The Short Sale Alternative

Original Post: http://online.wsj.com/article/SB10001424052748703794104575546312207379980.html?mod=WSJ_RealEstate_LEADTopNews

By SARAH MAX

OCTOBER 13, 2010, 1:45 P.M. ET

Barbara P. Fernandez for The Wall Street Journal

Justin and Rebecca Rakitin are finally moving into their townhome after nearly a year of wrangling.

When newlyweds Justin and Rebecca Rakitin starting shopping for their first home in the Fort Lauderdale, Fla., area last year they assumed the process would be quick and easy, with a $8,000 first-time buyer tax credit at their disposal and 'For Sale' signs littering every block.

In fact, most of the listings in the Rakitins' price range were either foreclosures or short sales, where sellers were asking for less than they owed on their mortgage. After seeing some "really nasty" foreclosures, says Ms. Rakitin, age 27, the couple decided to stick with short sales.

In November 2009 they found what they wanted–a three-bedroom, two-story townhome that sold for about $300,000 in 2007, listed for half the price. Worried that other buyers would pounce, they offered $165,000. The sellers quickly accepted.

Then the waiting game began.

Once relatively obscure transactions, short sales have become the norm in many hard-hit markets, representing roughly a third of properties for sale in Nevada, California and Florida, according to estimates from the National Association of Realtors. Though most buyers don't actively seek short sales, they're an opportunity to buy property that's generally in good shape and priced 10% to 20% below market value.

While foreclosed properties typically see bigger discounts, short sales have one distinct advantage: "They have the cooperation of the owner," says Lance Churchill, an attorney and president of Boise, Idaho-based Frontline Real Estate Education Group, which offers training to real-estate agents and investors, in Boise, Id. That's particularly germane now. In recent weeks, four major mortgage servicers have halted foreclosures, as questions over improper documentation have arisen. Sales of foreclosed property are also being put on hold and buyers are wary of getting into the market. (More: Evicted Family Breaks Into Their Former House)

Of course, short sales have problems of their own. Because a short sale results in a loss to the seller's lender, the deal can't go through without a blessing from the bank. Typically that doesn't happen until after an offer is made, says Rick Sharga, a senior vice president at RealtyTrac, which tracks foreclosure and home sales data and sells it to investors. "The bank may not even know that the seller is attempting to short sale the house," he says.

The government's new Home Affordable Foreclosure Alternative program promises to streamline the process with preapproved short sales. Still, it's not uncommon for buyers to spend three to six months, or longer, in real estate limbo. "As a buyer, you're stepping into quicksand," says Lawrence Duffin, a partner with Taza Systems, an online portal that banks, agents and investors use to track distressed property. For a short sale to make sense, he says, the house "has to be aggressively priced or exactly what the homeowner wants."

Last year, Nikolai and Jeanny Vinogradov set their sights on a luxury condo development in downtown Seattle when prices began falling within their reach. Mr. Vinogradov found a 900-square-foot one-bedroom that sold for $497,000 in March 2007 and was initially listed as a short sale at $430,000. In no rush to buy, the couple kept tabs on the listing–getting preapproved for a loan with 20% down in the meantime. When the price was reduced below $400,000 last September they offered $350,000 and then waited seven months for the seller's lender to sign off. "It was long and painful, but we were patient," says Mr. Vinogradov, an investment management associate. "In the end it worked out amazing for us."

Because there are any number of factors that can influence the timeline, "knowing the dynamics of the situation is key," says Kirk Russell, a broker with John L. Scott in Seattle. For example, things can get complicated when one bank services a loan and another one owns it, if mortgage insurance is part of the picture or if more than one lender has skin in the game. "Second liens are notorious for screwing up short sales," says Mr. Churchill.

Such was the case for Rakitins. While the seller's two lenders wrangled behind the scenes, the couple waited nearly a year, renting month to month. Just this month, the couple finally closed on their townhome–hours before the home buyer tax credit expired. "Our [agent] kept us on alert about what came in the market," says Ms. Rakitin, who works in public relations for the travel industry. "But they were all short sales and we didn't want to start the process over again."

Given all the nuances of these deals, buyers considering short sales should work with agents who have experience navigating this murky territory. If time is of essence, avoid short sales altogether or at least stick with listings whose prices have already been preapproved by the bank. "If you're fortunate to follow up on a deal that fell apart, you might be able to come in and close in 30 days," says Mr. Russell.

When making an offer, do your own homework. Just because a short sale is priced at a steep discount relative to where it last sold doesn't mean it's a great deal relative to the current market. Conversely, some agents will underprice a listing in the hopes of sparking a bidding war, says Mr. Sharga.

Of course, the highest bidder doesn't always win. "Banks want to see a clean offer with solid financing and no contingencies," says Mr. Churchill. Buyers who've been preapproved and bring hefty down payments to the table or can pay cash tend to get first consideration. And don't expect the bank to bend over backwards making repairs; most sales are as is.

After moving to Sante Fe from Colorado in 2008, Scott and Margaret Newman put an offer on a three-bedroom, two-bathroom short sale. "They acknowledged the offer and then it went dark," says Mr. Newman, a fixed-income portfolio manager, who after two months found another home and pulled out of the deal. "The whole process was so nontransparent; I don't think I'd go through that again."

Write to Sarah Max at Sarahvonmax@gmail.com

From a Mysterious Mansion to a Ralph Lauren Store

Original Post: http://www.nytimes.com/2010/10/10/realestate/10scapes.html?_r=1

Streetscapes Madison Avenue and 72nd Street

Picture: Frances Roberts for The New York Times

The building, shown in 2005, became a Ralph Lauren store; another has just gone up across the street.



By CHRISTOPHER GRAY


Published: October 7, 2010
 
THE super-luxe new Ralph Lauren palazzo, at the southwest corner of Madison Avenue and 72nd Street, is scheduled to open in mid-October. But across the street, hidden for months behind a veil of netting, is the old store, a limestone mansion with a mournful past, built in 1898 by an heiress who never lived in it.

Office for Metropolitan History

The Gertrude Rhinelander Waldo house, as it looked in 1899. By most accounts, Mrs. Waldo never lived there.

Gertrude Rhinelander was born about 1837 into a family that had lived in New York since the 17th century, and in 1876 she married Francis Waldo, a stockbroker who had been ruined in the Panic of 1873. Her lifestyle, however, was never less than genteel; at her death in 1914, The New York Sun said she had inherited $2 million.

Mr. Waldo died in 1878, and in 1882 Mrs. Waldo bought the southeast corner of 72nd Street and Madison Avenue, which despite its horsecar line was dotted with the mansions of those who eschewed the show of Fifth. The Real Estate Record and Guide reported that Mrs. Waldo was going to erect a mansion “quite unique in design.” She did not go ahead, but five years later bought the inside lot on the side street.

Mrs. Waldo still did not build, and lived with her sister, Laura, in a row house across 72nd from the site. According to The Oswego Daily Palladium in 1889, Mrs. Waldo was “a very pretty woman,” and by some accounts she was keeping company with Charles Schieffelin, a lawyer.

But in 1889 she sued him for stealing $12,000 she had given him to invest. Mr. Schieffelin, a Union Club member separated from his wife, counterclaimed that he and Mrs. Waldo were to be married, and that he had invested the money as directed. She protested that marrying a divorced man would have been “too dreadful” to contemplate. The disposition of the case is not clear.

It was not until 1894 that Mrs. Waldo, then living at the old Hotel Savoy, began to build an impressive limestone mansion, along with a smaller house on the inside lot. In the French Renaissance style, it would have fit in just fine with those on Fifth. In any event, it had elegant company on Madison Avenue, which north of 59th attracted perhaps a dozen mansions. Consuelo Vanderbilt was living in one on the southwest corner of 72nd when she married the Duke of Marlborough in 1895.

Kimball & Thompson received design credit in architectural periodicals, but a photograph of the mansion published at or near the end of construction included the notation that it was designed by Alexander Mackintosh, an obscure local practitioner. With delicate, lacy Loire Valley trim, it has so many windows, it looks as if somebody had taken a shotgun to it. There was said to be a top-floor ballroom and 2,000 electric lights, but only two bedrooms for servants. The New York Times opined that such a house would require a staff of at least a dozen.

Mrs. Waldo’s overwrought dwelling was completed by 1898. One directory lists her as residing there, but that is probably an error. All other period sources say she remained in her sister’s much more modest row house across the street, and never moved in.

At her death in 1914, The New York Sun described Mrs. Waldo as “of forceful manner and some unusual views” on art, dress and society, and said that she had vowed to leave the United States several times. Mrs. Waldo was often in court, and not just with Mr. Schieffelin. In 1901 a subcontractor on the house filed a claim against her for $2,600. In 1909, she began an extensive legal battle with a servant, Mary Madden, who complained she was owed $5; there were suits and cross-suits for $250, $15,000 and a claim of false arrest.

Mrs. Waldo resigned from a club in indignation in 1909 when another member criticized her dress. And in 1912 The Sun reported that she was sued for illegally transferring assets to her sister to avoid payment of a debt. The outcome of most of these complaints is hazy.

At the same time, Mrs. Waldo personally collected rents in her twin apartment buildings, the Kaiser and the Rhine, at Second Avenue and 89th Street; in 1904, when a fire broke out, she tried to get through police lines to rescue her tenants; no one was killed.

In 1909 The Times reported that her remarkable house, built and furnished at a cost of $1 million, was in foreclosure, its limestone badly discolored, its great glass dome cracked.

By the 1920s the house was the headquarters of Olivotti & Company decorators, with apartments upstairs. Polo Ralph Lauren arrived in the late 1980s, and the building is still a Ralph Lauren store. The company has just treated it to an extensive exterior restoration, simultaneous with the completion of a second store across the street on the site of Consuelo Vanderbilt’s mansion. For the new building, Weddle Gilmore Architects has produced an assured and demure neo-Classic design, French in character. At the time of proposal it was challenged by some preservationists as a fake, but as it stands, it is magnificent.

The peculiar story of Mrs. Waldo is not unusual; New York has other private houses that for unexplained reasons were never occupied by their rich owners. But Mrs. Waldo’s case is a particularly sorry one; although she had inherited millions, in 1915 The Times reported that she died in debt for $135,000.

E-mail: streetscapes@nytimes.com

A version of this article appeared in print on October 10, 2010, on page RE9 of the New York edition.

Banks face fresh crisis: How to be a REIT

Original Post: http://finance.fortune.cnn.com/2010/10/07/banks-face-fresh-crisis-how-to-be-a-reit/

Posted by Katie Benner


October 7, 2010 1:13 pm

The biggest banks are now large property owners, thanks to for the foreclosure crisis. Clearing those assets off the balance sheet won't be an easy task.

The White House said on Thursday that President Obama will veto legislation that some say would make it easier for banks to process foreclosures. The threat of what would be the President's first veto comes as several of the largest banks are being investigated for improperly processing thousands of foreclosures.

This also comes as some of the nation's largest financial institutions are already strapped with real estate assets and in many cases must now foreclose, take physical possession, and sell property – the sort of labor intensive activity that banks were never meant to handle, Chris Whalen, co-founder of Institutional Risk Analytics, told a packed room at the American Enterprise Institute on Wednesday. "They are not designed to be REITs, but that's what our banks are becoming," he said. "We are turning all of our banks, [Fannie Mae] and [Freddie Mac] into owners and operators of real estate, and this stress is going to overwhelm them."

Whalen demonstrated that banks are already under the same operational stress they were after the last two major recessions, but in this case they're far from out of the woods. Citing research by Laurie Goodman of Amherst Securities, he said that only 25% of the total number of foreclosures and sales of foreclosed properties have been accomplished. Another presenter at the event, UBS managing director Thomas Zimmerman, said there could be 11.5 million more foreclosures in the next few years, a situation he called "really bad."

Bank of America (BAC) and Wells Fargo (WFC) were mentioned as institutions to watch, since they face a "mind boggling" flow of property and claims related to securitization activity that will raise the cost of doing business far beyond what these institutions can handle.

In response, Bank of America reiterated points made in September by chief executive Brian Moynihan, who said that the bank was among the few to give detailed liability disclosures. "Just because a loan's put back doesn't mean there's loss in it… they're manageable numbers, not pleasant numbers but manageable numbers," Moynihan said during a presentation to analysts. He added that the situation would settle sometime in 2012.

Wells Fargo did not respond to a request for comment.

Pessimism prevails

Whalen delivered his remarks during a particularly grim AEI event titled, "Living in the Post-Bubble World: What's Next," where panelists including NYU professor Nouriel Roubini and Mark Fogarty, of National Mortgage News, competed for the title of most pessimistic prognosticator.

Roubini said that even without a double dip recession the global economy will continue to feel like it's in recession, and that a double dip recession could be triggered by problems in Europe. Desmond Lachman, an AEI resident fellow, agreed that we're not far away from a major European banking crisis, and said that the euro is going to have to unwind.

Whalen also said that the Federal Reserve is keeping a lid on consumption by keeping interest rates ultra low. While this increases the amount of money banks make on loans, it has effectively transferred about $750 billion in money from consumers and corporations to the banking industry to subsidize losses. You won't see a pick-up in consumer demand until it ends, he said. "If you take grandma's money away and she just has enough left to buy food, then obviously the grandkids aren't going to get nice gifts at Christmas," said Whalen.
Even so, John Makin, an AEI resident scholar and principal at Caxton Associates, said that the downturn will compel the Federal Reserve to expand its purchase of Treasuries and mortgage securities.

Whalen provided the panel's tarnished silver lining, saying that the government's many modification and forbearance programs did not fix problems, but bought us time to figure out the next step. "We have to start restructuring," he said. "Whoever does that first in the global marketplace is going to be ahead of the game, and I think the United States can do that."

Tags: Wall Street, banks, Federal Reserve, banking, real estate, Chris Whalen, Nouriel Roubini

'The Social Network' mystery: Where are the lawsuits?

Jesse Eisenberg as Mark Zuckerberg

By David A. Kaplan, contributorSeptember 27, 2010: 12:02 PM ET

FORTUNE -- If you believe what the folks at Facebook have been telling the press, there's a lot in the new movie, "The Social Network" that's just plain fiction -- especially about the company's co-creator and chief executive, Mark Zuckerberg. Aaron Sorkin, the screenwriter, has acknowledged he aimed for "fidelity." But the fidelity was to "storytelling," not to truth.The movie itself ends with a disclaimer that some material in it is invented -- as in "not true." There clearly are specific scenes that didn't happen in real life and some of them -- like Zuckerberg having sex in a bathroom with an underage woman -- are not kind. Overall, by most accounts, he comes across as a jerk.

So in our litigious society, just how can a studio make a film like the "The Social Network" and not get sued?

An obvious part of the answer lies in the creative license that American law gives to writers. A novelist can pen a roman à clef, journalists can play with quotes, Oliver Stone can do a wicked screed like W. -all are protected under the First Amendment as long as the material isn't outright libelous. The fact the works play with the truth is legally beside the point unless the fiction is so over the line that it harms somebody and does so recklessly. [Read Jessi Hempel's take on squaring the Zuckerberg she knows with the one in the movie: "The incredibly untrue adventures of Mark Zuckerberg."]

For some "based on true events" films -- especially on TV -- studios get waivers or releases from the living real-life individuals who will be portrayed on screen. The price of cooperation is a big fat check, with the transaction sometimes being couched in the notion the individuals will be "consultants" or "advisers" on the movie. HBO has become the model for doing it differently, preferring to rely on the public record, as well as its own research. It will buy the rights to books from authors, but HBO typically does not pay for the rights to anyone's "life story."

So, when "Too Big to Fail" starts shooting in a month, no participant in the great financial meltdown of 2008 will have gotten a dime from HBO (which, like Fortune, is owned by Time Warner). Similarly, HBO will not have any waivers or releases when it films docudramas on the 2008 presidential race and 2006 Duke lacrosse scandal. The studio does aspire to verisimilitude: It will interview real-life participants and show them scripts and early film cuts -- and make changes if HBO is convinced they're warranted.

"The Social Network," which Sony Pictures releases this week, followed the HBO example, sort of.

Producer Scott Rudin had ongoing discussions with a Facebook executive, Elliot Schrage, who saw a script and an advance cut. Although Zuckerberg and the company declined to collaborate, Schrage was able to get some scenes and a few details changed. And the moviemakers satisfied their own agenda: they went for accuracy (when it suited them) and were apparently able to defuse any potential Facebook thoughts of litigation, while at the same time being able to focus on "storytelling" rather than "truth."

The quiet negotiations between Facebook and producers might be relevant if there ever were defamation litigation. Facebook would argue it provided ample warning that the movie contained falsehoods-and the producers' failure to fix them would help Facebook prove the kind of abject carelessness that libel law requires. But the moviemakers would argue by showing Facebook a script and a cut the moviemakers were going out of their way to be cautious.

"The Social Network" also relied in part on "The Accidental Billionaires: The Founding of Facebook -- A Tale of Sex, Money, Genius, and Betrayal," a book by Ben Mezrich that itself skates between truth and fiction; an author's note explains the book is "a dramatic, narrative account" that "re-creates" scenes and dialogue, and uses "details" that have been "imagined." In other words, Mezrich made some stuff up, which in turn is used by the movie, which bills itself as "based on true events." Pretty neat trick.

Zuckerberg could well decide that any errors in "The Social Network" are trivial and that the movie actually winds up making him a sympathetic figure. After all, Facebook was founded when he was in college; everybody behaves badly in adolescence; and at the end of the day Zuckerberg is the $6 billion boy king of a Silicon Valley corporate icon. Then again, he might still be looking to avenge his honor, but conclude he needs to suck it up. It's possible that a judge and jury could rule the movie does defame Zuckerberg or cast him in a false light. Zuckerberg could file a lawsuit and -- after embarrassing depositions and years of waiting for a trial date -- win some damages and paper vindication.

In the end, though, he'd just wind up generating more publicity for the movie. And no matter how unhappy he may be, that's the last outcome he wants.

David A. Kaplan, a contributing editor at Fortune, used to practice law on Wall Street and also teaches media law at NYU.


Challenges of Castle Ownership

Albeit a charming idea, the never-ending expenses behind renovating a château can be daunting

By TARA LOADER WILKINSON

Château de Sagnes in the Tarn region, near Toulouse, France.

Chesterton Humberts Estate Agents

The idea of welcoming dinner guests across a drawbridge may be romantic, but if your home is a European castle, the maintenance costs can be daunting.

When Malcolm Goodbody heard that the 15th-century, 230-square-meter Dunsandle Castle in County Galway, Ireland, and its surrounding 20 forested hectares were up for sale, he knew he had to have it.

"As a boy, I grew up a mile away from Dunsandle," says Mr. Goodbody, who runs a flooring company in Galway. "We spent our summers playing in that castle—it was part of my childhood. I couldn't let someone come in and wreck it."

In 1995, he bought the roofless and crumbling sandstone castle, along with several acres of forest for £45,000 from the local authorities in Galway, and had originally planned to renovate and live in it. But he soon realized this presented a fundamental conflict.

"In order to maintain the integrity of the castle, I could not make it habitable. I wanted to recreate it exactly like it would have been—and as it was, I would have been pretty uncomfortable."

Mr. Goodbody, 42 years old, set up scaffolding and commissioned a group of stonemasons from Paris and specialist carpenters from Dublin to restore the unusual counterclockwise spiral staircase (most castles have clockwise staircases that are easier to defend because the guard's sword hand is free to parry), the arch-beam roof dowelled with Irish green oak pegs, and to refit the so-called killing room—where attackers who had breached the castle doors met their fate. Fifteen years and half a million British pounds later, it still needs work, he says.

The castle (www.dunsandlecastle.com) has been open to the public since 2009, offering guided tours for €6 per adult; and Mr. Goodbody rents it out for events and parties. He admits it has been an expensive project, but then, he says he never did it for the money.

Would he do anything differently? "I might pick a smaller castle," he laughs.

While sounding dreamy, renovating your own castle can have its share of horror stories.

Rupert Fawcett, head of the Italian team at estate agent Knight Frank International, says he knows of individuals who became deeply involved in a project which left them practically bankrupt. "They love the romance, but the reality can be different," he says. "The renovation and upkeep of such a building can easily run into the millions, while obtaining planning permission can take years."

One problem restorers frequently overlook is access to the site, explains James Mott, founder of ProjectBook, a U.K.-based renovating consultancy. "These castles are often totally remote. I've seen cases where miles of roads must be built before even thinking about starting work on the castle," he says, adding that installation of electricity, plumbing and telephone lines frequently present headaches.

Finding the castle in the first place can prove equally difficult, he says. In the 16th century there were around 7,000 castles in Scotland alone, but he says the numbers of castles suitable for restoration have dwindled to a few thousand in Europe.

While there is no list of vacant castles Europe-wide, individual realtors such as Knight Frank offer listings. Currently on the market, Knight Frank is offering several castles, including the €1.9 million Castello di Brancialino in Tuscany, Italy. The oldest part of the Castello was built 1,000 years ago and the site includes a 12th-century church.

Similarly, U.K. agent Chesterton Humberts has several castles on its books, including a 29-bedroom 19th-century château near Paris, for €4.5 million, and an 18th-century château in Normandy with an in-house pâtisserie, for €1.1 million.

Alternatively, charities also can be a good way to find a castle in need of ownership. Save Britain's Heritage has compiled a register of British buildings at risk. Catherine Townsend at the charity says they have around 1,500 Grade II and Grade I-listed buildings on the register, many of which are castles. "Sometimes they are well-hidden—no-one would notice them for years. Restoring these buildings is a way of bringing life back into the area."

More often than not, it is a chance encounter on a country walk that sparks a love affair with a ruined castle, Mr. Mott says.

John Mew, an octogenarian retired orthodontist, eliminated the problem of finding a castle by building his own from scratch. "When I set out to build a home, I made a list of the best things about any house. I soon realized what I actually wanted was a castle," he says.

Mr. Mew constructed the brand new castle, known as Braylsham Castle, in the grounds of his home in Sussex, U.K. Complete with drawbridge, moat and three-story great hall, the six-bedroom property is modeled on a 13th-century Medieval castle with details like the deliberately uneven stone floor and walls constructed 13 degrees off true.

"I got interested in castles after writing a book on social anthropology," says Mr. Mew. "We are attracted to the old because it makes us feel safe—it has stood the test of time. In this time of insecurity people are yearning for nostalgia."

Mr. Mew spent around £350,000 building the property and local agents say it would sell for around £2 million in the current market.

Building a castle from scratch, which sidesteps the plethora of problems associated with refurbishing an old property, is unusual. For many, the challenges of subsiding walls and rotting timbers is part of the attraction.

"Owning a castle is the ultimate caché," says Andrew Hawkins, head of international property at Chesterton Humberts. "We have seen an increase in enquiries over the past six months from couples who have spent careers in the City or big business, and are looking for an active retirement," he adds.

Former furniture designers Guy Tamplin, 62, and his wife Maddie, 53, had long wanted to escape the U.K. to the South of France for a change of lifestyle. After a two-year search for a property to renovate, they came across the Château de Sagnes in the Tarn region, near Toulouse, in 2000. An old wine château, the house had been uninhabited for more than 40 years and was in a sad state of repair. Without electricity, plumbing or window panes, wisteria was threatening to take over the bedroom. But the Tamplins were charmed.

"We fell in love with the Château de Sagnes at first sight and bought it almost immediately, without knowing much about the local village and area," Mr. Tamplin says. "The renovation of the main house and gardens took us five years as we did most of the work ourselves, step by step," he adds.

The 11-bedroom château is part of an estate that includes a four-bedroom manor house, a caretaker's cottage, a pigeonnier, an old winery, two swimming pools and nearly seven hectares of land.

Although the couple spent about £1 million restoring the château, which they purchased for £400,000, they left some of the rooms in their original state, opting for candlelight over electricity in the dining room. They saved the original silk wallpaper, dating back 140 years. "It was beautifully preserved thanks to the Mediterranean winds whistling through the house," Mr. Tamplin says.

Resale values of renovated castles can be high. The Château de Sagnes is on the market through Chesterton Humberts estate agents for €2.2 million. "It has been our baby for the last 10 years, but now we are ready to move on to the next project," says Mr. Tamplin, on his reasons for selling it. "There are always challenges and it is hard work.

Still, the château remains a soft spot, says Mr. Tamplin. "When you sit down with 20-odd friends and family to a candle-lit dinner in the dining room, none of that seems to matter, as every time it feels like Christmas."

Builders buy - Banks unload lots

Home Front: Beach-Front Living in East Hampton

Ad man Jerry Della Femina has created campaigns for companies from Meow Mix to Pan Am Airways. Now, he's pitching his sprawling East Hampton estate, priced at $35 million.

4 lessons from a 97-year-old real-estate agent

More than 7 decades in the business have given him wisdom; he shares a few gems.
By John Roach of SwitchYard Media

Nonagenarian George W. Johnson has been selling real estate in Seattle for more than 70 years and is still at his desk six mornings a week. (Photo: Dan Lamont)

Buy a house today if you can, but don't sell one if you don't have to, says George W. Johnson, a 97-year-old real-estate agent who has been working the Seattle market since 1936.

Johnson, who is reluctant to call himself America's oldest real-estate agent — he says he just learned of a 99-year-old broker in Florida — has seen his share of housing booms and busts since he hung his first real-estate shingle 74 years ago.

"I've been through a lot of these ups and downs," he says, remembering the property boom that followed World War II, as well as the deep downturn in the 1970s when Seattle's biggest employer, Boeing, laid off thousands of workers.

Through it all, Johnson says he has learned many enduring lessons. Chief among them: After every housing recession, the market has "gone higher than the one before." You have to have the stomach to hang on through all of the twists and turns, he says.

This market a 'baby' compared to days past

Johnson wasn't always a real-estate guy. He was born to a farming family in South Dakota on Dec. 22, 1912, and moved to Seattle at the height of the Great Depression to attend college and pursue a teaching career. To make ends meet, Johnson juggled three jobs at one time. He delivered milk for a while. "Whatever you could do to get by with, you did it."

Then, in 1936, he started dabbling in real estate. Unemployment hovered around 30%, soup lines stretched around blocks, homelessness was rampant.

"You could have bought the best house in (the Seattle neighborhood of) Ballard for $3,500." Times were tough. The current real-estate market, Johnson says, is "a baby" by comparison.

"In addition to the Depression, we had the drought at the same period, so it was just compounded. You wouldn't believe the things that happened during that period."

Johnson, a natty dresser who drives himself to work every day — including Saturdays – managed to carve out a niche as a service-oriented agent. When the economy turned at the end of World War II, he opened up his own shop in Ballard, north of downtown. He and his sons have run George W. Johnson Realtors ever since, weathering the ups and downs in the market with confidence that profits are there for the making.

"I've lost a lot of money in a lot of things, but I've never lost in real estate," Johnson says. He remembers selling his first house in the 1930s for about $1,500. "It's probably worth $300,000 now."

4 real-estate tips from Johnson

You can't thrive in the real-estate industry for this long without learning some useful lessons along the way. Here are some of Johnson's pearls of wisdom:

Beware one-company towns: Cities dependent on a single company or industry are more vulnerable to jarring downturns if the economy goes south. The Rust Belt's old factory towns have made that abundantly clear.

The Seattle market turned particularly grim in the late 1960s and early '70s when Boeing, the aerospace giant, laid off more than 60,000 people in the Seattle area. "Boeing was about the only major company we had other than (the University of Washington)," he recalls. "Now we've got a much broader base to help out … it is altogether a different proposition."

Johnson counsels homebuyers to look beyond real-estate values and investigate an area's fundamental economy before making a purchase.

Don't get greedy. Johnson blames "plain old greed" for the latest real-estate downturn — people got caught up in the enthusiasm of the moment and banks egged them on with cheap loans.

"Everybody was out to buy a house, raise the price, double it and make a quick buck," he says, shaking his head. "People signed up for stuff that they knew they shouldn't have and they couldn't pay (for) and of course the banks helped them."

Johnson is old-school in that way. At the heart of his real-estate philosophy is his fundamental belief in personal responsibility. "You've got to be able to hang onto a house until conditions are such that you can make a little money," he says, emphasizing that each and every potential homebuyer should make an honest assessment of his or her financial potential and should be wary of offers that seem too good to be true.

"People aren't as dumb as the media is making them out to be. They knew what they were getting into," he says.

But he is compassionate for those who have run into honest trouble. "It's tough on people who lost their jobs and are now losing their homes and that type of thing. It always is," he says.

Their pain, however, is the buyers' gain.

Timing is everything. "In this market, any young person that hasn't bought a house ought to buy one," Johnson says. "A buyers market doesn't come along that often … you just can hardly help but make money on whatever you buy today at the prices they are."

Johnson says rates are only going to go up over the long term, so borrowing will cost more. (Check local interest rates.)

If you don't have to sell, hang on. Unfortunately, Johnson expects sellers to continue to suffer, at least for now. Buyers, on the other hand, "know it's a buyers market – they are going to come in with offers below what we've appraised it at just because they know a lot of people have to sell," he says.

Despite the continued housing-market struggles, Johnson is confident that the latest downtrend is largely over. "We are headed up," he says, "but like I said, I think it is going to be slow. It will take a year or two at least."

And as the market heads up, Johnson hopes to be there helping his customers buy and sell homes just as he has for most of his life – out of a small, family office dedicated to service with a smile.


"We've done a good job," he says of his business. "We've been careful and honest and thorough and it's been good service, and I think that will always produce, no matter what business you're in."

Are slow housing sales always a bad thing? Hell no.

by Stephane Fitch


Real Estate Advisor
 
The stock market plunged yesterday, driven largely by concerns over news of a 26% slowdown in the pace of home sales reported by the National Association of Realtors. But before we all conclude that there’s nothing good about huge drop in sales of used homes, that it absolutely must be terrible news, let’s stop and think.


I’d like to propose a simple idea: The drop in sales volumes is good news, even great news.

Whenever thinking about economic data that is universally regarded as a harbinger of horrible things to come, I try to consider an opposite scenario. What if the data had said housing sales were at a blistering pace? Well, that would have been greeted as good news. And in fact, the last time that the Realtors were reporting that homes were trading at an all-time record pace was…

Well, by golly, that was during the housing bubble. The housing market of 2005-2006 was a model of poor health—prices out of whack with rents and median incomes, Fannie, Freddie and the banks giving away debt to anybody with a pulse—yet the vast majority of folk (not everybody, but most) were citing the rapid pace of sales back then as great news.

So couldn’t all the people pointing at the super-slow pace of sales now be wrong when they say that housing and the economy is forever doomed, just like they were wrong when they were citing rapid home purchases as a sign of good economic footing back in 2005 and 2006? Hell yes, they’re wrong.

I think the slow pace of home sales represents, above all, a sign that homeowners, home sellers and home buyers are coming to their senses. A market full of sober, careful players is a good thing.

If you want to watch housing data, pay attention to the numbers that really matter, like “affordability.” That’s the measure of the average monthly payments that buyers in an area face when buying median-priced homes versus the median income. In the vast majority of places in the U.S., affordabilty is up since 2005-2006. That means that the people buying homes today will not be house poor. They’ll have more to spend as their incomes grow and the economy recovers in the next year or two.

That’s a hell of a lot better than those of us who purchased homes when the pace of sales was roaring can say. (My situation? I purchased a home in Chicago in December 2007 for less than it had been worth when values peaked in Chicago but at least 10% above its current value.)

Image by Getty Images via @daylife

Hedge Fund Heavyweight Paulson Makes New Housing Bet

Published: Friday, 20 Aug 2010 3:57 PM ET By: Maneet Ahuja

Hedge fund manager John Paulson is underscoring his bullish bet on America in a big way.

The billionaire investor, who famously made more than $4 billion betting against the US subprime housing market at its peak in 2007, will be throwing his hat into the race to acquire residential land—and dirt cheap.

John Alfred Paulson, president of Paulson & Co., Inc.

Picture byTim Sloan AFP Getty Images

Paulson, who manages the $31 billion Paulson & Co. fund, has made a "stalking horse" bid of $42.4 million to acquire the assets of Engle Homes, which includes land and lots in Arizona targeted for more than 8,000 homes, and nine completed residences.

Engle-owned property in Colorado and Nevada is also part of Paulson's proposed deal. Engle is a subsidiary of Technical Olympic USA of Hollywood, Fla. [TOUSQ 0.0040 --- UNCH (0) ].

The offer follows auctions earlier this year by TOUSA where Paulson also participated, according to Reuters and sources familiar with the matter.

Paulson runs the $31 billion hedge fund Paulson & Co.

With builders suffering due to continued sluggish sales of new homes, slow job growth, and the competition for market share, it really is survival of the fittest—talks of consolidation among the biggest players have been circulating in the industry and among investors.

According to Citigroup [C 3.7876 0.0376 (+1%) ] analyst Josh Levin, in a note issued to clients Wednesday, "We view consolidation as the proverbial elephant in the room. Management teams are not discussing the issue publicly, but we would be surprised if at least some of them were not talking about it privately.

Investors like Paulson see this as an opportunity to strike while the iron is hot. Buying land makes sense because they recognize the demand from builders who could benefit from increased supply and lower prices.

The case for a $50 billion Facebook

August 20, 2010 3:00 AM

When will Facebook go public? How will it monetize its users? We don't know yet, but here's one educated guess about how much the social networking giant will be worth.

by Andy M. Zaky, contributor

Like many privately held companies, Facebook is very tight-lipped about its financial performance. It told us it became cash flow positive for the first time in September 2009, and earlier this summer it announced it had eclipsed 500 million subscribers. It continues to push into new businesses – earlier this week it announced new location-based features – but when pressed to share the plans for monetizing these businesses, Facebook CEO Mark Zuckerberg typically declines to elaborate.

Facebook CEO Mark Zuckerberg

But all this mystery doesn't stop rampant speculation about Facebook's valuation. Nor does it stop big investors from taking sizable stakes in the company in the hopes of getting handsome returns on an IPO that some insiders suspect will happen in 2012.

Based on a recent study released by eMarketer, Facebook is expected to bring in roughly $1.3 billion in revenue in 2010, nearly double the $665 million the research firm estimates Facebook recorded in 2009. Yet despite its enormous revenue growth, Facebook currently only brings in a meager $0.56 per 1,000 page impressions compared to the industry average of $2.43, according to Comscore. Furthermore, according to current estimates provided by Second Shares, Facebook makes only about $2.60 per user on an annual basis, which is significantly lower than the $18 made by Google (GOOG) or the $12 made by AOL (AOL).

And while Facebook is poised to surpass Google in terms of visits – in July, according to Compete.com, Google had 3.161 billion visits and Facebook had 3.152 billion -- it's worth questioning the company's ability to fully monetize its user-base. But it's also important to remember that other Internet-based companies started in a similar way -- including Google -- and that Facebook could easily improve upon its anemic revenue per-user growth.

Facebook insists there's no imminent public offering. But that won't stop us from asking: What is Facebook really worth, and what kind of IPO valuation might we expect?

Shares of Facebook already trade on two private exchanges, where a small market exists for investing in venture-backed companies. The trades aren't made public, and the lack of liquidity makes it difficult to determine a true market value. According to Next Up Research, investors were valuing Facebook at between $11.1 billion and $12.5 billion earlier this year, based on an analysis of shares purchased on the SharesPost private exchange. Today, they're valued at $24.9 billion, according to Bloomberg.

And, according to Larry Albukerk, a specialist at EB Exchange Funds who privately brokers shares of Facebook, the company occasionally trades at an even higher valuation. "There are very larger, sophisticated institutional investors who are buying at a $30 billion valuation," he recently told MSN Money.

The volatility of the private market

Those are big swings, but Facebook investors are all too familiar with such volatility. When Microsoft (MSFT) took a $240 million stake in the company in October 2007, it was valued at $15 billion – the same valuation it had in early 2008 when Hong Kong billionaire Li Ka-Shing made the second of two $60 million stakes. But by 2009, Facebook's value had dropped. A $200 million stake made by the Russian technology firm Digital Sky Technologies in May 2009 put the company at a valuation of roughly $10 billion.

So are private investors getting overzealous in their assessment of the company or will these large stakes prove as lucrative as they were for Google's earliest investors? With 500 million subscribers, Facebook already owns a quarter of the world's Internet users. Yet, as the financial community learned with YouTube, having a gaggle of users is only one part of the equation.

Facebook will probably be able to monetize its user-base more efficiently in coming years as its business strategy shifts, says eMarketer analyst Debra Aho Williamson. Although half of Facebook's current growth comes from the blockbuster success of its self-serve ad platform, its future lies with big-brand advertisers who want to reach customers through Facebook and are willing to pay higher CPM rates (cost per thousand page impressions) than the current platform delivers. Procter & Gamble (PG), the world's largest advertiser, continues to take a significant interest in Facebook, and other big brand names will likely follow.

Secondly Facebook will soon see a significant uptick in user-growth through international markets, which is key in making the overall platform very attractive to brand advertising.

Finally, despite the company's massive customer base, it's still far outpacing Google's growth in users. According to recent estimates, Facebook grew its user-base by 150% in 2009 versus Google's 40% growth based on similar metrics.

Even if Facebook doesn't substantially raise its revenue per user in the immediate future, that staggering user growth by itself justifies a valuation of nearly $50 billion over the next several years. Facebook is expected to earn nearly $1.8 billion in revenue in 2011 and that's based on a projected 600 to 700 million users. Google currently trades at a $150 billion market capitalization and the only thing standing between Google and Facebook is Google's revenue per user. If Facebook figures out a way to command similar revenue per user rates as Google, the company could potentially be worth upwards of $150 billion.

It almost doesn't matter exactly when Facebook's business model meets its full potential – it is certain to have a welcome reception whenever it decides to go public. What investors will likely see on Facebook's IPO is a rally not seen since Google's IPO. Many investors missed out in getting ahead of Google's meteoric stock surge, and Facebook will give investors a second opportunity to participate in a blockbuster IPO.

'Vultures' Save Troubled Homeowners

Wall Street Journal

By JAMES R. HAGERTY


Anna and Charlie Reynolds of St. George, Utah, were worried about losing their home to foreclosure last year. Then they got a lucky break—from an unlikely savior.

Some investment funds are emerging as the best hope for millions of U.S. households, like the Reynolds, above, who were behind on their mortgage payments. James Hagerty discusses. Also, Anupreeta Das and Liam Denning talk about BHP's $38.6 billion hostile bid to buy Canada's Potash, a bid that Potash's management called 'grossly inadequate.'

Selene Residential Mortgage Opportunity Fund, an investment fund managed by veteran mortgage-bond trader Lewis Ranieri, acquired the loan at a deep discount and renegotiated the terms with the Reynolds. The balance due was cut to $243,182 from $421,731, and the interest rate was lowered. That reduced the monthly payment to $1,573 from $3,464, allowing the family to stay in their home despite a drop in Mr. Reynolds' income as a real-estate agent. "It was a miracle," says Ms. Reynolds.

But Mr. Ranieri isn't your typical miracle worker. As a fund manager who was once vice chairman of the bond-trading firm Salomon Brothers, he's a member of the Wall Street crowd that is often pilloried for helping inflate the housing bubble, though he sat out the excesses of recent years. The 1989 book "Liar's Poker" made him famous for billion-dollar trades in mortgage bonds and junk-food "feeding frenzies" with his trading-desk buddies.

“Good for the vultures. Like the real bird, they serve a purpose in the financial ecology, like it or not. Ugly as some might think they are, they are doing a better job cleaning up the detritus than our federal government. ”

—Edward Berry.



Borrowers less lucky than the Reynolds family must work with middlemen—loan-servicing firms that don't actually own loans, but represent banks and investors, and collect mortgage payments on their behalf. These firms follow often-ambiguous rules set by the owners of the loans. In cases where a loan has been bundled into a security, it might have thousands of owners scattered around the world, making it impossible to know all their preferences.

By contrast, Mr. Ranieri's Selene is the sole owner of its loans and has a servicing affiliate that can negotiate directly with borrowers. "Every case is individual," Mr. Ranieri says. "There's no template."

But the main reason Mr. Ranieri can strike deals with borrowers is that his firm buys loans, mostly from banks, at steep discounts to the balance due. If his fund pays $50,000 for a loan with a $100,000 balance due, for example, it can make a profit even if the borrower ends up paying back only $70,000.

Since mid-2007, nearly 3.4 million households have received loan modifications, according to industry data from the Hope Now alliance of loan servicers. But the group doesn't disclose how many of those borrowers have fallen behind on payments again. Many of the loan modifications granted in the early months of the default crisis didn't reduce payments for the borrowers and merely helped them catch up on arrears; some of those modifications resulted in higher payments.

Cutting the loan balance is one of the most effective ways to motivate borrowers to resume payments because it gives them more hope of eventually owning the home, say nonprofit groups that work with distressed borrowers. But analysts say banks have been reluctant to reduce principal, partly because that would require them to recognize losses they still hope to avoid. Their modifications almost always involve reducing the interest rate or giving the borrower more time to pay.

Around 90% of Selene's loan modifications involve reducing the principal, compared to less than 2% of the modifications done by federally regulated banks in the first quarter.

"There are obvious inconsistencies in treatment [of borrowers] depending on who owns and services the loan." says Edward Delgado, a former Wells Fargo & Co. executive who is now chief executive of Five Star Institute, a provider of training programs for mortgage professionals. To some extent, he says, "it's the luck of the draw."

But only the lucky few have so far benefited from Selene or other distressed-debt investors. Selene, which owns about $1 billion worth of home mortgages, will say only that it has modified "thousands" of loans, a drop in the bucket among the millions of overdue mortgages. Many loans are locked up in securities and thus unavailable for sale. In other cases, owners of loans aren't willing to take the losses that would be needed to mark down the mortgages enough to lure buyers like Selene.

Over the past two years, less than $25 billion of delinquent mortgages have been sold to investors who specialize in this area, estimates Dwight Bostic, a managing director of Mission Capital Advisors, which advises investors on mortgage transactions. That is only about 0.25% of U.S. home loans outstanding. But Mission Capital executives say the number of loans sold is likely to grow in this year's fourth quarter as banks try to clean up their books before year end. Some banks have more bad loans to sell because they have had to buy back from Fannie Mae and Freddie Mac mortgages that didn't meet quality standards.

Selene buys loans to make a profit on them, not as a public service, but company officials say it is often more profitable to keep the borrower in the home than to foreclose. If a delinquent loan can be turned into a "performing" loan, with the borrower making regular payments, the value of that loan rises, and Selene can turn around and either refinance it or sell it at a profit. Mr. Ranieri declines to discuss the fund's performance. But one of the shareholders, the Public Employees Retirement Association of New Mexico, reported that its holdings in the fund had a market value of $19.8 million as of June 30, up from $18 million in late 2008. That excludes distributions of profits to shareholders in the funds.

Once Selene acquires a loan, the firm immediately tries to contact the borrower, sometimes sending a FedEx package with a gift card that can be activated only if the borrower calls a Selene debt-workout specialist.

Paul Cheatham, a Houston oil-field engineer with two children, says he was worried about payments rising on his adjustable-rate mortgage and so was eager to talk when he got a registered letter from Selene saying it had acquired his loan and might be able to help. He says Selene was able to arrange lower payments and a fixed interest rate for him within about a month. "They helped me out," says Mr. Cheatham, who had fallen behind on payments because of a drop in income. Selene reduced his balance by $16,000, to $80,000, and his monthly payments to $541 from $831.

Selene says it's able to keep about half the borrowers it deals with in their homes through a refinancing or modified loan terms. Sometimes the company gets creative, paying off other debts, such as car loans, to lower a borrower's overall debt load enough to qualify for a refinancing. In roughly 20% of cases, the home is sold without a foreclosure in a so-called short sale for less than the balance due.

As for the remaining 30% or so of cases—their luck runs out when Selene proceeds with foreclosure. The company says some borrowers can't afford their homes, even at the reduced terms the fund would be willing to offer.

One reason Selene has the leeway to help borrowers is that it generally bypasses the federal government's $50 billion Home Affordable Modification Program, or HAMP. The program offers financial incentives to lenders and servicers to modify loans. When President Barack Obama announced HAMP 18 months ago, the program raised hopes among millions of borrowers. As of June 30, however, only about 389,000 households were benefiting from long-term reductions in payments under that program, and 364,000 were in "trial" periods, trying to qualify by showing they could make reduced payments.

Critics say the program is overly complex, unwieldy and revised so often that servicers have a hard time keeping up with the latest requirements for modifications. The Treasury Department blames servicers. They "have done a terrible job of making sure that they are doing everything they can to meet the needs of their customers who are facing the possibility of losing their home," Treasury Secretary Timothy Geithner told a congressional panel in June.

Nonprofit counselors who help homeowners say far more borrowers have either failed to qualify or given up than have actually received modifications. Some borrowers have spent more than a year trying to find out whether they qualify.

Among those whose future is uncertain are Alberta and Arthur Bailey, who live in a bungalow in LaPlace, La. Mr. Bailey, 69 years old, worked for decades in an auto-body shop but retired after a stroke in 2002 and now needs a cane to get around.

Tiffany Brown for the Wall Street Journal

Selene bought and modified Anna and Charlie Reynolds' home loan.

The Baileys bought their bungalow in 2003 and hoped to spend the rest of their lives in it. In 2004, Mr. Bailey got a call from a loan officer from Countrywide Home Loans, now part of Bank of America Corp. The loan officer told the Baileys they had $33,000 of equity in their home and could refinance the loan in a way that would release some of that money. They used the money to repair the roof and install new doors, Mr. Bailey says.

The Baileys ended up with more debt than they could handle on their income of $1,600 a month in Social Security payments, plus food stamps. Help, however, has yet to arrive. The mortgage ended up as one of hundreds of mortgages owned by investors in a series of securities. Alexa Milton, a manager at Affordable Housing Centers of America, a nonprofit group counseling the Baileys, determined that they qualified for HAMP. But, she says, the servicer of the loan, Litton Loan Servicing LP, told her that the rules governing the securities don't allow for a HAMP loan modification.

A spokeswoman for Bank of America, which now owns Countrywide, the original issuer of those securities, disagrees, saying that the rules would allow a HAMP modification. A Litton spokeswoman declines to comment. A person familiar with the situation says Litton believes that the rules are ambiguous and so a modification would subject the servicing firm to the risk of lawsuits by the owners of the securities.

Litton has held off on foreclosure while studying other means of reducing the Baileys' payments, currently about $750 a month. "If I can get it down to $500 a month," says Mr. Bailey, "I can make it."

Write to James R. Hagerty at bob.hagerty@wsj.com

An Overnight Hollywood Success 8/16/2010 7:02:38 PM

Coinstar's DVD rental group has risen from nowhere to become a major film player -- and the story's not over yet.

Fannie conference sees call for subsidy reduction

By Ronald D. Orol, MarketWatch


WASHINGTON (MarketWatch) -- Participants at a housing finance conference Tuesday largely agreed that subsidies for housing need to be reduced but not eliminated even as they disagreed on how far government assistance to the mortgage market should be curtailed.

The gathering Tuesday comes in the wake of the near-nationalization of Fannie Mae and Freddie Mac at the peak of the credit crisis in 2008. So far, the mortgage giants have cost taxpayers roughly $145 billion in funds, used to cover their losses, with more losses expected on the horizon.

Nonetheless, most new mortgage loans are guaranteed by Fannie Mae /quotes/comstock/11k!fnma (FNMA 0.36, -0.01, -1.88%) and Freddie Mac /quotes/comstock/11k!fmcc (FMCC 0.40, -0.01, -1.25%) and the Federal Housing Administration.

U.S. Treasury Secretary Tim Geithner, fourth left, participates in the Obama administration's Conference on the Future of Housing Finance in the Cash Room of the Treasury Building in Washington, August 17. With Geither are (L-R) PIMCO's William Gross, Bank of America's Barbara Desoer, National Urban League's Marc Morial, New York University's Ingrid Gould Ellen, American Enterprise Institute's Alex Pollock and the University of Pennsylvania's Susan Wachter.

U.S. Treasury Secretary Timothy Geithner and the vast majority of the participants at a gathering on the fate of Fannie and Freddie decided that no matter what structure will emerge - and dozens of different approaches are being considered - the government would offer some type of federal guarantee of mortgage securities to buyers in the market for a fee. Read Geithner's remarks.

Some participants called for a significant continuation of the guarantee program, while others called for a transition to a system where the guarantee should only kick in to cover catastrophic losses.

Ingrid Gould Ellen, professor of Urban Planning and Public Policy at New York University's Wagner Graduate School of Public Policy, said that the government should set up such a "catastrophic loss" guarantee where private investors take the first set of losses before the guarantee kicks in. In one scenario, investors would take the first 5% of losses when a high quality pool of mortgage securities fails, while the government guarantees the other 95% of the package. She argued that over time the catastrophic guarantee would cover a smaller share of the market, as the private sector increases its share.

"Private-market insurers, securitizers would cover the first losses and all of their capital would be at risk, and you might even require, for instance, that there be -- that private mortgage-backed securities stand in front of the -- of the guaranteed bonds to provide a further cushion on losses," Ellen said. "We certainly want to begin to ratchet down the public involvement, and we want to begin to ratchet down, over time, the limits on the government programs so over time that this sort of catastrophic guarantee would cover a smaller share of the market."

However, Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., said he favored the creation of one national agency that would impose a broad government guarantee. Gross said that without government guarantees, mortgages would be hundreds of basis points higher, resulting in a moribund housing market for years. He added that PIMCO would not buy a privately insured mortgage pool unless it was made up of mortgages that each had at least a 30% down-payment, an amount that is unachievable for most first-time borrowers.

"The concept of guarantees is crucial to the liquidity and to the cost of home financing; it lowers it. It is the ultimate liquidity provider and the lowest cost provider," he said. "PIMCO advocates a hundred-percent public finance, with government guarantees that are protected by adequate down payments, obviously, and sufficient insurance premiums."

However, Alex Pollock, fellow at the American Enterprise Institute, argued that the bulk of mortgages should be private and the government should phase out much of its guarantees.

"The way we get there is by ratcheting down the limits for all the government guarantees; that is, for Fannie, for Freddie and the Federal Housing Administration," Pollock said.

Marc Morial, president of the National Urban League, indicated that he was concerned about what impact a reduced reliance on government guarantees would have on the flow of credit to homeownership in the U.S.

"One thing I don't want is a system where homeownership is available to a few, where underwriting rules require 35 % down-payments, where only some Americans can afford a home -- and then we create a class of renters," he said "What impact does the design of the guarantee have on the objective of improving and increasing the flow of credit in homeownership in this country."

Ronald D. Orol is a MarketWatch reporter, based in Washington.

Banks Should Let More Homeowners Refinance: Adviser

Published: Monday, 16 Aug 2010

By: Michelle Lodge

Special to CNBC.com

Banks should allow homeowners who are deeply in debt but are current on their mortgage payments to refinance without documentation, an investment adviser suggested on CNBC Monday.

A Prescription for Recovery

The reasons behind the slowed growth in the economy, with Doug Dachille, First Principles Capital Management CEO.

“If you’ve demonstrated a track record of paying your mortgage consistently, not late, on time, for the past 24 months, we’re going to re-fi you without documentation, without looking at an appraisal, we’re just going to lower your mortgage rate,” said Doug Dachille, CEO of First Principles Capital Management.

Dachille, formerly president of Zurich Capital Markets and global head of proprietary trading for JP Morgan [JPM 37.48 -0.21 (-0.56%) ], acknowledged that if banks became more flexible in their lending practices toward homeowners, it would would upset investors of mortgage-backed securities. But he added that those investors have reaped the financial rewards of the Federal Reserve's policy of mortgage-backed securities to help keep interest rates low.

“Mortgage-backed securities investors have gotten a benefit from something that was unprecedented too,” he added. “And that was that the Fed was buying $1.25 trillion (of mortgage securities) at a time when people couldn’t re-fi, driving up the price to historical levels.”

Dachille said the Fed policy has failed to benefit those it intended to help—the borrowers. He added that some homeowners can't refinance, which would make it easier to repay their loans, because banks require proof from documentation like income and bank statements. Dachille said that many homeowners got the mortgages initially without documentation.

“It’s frustrating to look at a 3.5 percent mortgage rate,” he added, “and have no one able to take advantage of it.”

The government already has spent billions on helping troubled homeowners, including $3 billion in aid to unemployed homeowners announced last week. Meanwhile, US mortage rates continue to hit record lows, helped by plunging Treasury bond yields and the Fed's pledge to continue buying up government debt.

Dachille's suggestion came a day before the US Treasury Department will host a summit on overhauling Fannie Mae and Freddie Mac and the troubled mortgage market, which accounts for about 15 percent of the country's economy.

© 2010 CNBC.com

Mortgage eligibility at heart of Fannie, Freddie debate

Aug. 16, 2010, 4:40 p.m. EDT · Recommend · Post:

Policymakers to square off over future of Fannie and Freddie on Tuesday

By Ronald D. Orol, MarketWatch

WASHINGTON (MarketWatch) -- Policymakers in Washington discussing the future of Fannie Mae and Freddie Mac on Tuesday are set to battle over the kinds of mortgage securities that should be eligible for government guarantees -- a clash that could mean hundreds of dollars a month in additional payments to those with loans that don't get Uncle Sam's backing.

"One reason you need a federal guarantee is to keep mortgage rates in the 6% range that they have been in the past," said Paul Leonard, vice president of government affairs for the housing policy council at the Financial Services Roundtable.

Currently, most new mortgages are guaranteed by Fannie Mae /quotes/comstock/11k!fnma (FNMA 0.37, -0.01, -1.87%) and Freddie Mac /quotes/comstock/11k!fmcc (FMCC 0.40, 0.00, 0.00%) and the Federal Housing Administration while the Federal Reserve has purchased $1.1 trillion in agency mortgage securities as a means of propping up the market and keeping loan rates affordable. See separate story on FHA loans.

The two mortgage giants were essentially nationalized at the peak of the crisis in 2008 to avoid losses and stem the credit contagion. So far, they've cost taxpayers roughly $145 billion in funds, used to cover their losses, with more losses expected on the horizon.

Replacing Fannie and Freddie

MarketWatch's Alistair Barr explains how a replacement for Fannie Mae and Freddie Mac might work and what's at stake, including the value of your home.

Many Washington legislative observers argue that no matter what structure will emerge - and dozens of different approaches are being considered - the government would offer some type of federal guarantee of mortgage securities to buyers in the market for a fee.

Treasury Secretary Timothy Geithner said he supports a federal guarantee though he hasn't provided many details about how it would work except to say that it should ensure that U.S. borrowers could easily finance the purchase of homes even in a deep recession.

Assuming that policymakers agree to permit some form of government backstop, a battle is expected to ensue over the quality of mortgages that the successors to Fannie and Freddie will be permitted to guarantee. The quality of mortgages that could be guaranteed will be subject to debate at the Fannie and Freddie conference.

"There will be a big fight in Congress about what constitutes a quality loan that would qualify for a federal guarantee," said Mark Calabria, director of financial regulation studies at the CATO Institute in Washington.

Calabria said some conservative lawmakers such as Sen. Bob Corker (R., Tenn.) are likely to seek legislation that would only permit guarantees of securities made up of the highest quality fixed, 30-year-mortgages with significant down-payments and strong borrower credit scores.

Meanwhile, Ted Gayer, fellow at the Brookings Institution in Washington, contends that Democrats will be under pressure both from the housing lobby and consumer advocates to give government guarantees for higher risk mortgage pools with lower borrower requirements, in part, to promote homeownership among lower income Americans.

"The right would say they will go deeper into high risk pools to promote home ownership among subprime borrowers," he said.

Calabria added that Democrats are likely to push to ensure that the future mortgage giants don't guarantee loans that have prepayment penalties; a provision in some mortgage contracts that in the event a borrower pays off a loan early they will pay a penalty.

One possible way of trying to deal with the dispute is for mortgage investors to be charged higher guarantee fees for riskier pooled mortgages and lower fees for plain-vanilla mortgage securities, Gayer said.

"If there are more subprime securities in the loan [pool] there would be a higher guarantee fee," Gayer said. "Lower fees would be for pools made up of mortgages with 30-year-loans with 10% down payments."

Lawmakers also expected to disagree over whether a limit should be placed on the dollar-figure size of each mortgage in the pool that could receive a guarantee.

FSR's Leonard said that the size cap for loans that will become approved for federal guarantees are expected to be lowered over time, limiting the kind of risk involved. Currently, he added that big and small loans are permitted to be purchased by Fannie and Freddie as part of the government's continued effort to stabilize the housing market.

Calabria said he would prefer that Fannie and Freddie be permitted to buy long-term mortgages with payments of at least 20% of the home's purchase price, but he added that it was unlikely lawmakers would agree to such a restriction.

"The industry is going to fight any onerous down-payment requirement, but people like Senator Corker are going to try to counter that pressure," Calabria said.

FSR's Leonard said he expects to see tighter underwriting standards for mortgages that could receive a government guarantee when they are pooled into securities. He expects that acceptable loans will be traditional, fixed, 30-year-mortgages with some sort of down payment requirement. Borrowers would be required to document their income, he added.

Reform is still a long ways off. The Obama administration is still in the early stages of identifying its own proposal, which is due for Congress to consider in January. After that, legislative efforts to reform the mortgage-giants would expand.

Ronald D. Orol is a MarketWatch reporter, based in Washington.

Condo Buyers Find Escape Clause

Court Ruling in Manhattan May Help Unhappy Owners to Break Purchase Deals.
Text By CRAIG KARMIN

A decades-old federal law initially intended to reduce fraud in sales of Florida swampland was applied for the first time to help dissatisfied buyers of Manhattan condominiums.

A federal judge in Manhattan ruled on Tuesday that a company controlled by property developer Africa Israel, a unit of Israeli-based AFI Group, had to return deposits to three buyers of condos in a downtown apartment building because of inadequate disclosure in the condo's offering plan.

The judge referred to the obscure federal law known as the Interstate Land Sales Full Disclosure Act, or ILSA, as the basis for allowing the three buyers of units at 111 Fulton St. to get out of their contracts and receive refunds on their deposits.

Mustafah Abdulaziz for The Wall Street Journal

Condo buyers at 111 Fulton St., above, won their case in federal court.

Officials at Africa Israel didn't respond to calls seeking comment.

Judges in other states have cited ILSA when ruling on behalf of home buyers but lawyers say this decision marks the first time in New York that a developer hasn't prevailed in an ILSA case.

The ruling comes at a time when hundreds of New York condo buyers have been trying to escape contracts signed around the market's peak and whose units have since fallen significantly in value.

Lawyers have pored through piles of documents and arcane laws in an effort to find something that would enable buyers to invalidate their contracts. Starting in early 2009, many buyers have based their cases around interpretations of ILSA. Some attorneys suggest that Tuesday's ruling could make way for pending cases and new appeals based on the act.

"It's quite significant," says James Schwartz, partner at Mitchell Silberberg & Knupp, a New York law firm not involved in the case. "It opens the door for wholesale use of the act to get out of contracts."

U.S. District Court Judge George B. Daniels ruled that the developer failed to comply with ILSA, which requires that buildings with more than 100 units provide buyers with documents that include a long list of disclosure details, from information about the condo association to zoning regulations.

If the developer fails to meet the disclosure requirements, buyers under the act have the right to tear up their contracts and receive refunds on their deposits within two years of their contract signings.

In previous New York cases, developers have argued successfully in court for exemptions from ILSA, such as saying that even though their buildings were marketed as having more than 100 units, fewer than 100 were actually sold. The law was initially intended to protect consumers from fraud on sales of Florida swampland and Arizona desert land.

Mustafah Abdulaziz for The Wall Street Journal

The Fulton Street building

.Bruce H. Lederman, an attorney with D'Agostino, Levine, Landesman & Lederman who has represented developers in other ILSA cases, says that Tuesday's ruling wouldn't have a far-reaching effect. "The judge decided that the very specific language of that condo offering plan did not qualify for exemption," he says.

But Lawrence Weiner, a Wilentz, Goldman & Spitzer attorney who represented the buyers in the case, said developers had sometimes said that ILSA does not apply to high-rise condonimums. "This case reconfirms that it does apply," says Mr. Weiner. He added he has about nine pending ILSA cases related to New York buildings, involving more than 50 purchasers.

He is also appealing two other ILSA-related cases, one in Harlem and one in Long Island City, where the court ruled on behalf of the developers.

Recent federal court rulings in Virginia and Florida that sided with buyers in ILSA cases had given hope to New York lawyers working with condo owners that their state would follow the same logic. "Even though it's a different jurisdiction, the ruling was persuasive and supports the purchaser," Mr. Weiner said of the Virginia case.

The 163-unit Fulton Street building began selling condos in June 2007, and three condo owners in the case signed contracts in 2007 and 2008. Their combined deposits totaled about $300,000, and the purchase price of their apartments ranged between $800,000 and $1.485 million, court documents said.

Africa Israel is headed by Lev Leviev, an Uzbekistan-born diamond merchant who immigrated to Israel and in recent years has bought up trophy properties in Brooklyn and Manhattan. That includes the historic Apthorp on the Upper West Side which is being converted into a high-end condo from a rental.

Write to Craig Karmin at craig.karmin@wsj.com

Realty Check

Airtime: Thurs. Aug. 12 2010

11:31 AM ET

Total foreclosure filings in July rose 4%, but they are still down 10% from a year ago. CNBC's Diana Olick has more on this and other real estate headlines.

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Houses That Make Their Own Energy

Divine Help For Home Sellers?

Published: Tuesday, 3 Aug 2010 1:02 PM ET By: Jane Wells

CNBC Correspondent

There's a lot of funny business out there, ideas which don't always make sense. Some of them are intentionally half-baked and could, if brought to fruition, create chaos. Like the bluetooth earpiece made in the shape of a gun. A bad idea. A really, really bad idea.

Saint Joseph Homer Seller Statue Kit

Source: amazon.com

Then there are the ideas which may seem silly to some, but have merit to others.

Like burying a statue of St. Joseph in your yard to quicken the sale of a home.

Catholics and non-Catholics say it works.

Some realtors swear by it.

One even wrote a book called "St. Joseph, My Real Estate Agent: Patron Saint of Home Life and Home Selling", where realtor Stephen Binz argues that "seeking Joseph's intercession is not a superstitious act, but a devotional one." Who better to help someone facing foreclosure than a man forced to leave his home for the census and who later vacated it again to avoid Herod? (Yes, I went to Sunday School.)

Well, here's a revelation. This is a housing debacle of nearly apocalyptic proportions.

Even Heaven may not help us.

St. Joseph statues and "home seller kits" are suffering price cuts on Amazon.com (though not the "Eco Joe" statue made of earth-friendly clay--that's still full price).

The product reviews reveal that while some sellers credit the statue and prayers with finally getting a home sold, not everyone is a believer.

"In no time I started getting numerous walk-throughs and bids on my home," writes "M" on Amazon about the statue she bought and buried. "Jackpot! I was able to sell my house quickly and for a goodly profit. I even donated 10% of my increase to a local church to show God my gratitude."

J. Hokett was also impressed. "House had been on the market for 7 months and got an offer within 1 week of this statue's arrival."

On the other hand, J. Schleier is still waiting. "I first tried (burying the statue) by the sales sign, nothing. I then moved it to the backyard, facing the house, upside down. It is not working. Someone told me to dig him up, bath him in salt water and return him. He is not soaking in salt water. It has been 7 months and nothing on my house which is priced below market value. Oh well!"

S. Hartwell wrote, "I bought and buried this statue in Oct 2009 a little over a month after I put my house up for sale. Needless to say I'm still waiting!! I know it's a slow market but..... "

Finally, JustMe's review illustrates that to every thing there is a season. "It hasn't worked yet.. but I will keep faith, that house is gonna sell, it will, I tell ya."

With faith like that, you don't need anything else.

Questions? Comments? Funny Stories? Email funnybusiness@cnbc.com

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