people who can pay their mortgage to take advantage of lower interest rates without walking away from their current homes — creating a completely needless foreclosure. It is unfortunately completely logical for families to take advantage of low rates and slashed prices, even at the expense of a lower credit score.

I’ll end with two hopeful tidbits: the NAR pending sales index has risen 4 straight months, and some evidence from an economist that prices have bottomed. Both these items are about the larger national housing market. My readers have seen these trends in place locally for some months. Don’t forget to watch the trend continue in Friday Figures tomorrow.

There’s been much said today about the Treasury’s “plan” to force mortgage rates down. Since no government agency actually has the authority to “control” mortgage rates directly — not even the Federal Reserve! — it would have to be done indirectly through the purchase of mortgage backed securities.  A whole lot of mortgage backed securities.  That “demand” would drive the price of such securities up, which in turn makes the interest rate go down like any other bond.

This reduced interest rate would theoretically stimulate demand during our current “housing recession.”  Mr. Bernanke seems to be all for anything that would stimulate housing demand and/or reduce foreclosures.  There is much reason to be skeptical that this will work. Even Mr. Obama has gone on record as saying ”The deteriorating assets in the financial markets are rooted in the deterioration of people being able to pay their mortgages and stay in their homes.”  They both agree that it would be great if people could pay the mortgage, but I think they may disagree on whether the answer is lower mortgages or higher wages! 

By far, the best criticism I have seen of the Treasury plan is by Tom Vanderwell over at BloodhoundBlog.  He articulated my question, “How exactly is that supposed to work?”  Here’s the meat:

Okay, not to rain on everyone’s parade, but let’s take a logical look at the numbers and the statistics behind it.

1. What’s the only way possible that I’m aware of to lower mortgage rates?  By raising the price of mortgage backed securities which lowers the rates on them.   Lower rates on mortgage backed securities equals lower mortgage rates.
2. How do you increase the price of mortgage backed securities?  The only way that happens is by increasing the demand for them.
3. How do you increase the demand for them?  Have the government step in and buy a HUGE (I’m talking many many many zeroes!) amount of mortgage backed securities off of Fannie and Freddie.
4. How is the US government going to come up with that money?   All joking about printing presses aside, in reality, they are going to have to borrow the money.
5. How do they borrow the money?   By issuing a LOT of US Treasury bonds to finance their purchase of mortgage backed securities.

So, what happens with the price of US Treasuries if suddenly there’s another $1 Trillion on the market?

• Demand stays the same
• Supply goes way way up because the government is flooding the market with more debt.
• Price goes up down because there is more supply than demand.
• Rates go up.

So this looks very suspiciously like yet another plan where the Government throws money at the financial institutions that helped make this mess worse than it had to be, and hopes everything magically gets better. 

Here’s a trio of bonus items for you today:  the Feds have a new set of financial literacy websites that can help you learn about such important topics as financial security, home ownership, consumer credit, and other topics (go to it directly by clicking this link!);  copper theives are hitting lots of soft targets and causing lots of problems, but this article fails to mention empty houses! (Realtors, please check on your vacant listings regularly… and if you see something amiss in somebody else’s listing please let the other agent know!);  and a micro-loan fund to help entrepreneurs in third world nations is being run by students at Vegas’s Meadows School.

Every once in a while, somebody will ask me “Who is to blame for the current housing and foreclosure mess?”  Usually they want a short, snappy answer.  The truth is that there is a giant pie of blame, and there’s plenty to go around.  In no particular order, here are some of the culprits.  This is my opinion alone, and you are welcome to disagree with me.

Fannie Mae. The Federal National Mortgage Association, shortened to FNMA and then simply Fannie Mae, is a federally chartered entity designed to encourage home ownership primarily by purchasing mortgages from other institutions.  That meant that your local savings and loan would have the money to make new loans in your neighborhood.  That by itself is not the problem;  until recent years, they and sibling corporation Freddie Mac were only allowed to buy certain mortgages that met very strict criteria — so-called “conforming” mortgages.  The old girl has been urging people to buy a house for years, selling us a bill of goods that somehow or another our lives would be magically improved by home ownership.

The economy. The sad truth is that wages have not kept pace with inflation for almost all of this decade, inflation has been under-measured, and housing prices have gone up much faster than inflation!  Joe Average could not have caught up to the curve if he wanted to.  The economy also got a lot of people into situations where they had to take out second mortgages or equity lines of credit to pay the bills. This left them with little equity and a higher mortgage bill.

Stupid accountants. I have actually had people tell me their accountant told them to buy a bigger house for the interest deduction!  The money you “save” with this deduction is only the amount you spent on mortgage interest (not principal) times your tax bracket.  Let’s say for simplicity that you have a $1300 per month mortgage and $1000 of that is interest.  If you are in the 28% tax bracket, you are spending $1300 per month, your monthly tax savings is only $280.  If you would have spent $1300 per month renting, then fine, you saved money at the end of the year.  Many would argue that if you are spending more than $1020 on rent it’s coming out ahead.  Many people doing this math forget to account for the additional $280 out of pocket each month.  If you are “just getting by” paying $1100 per month, this “savings” will bleed you dry.

An unscrupulous minority of mortgage brokers.  Most mortgage brokers that I have known have done great work trying to get people into affordable mortgages and been brutally honest with clients about exactly how much they can afford (that’s why I prefer that clients get their pre-qualification letter before we even start looking).  However, a few mortgage brokers have been all about the fees at the end of the deal, and will do anything to get it done.  Even when that means putting people into a mortgage they can’t really afford in the long term. Perhaps they will even say tell the client to come back and refinance in a year — and they neglect to mention that they will rack up another fee to do so!  They have ruined the credibility of programs meant for special circumstances by abusing them and the homeowners they sign up for them.  “Stated income” loans?  A necessity for those who are small business owners or paid largely in tips!  Not intended for Joe Average (or his mortgage broker) to lie about how much money he makes so it looks like he can afford a house that he really can’t afford!

A similar unscrupulous minority of real estate agents. I’ve talked a little about them before.  Some agents fixate on the fact that they don’t do a lot more to sell a $200,000 home than a $100,000 home but they get paid as a percentage of sales price.  So some agents try to steer their clients up-market regardless of what they can afford. Agents like this don’t consider the effect this will have on their future business. You never know whether that guy you helped (or didn’t help) with the $100,000 home will just happen to be talking to somebody who needs help with a $500,000 home.

Appraisers in a Catch-22.  Make no mistake, appraisers found themselves in a tough place a few years ago, particularly in the hottest markets. They were being paid to say yes! Yes! That house may have only been worth 80% of that last year, but it’s worth that now. Yes! An almost identical house on the next block sold for $20,000 less two weeks ago but this house is worth even more now.  They weren’t going to get any business from their mortgage broker clients if they didn’t at least try to come close.  At $300 a pop, they had to do what they had to do.

Overly enthusiastic buyers. Motivated by greed for rising housing prices and fear that they would be priced out, some buyers over-extended themselves. They never thought housing prices could go down.  They refused to “just say no” to that house they love but just can’t afford.

Government programs to artificially stimulate housing demand.  I’m not going to criticize the mortgage income deduction here, despite the fact that it’s the only “investment” that the tax code favors. Rather, I am quite critical of programs for first time homebuyers. President Bush has made widespread home-ownership a priority of his Adminstration as part of his Ownership Society and as a result has spearheaded several such initiatives.  Unfortunately, there wasn’t really enough information and education to go with these initiatives. There are many things first time home buyers do not know and perhaps have never thought about. I think some of these buyers ended up in over their heads with homes in need of more repair than they knew how to handle,  with bills they didn’t anticipate, perhaps in neighborhoods that were not what they first seemed.  By the time they knew they were in over their heads, it was much too late.

And last but not least, the only individual I will single out.

Phil Gramm. The then-senior Senator from Texas is the prime architect of the banking deregulation resulting in “too big to fail” institutions. His further work deregulating the comodities and futures markets made possible the labyrinthine transactions that make it impossible to know just how big the housing problem is, nor how long it will take to completely play out. Further, the modern complications Senator Gramm’s deregulation allowed make it difficult for mortgage providers to modify mortgage terms to prevent foreclosures without violating contracts with investors who have purchased part or all of the paper.

While there are certainly other culprits, these are some of the biggest.

Cross-posted at TheModerateVoice.

UPDATE: Many thanks to the House of Representatives for making almost everything below obsolete by defeating the bill. Since some reincarnation of it is almost certain to ensue, it’s still a good idea to let your Congresscritters know what you think. Here’s some ideas about what the bill should say. It is worth noting that according to CNBC, Wall Street is just shocked that this thing didn’t pass (as I write, the DJIA is still/again down over 500 points). I’m just shocked that they’re just shocked that Congress did constituents wanted instead of what lobbyists, the Administration, and some wealthy financial institutions wanted.  It is 5 weeks before a national election, you know.

Here’s what I wrote to my Senators, supporting links added for your benefit:

As more details about the proposed Bank Bailout are known, the more insane it looks!

Not only does it give vast powers to the Secretary of the Treasury, not only does it do very little to help homeowners in Nevada and elsewhere keep their homes — I hope you have not forgotten that the Sun reports 1 out of every 91 Nevada households is in the foreclosure process — not only are economists on the right and left convinced it could make things worse, not only does it do nothing to keep bank executives from running off with excessive final paychecks while normal employees and depositors get the short end of the stick.

I am now reading that reserve requirements for some banks may be reduced to zero! That’s called “insolvency” by most people, Senator.

Further, the stock shares that the government will take in return for the “free money” in the bill won’t even be voting shares! For pity sake, if Joe Average buys 100 shares of a bank, he’ll get more of a vote than the entity giving them millions or even billions of dollars? I don’t think so!

This bill is bad for the American people, bad for the American economy, and bad for any Senator who hopes to be re-elected.

If you want to read the thing for yourself, a link to it is at Economist’s View. If you have a viewpoint you would like your Congresscritters to know about, grab a peice of recent mail with your Zip+4 on it so you can look up your Representative on the House website.  As I write, the House site is particularly slow, since thousands of people are all trying to reach it at the same time.  Remember, your Rep probably has a local phone number that you can call.  All you’ll need to get hold of your Senator on that site is to know what state you live in.  Feel free to copy/paste if you like what I wrote.  If you aren’t in Nevada, you might want to talk about your own state in that sentence.

Details of the foreclosure rescue bill passed by Congress and awaiting President Bush’s signature are coming out. Before we take a closer look, keep in mind we have 2.2 million vacant homes on the market, sales of new homes are plunging, and the trend of increasing foreclosure rates shows no sign of stopping.

Back to the bill. First, it won’t come into effect until October. If things continue as they are, there will be another 700,000-1,000,000 foreclosed homes on the market by then. The bill is estimated to help about 400,000 people (a little more than half the number of homes in the foreclosure process in the second quarter of 2008).

It will only apply to owner-occupied homes with mortgages dated 1/2005-6/2007 (one 30 month block). It will do nothing to help renters who dutifully pay rent and live in homes with defaulting mortgages. The homeowner has to prove that the mortgage payment is at least 31% of their monthly income, and that they won’t be able to afford paying it anymore.

Now, here’s the deal-breaker. The old mortgage company has to agree to write down the loan to 90% of the current appraised value and forgive the remainder. CNN correctly points out “that will mean a substantial loss for the lender.” A new mortgage company issues a new loan for that 90% (some sources are saying only up to 85% — where is our cash-strapped homeowner going to get that 5% difference?) and the old mortgage company has to accept it as full and final payment. One of the mortgage companies has to pay FHA a 3% insurance premium up front.

As for the homeowner, they will have to pay an insurance premium to the FHA every year of 1.5% of the principal. In addition, they will have to share any profit on the house with the FHA (100% the first year, declining to 50% after the 5th year, plus a 3% exit fee). The homeowner also must accept strict limits on equity loans.

For the sake of argument, let’s flesh out these numbers. If you own a median priced house in Las Vegas, the nice folks at HousingTracker say it’s worth $225,000. Scroll down for historical median prices. Let’s assume the mortgage originated in the middle of the 30 month window, March of 2006. Median prices then were roughly $325,000. For the sake of argument, say you had a 90% LTV, or a mortgage of $292,500.

Assuming you actually meet all the other qualifications, your mortgage company would have to agree to write down what you owe to 202,500 (lose almost $90,000 — the principal has come down a little since then unless you have an interest only loan). The local experts in bank-owned properties tell me that it costs a lender $60,000-80,000 to take a foreclosure to completion., so they really only have to bet that prices won’t decline another $10,000-$30,000 over the course of 6 months to come out ahead by refusing to play along. This bet becomes even better for your mortgage holder if you financed 95% or more of your home’s value.

But let’s also look at why this deal might be bad for you. First, somebody is going to pass the 3% FHA insurance origination fee on to you. That’s $6075. Plus there is the annual 1.5% insurance fee that will be tacked on to your payments, $3037.50 annually ($253.13 per month). And even if you sell your home 20 years from now, you will still owe the FHA half of any profits you may make on the place.

Rest assured, this deal is not a bailout. It doesn’t help much of anybody.

I’ll leave you with a couple of local interest items: 2 Nevada banks taken over by the Feds; and a Nevada court upholds term limits.

It must be nice to be a Congressman. They’re already out for the Independence Day holiday. Of course they left a few little things undone. Like, say, that bill that might have helped homeowners and mortgage companies prevent some foreclosures. Don’t get me wrong, the ideas on the table were far from perfect, but they were better than nothing.

Vacant homes — abandoned, foreclosed, or simply waiting to be sold — are now a serious problem in many communities across the nation. It’s no longer just an “inner city Detroit” sort of issue; even “nice” neighborhoods have boarded up homes that attract parties, drug use, vandalism, and theft.

However, even if we had enough buyers for these properties, there is the problem of getting the money to purchase (and renovate where needed) all those homes. We still have a “credit crunch” where many banks don’t have money to lend. Some of them over-extended credit to construction firms that were themselves overextended. Some of those builders have slashed prices just to raise capital, and in the process slashed market values in the neighborhoods they were building.

But today there is more to talk about than doom and gloom. Today in the Greater Las Vegas Association of Realtors (GLVAR) MLS, we have 21,390 available homes, 16,806 of them Single Family Residences. This level is high, but stable. In addition, we have 7,032 homes that are “contingent” or “pending”. These homes have signed purchase contracts, and the overwhelming majority of them will close within 30 to 60 days. However, the sale is not final yet. Of the available homes, 11,171 are currently vacant (54.7%); 5,809 are short sales (27.2%); 4,737 are REO/foreclosed/bank owned (22.1%). All those percentages are up over last month, and they represent “motivated sellers.” These figures must be taken along with these (courtesy of our friends over at Frothing Developer): taxable sales in the Valley are up (meaning economic growth, and the promise of more jobs); home sales are better than they were this time last year; and despite a regional “recession”, net new residents of 4,600 in May. That’s a slow way to fill those available homes, but it’s better than nothing.

Although we made our decision about potential Presidential candidates with a caucus, Nevada does have a primary election for other positions coming up in a couple of weeks.  Here’s a little more about who we will be voting for/against.

The intersection of real estate and politics is right here, in this item from the IHT called “U.S. housing bill evolves, but crisis grows deeper”.

Elections have a direct impact on you.  Primaries are in some ways more important than the Big Game in the fall.  It’s not easy finding out about these candidates and their positions, but give it a try, and remember to vote on August 12 if you are a registered Nevada voter.

The nice folks at Econbrowser have outlined how mortgage securitization works both in theory and in practice. Fear not; they include handy diagrams.

AlterNet has some choice opinions about the Bank of America bailout of Countrywide.

Some people are very particular about how you pronounce the name of this state.

Did you know that women are being disproportionately hit by the subprime crisis?

Don’t forget that the caucuses are tomorrow, Saturday, January 19, 2008! Here are links to help you find the closest location for the Democratic caucus and the Republican caucus.