Original NAR reports claimed 24.8 million homes were sold nationwide from January 2007 to October 2011. Revised data shows this figure to be off by 14% from readily available recorded data, with a total of only 21.3 million homes sold nationwide over the course of the Great Recession

(From: first tuesday)

She presented the plan in a letter to President Barack Obama earlier this month and it was discussed by the Democratic lawmakers and FHFA’s acting director Edward DeMarco on Wednesday.

A cramdown is a would-be bankruptcy process whereby a borrower would file bankruptcy, and as part of a reorganization plan, cram a principle reduction of a mortgage down a lenders throat. (Not just a “temporary” reduction in interest, by the way, but a true write down of principal.)

Seems counter-intuitive, doesn’t it?

“Hi, Judge. I’m a bankrupt borrower, but I could afford my house if I owed less, and had to pay less interest. The lender won’t agree. Will you make them, please.”

How does someone who is “bankrupt” afford a house?

It’s simple, in some cases anyway.

The largest debt of a cramdown borrower would be the mortgage. The borrower ** would be ** able to afford the house mortgage ** if ** the mortgage amount was equal to the value of the house – not 125% or 150% of the value of the house. If the interest rate were lower, that would help too.

Who loses in this scenario?

Fannie Mae and Freddie Mac – those GSEs that hold 75-85% of all mortgages in the US. (Oh, and some private banks that hold the balance. After all, what’s good for the goose…)

Can Freddie and Fannie afford to take the hit? THAT’s the question.

We’ve (as a Country) already dumped 2 TRILLION dollars into the economy. The Government (that’d be you and me by the way) will need to pay for the write offs any cram down allowed. How much more would that be – and where would it come from?

Here’s my $0.02.

The economy limps along like overcooked spaghetti. It’s going nowhere until the banks can get rid of the toxic debt, and consumer confidence rebuilds. Take the losses now, and we can start the recovery sooner. Yes, the losses WILL BE staggering. The bankruptcy courts will be overwhelmed. (I’d bet that some smart folks will start renegotiating those loans without the need for bankruptcy court intervention if the law allowed a borrower to do it through a bankruptcy proceeding – after all, it’d be cheaper for the banks that way…)

But, once the borrowers start paying on their loans again, once borrowers “feel” like they have readjusted on their homes, confidence – i.e. certainty – returns. And with certainty comes spending. With spending comes an uptick in the economy, and the ability for everyone to start making money again. Even he Banks. THAT’s how we pay for the losses Fannie and Freddie will take. We tax our way through it, with the increased economic activity.

Hell no, it’s not pretty. But it could work!

Imagine a scenario where you have a small business in a building you purchased in 2001 for $1 million, and for which you have a loan of $850,000.

The property has gone up in value, and is now worth $1.5 million. You have inventory of $100,000 that needs to be paid, and a new order that needs an additional $100,000 for inventory. You would love to tap into the equity in the building to pay off that old inventory, fund the new, and lower your interest rate on the original loan. Your commercial bank has told you that your credit is great, and your cash flow is good, but that it will only loan 65% of the market value of the property. That’s only $975,000. You need $1,050,000. What can you do?

You call a Certified Development Company (CDC) and apply for an SBA 504 loan. CDCs are conduits for commercial banks and their borrowers to access Small Business Administration-guaranteed financing.

Mark Stebbins and Fernando Alvarez of California’s CDC Small Business Finance commented on the recently revised SBA 504 Debt Refinance loan program. Regulations were made substantially less restrictive Oct. 12, 2011.

“We think there are many commercial property owners who can benefit from this program, who have been shut out of refinancing programs in the past,” Stebbins said.

The SBA rules previously required that borrower’s provide historical records showing that each and every refinance of their commercial property resulted in at least 85% of the proceeds going towards the acquisition and or improvement of the real estate. That restriction is gone, replaced by the requirement that only the original loan satisfied the requirement that 85% of the loan proceeds were used for the acquisition and or improvement of the real estate. In addition, if the original purpose in acquiring the real estate was for investment purposes, but now the property is at least 51% owner occupied, the refinance of the original and all subsequent debt would be eligible.

Another huge obstacle that has been removed is the requirement that the commercial bank no longer has to finance 50% of the property’s value. That’s huge. CDC Small Business Finance’s Fernando Alvarez explained: “Under the recently revised 504 debt refinance program, the commercial bank and the SBA lender can each loan the same amount, as long as that isn’t more than 90% of the property’s value.”

A 90% LTV (loan-to-value) is an advantage to a commercial property owner, in and of itself. But the critical point is that the commercial bank doesn’t have to loan the first 50% LTV anymore.

Imagine if the owner in the scenario above wanted to refinance a total debt of $1,050,000. Under the old rules, the SBA 504 loan required the bank to loan the first $750,000 (50% of the value of the property). The SBA could then loan the difference for an additional $300,000. The old rules did not allow for cash out to cover inventory or any other business purpose.

Under the new rules, the commercial bank can lend the same amount as the SBA, not the first 50% of LTV. That means the commercial bank loan would only have to be $525,000 instead of $750,000 thereby saving the business owner increased interest expense for the additional $225,000 . The interest savings is derived from the SBA taking an equal share of the loan at rates historically below current commercial rates.

In the last couple of years of very depressing economic news, the changes to the SBA 504 debt refinance program is certainly a breath of fresh air and a step in the right direction.

first tuesday – a real lestate publication that I’ve come to enjoy, and agree with (on almost everything . . . almost) pegged a 15% decline yet to come.

http://firsttuesdayjournal.com/the-equilibrium-trendline-the-mean-price-anchor/?utm_source=first+tuesday+Students&utm_campaign=93ae2b9454-Monthly_Email_October_11_2011&utm_medium=email

Yale economist Robert Shiller agrees, and sees an even bigger drop to come.

http://www.slideshare.net/RealtyTrac/why-is-real-estate-not-rebounding

So, what’s one to do?

Grab on tight to buyer-investors. Make what feels like low-ball offers. They may give the client room to survive the coming downturn, and still propser, 5 – 7 years from now.

A fascinating statistic was reported by the Bee:
“Andrew LePage is an analyst with DataQuick, a San Diego real estate information firm. He said the lack of move-up buyers can easily be detected by looking at what’s happened to sales of homes in the $250,000-to-$600,000 range.
In 2006-07, when the local market was near its peak, that segment accounted for 70 percent to 80 percent of all sales in the Sacramento region, according to DataQuick. These days, homes in that price range account for less than 19 percent.” ((Read more: http://www.sacbee.com/2011/08/29/3868485/generation-of-homeowners-stuck.html#ixzz1aPXy6jHp ))

80% down to 20%. That is where the market transaction counts are as well.

“Starter homes” are being bought up by savvy investors, who can rent them for more than the mortgage, because they can be bought cheap. But what about the “middle?”

Just like the middle class on every other front (loss in income levels, increased taxation, stagnant employment) the middle home-buyer-owner market is stuck in the mud.

A recent article in the NY Times …

http://bucks.blogs.nytimes.com/2011/05/16/the-dangerous-allure-of-distressed-real-estate/?ref=business

… hit it right on the head. Which is where you and your clients can get hit if everyone isn’t REALLY careful.

It was fun reading. I’d recomend it.

“And lenders … expect to see a debt-to-income ratio of no more than 40 or 45 percent…”

What does that do to the value of housing that a “senior” can afford?

If retirement income is $2,000 per month, and 45% of that can be sued for “debt” then housing debt should be capped at about 31%. 31% of $2,000 is $620, and if the interest rate is 5% over a 30 year amortized loan, that’s $115,000 (before taxes and insurance are factored in.

Better go buy that REO house in the California central valley now.

Thus reported the New York Times.

You might want to read this: We settled with the investors, now we have to move this garbage through the system and foreclose on everything. If only the Bank would.

8 Billion (with a B) is a lot of money. But it’s a drop compared to the amount of underwater residential (we haven’t even touched commercial) loans out there.

Want to get the economy running again? Take the hits needed on these bad loans. Re-balance the balance sheet (yes, you WILL BE a smaller Bank), and then let’s get back to business.

My $0.02.

Only for bubble brains, I’d say.

At the conference of bankers (senior asset managers for three SF Bay Area Banks) I attended this morning, the story was very different.

No, they are not lending on commercial properties – unless those LTVs are in the mid-60′s and the DCRs are at or above 1.35. Hell, we’d all lend on those terms.

As for their forecast: a flat bottom for the next five years.

I’d bet on the bankers. This time.

When has the government EVER been good at something like this?
And ALL “consumer finance” (student loans?, credit cards?, mortgages?, annuities?, 90-day lay away programs for mattresses?) will be governed, watched over, regulated by this one Gi-Huge-ic, government bureaucracy.

Yup. The same people that brought us home mortgage deregulation in the first place – are now, “here to help.”

May the gods help us.