C.A.R. Market Matters September 18, 2008

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Los Angeles Times

Has the housing market hit bottom?
In some areas, foreclosures are increasing, housing inventories are higher than normal, and even well-qualified borrowers cannot receive mortgage loans. Many homeowners and home buyers also are becoming increasingly concerned about when the housing market will reach bottom. Although some areas, such as the Inland Empire and the Central Valley, appear to already have experienced the bulk of their price declines, other markets, such as the San Francisco Bay Area and Southern California may still see home values decrease further, according to some analysts.

MAKING SENSE OF THE STORY FOR CONSUMERS

• Some economists are comparing the current real estate cycle to the 1990s but the origin of this cycle is different from that of the last decade. During the 1990s, a higher rate of unemployment and many other economic factors triggered the downturn, contributing to weak sales for a five-year period. The current real estate market is different in that sales declined at a quicker pace during 2006 and 2007, but have shown marked improvement in 2008. In July home sales remained above the 400,000 level for the third consecutive month.

• Although home prices in California appear to be high compared with incomes, the current cycle has allowed home prices in California to become realigned with incomes. Affordability increased dramatically in the second quarter of this year, and is currently at 48 percent, meaning that nearly half of the state’s households can afford to purchase an entry-level home in California. • Some economists predict that the housing market will have several “false starts,” meaning that there may be periods when home prices reach a plateau, or may even increase for a brief period, and then decrease again. Although home prices have not yet stabilized, home sales are increasing. It also is important to note that real estate is cyclical and prices will eventually rebound, correcting the current market.

To read the full story, please click here:
http://www.latimes.com/classified/realestate/rentals/commercial/la-fi-bottom13-2008sep13,0,1656693,full.story

Wall Street Journal

U.S. to Take Over AIG in $85 billion Bailout; Central Banks to Inject Cash as Credit Dries Up
American International Group Inc. (AIG), one of the world’s biggest insurers, signed an $85 billion deal with the federal government earlier this week. This deal prevents AIG from entering bankruptcy and in turn the government receives a 79.9 percent equity stake in the company.

MAKING SENSE OF THE STORY FOR CONSUMERS

• Because of the unusual nature of the AIG bailout – AIG is not directly regulated by the federal government -- some consumers may not fully understand the terms of the agreement, and may view it as another burden to taxpayers. However, the agreement with AIG differs from the life line provided by the Federal Reserve to Bear Stearns earlier this year. Under terms of the AIG agreement, the federal government is providing AIG with a two-year, $85 billion loan at 11.5 percent interest. In return, the Fed is receiving a 79.9 percent equity stake in the company, providing an opportunity for taxpayers to benefit if AIG should return to profitability.

• Because AIG owns more than two dozen companies licensed to transact insurance in California, some consumers may be concerned about the ability of the company to pay its claims. However, it appears that AIG’s reserves are more than adequate at this time. In the unlikely event that the subsidiaries are unable to pay claims, the state’s insurance regulator will take control of the firm and assume responsibility for the necessary payments.

To read the full story, please click here:
http://online.wsj.com/article/SB122165238916347677.html

Sacramento Bee

Short sales a win-win – or a minefield
With more homes going into default, and more homeowners unable to qualify for loan modifications, short sales are becoming a viable alternative for many. However, these transactions can be complicated and often require more paperwork and time than a more traditional sale.

MAKING SENSE OF THE STORY FOR CONSUMERS

• Short sales are designed to offer homeowners and banks an alternative to foreclosure. Generally this tactic is employed during real estate downturns, when it becomes more difficult for a homeowner to sell the property for an amount equal to or greater than the amount owed on the original loan. Short sales can be a win-win because they allow sellers to avoid foreclosure and can be less damaging to the seller’s credit score than a foreclosure. With a short sale, buyers have an opportunity to purchase a home at a more affordable price.

• Short sales often are more time intensive than a traditional transaction and often require additional paperwork. Because some banks are overwhelmed with short sale offers, it is important that the seller working closely with their REALTOR® to provide all of the necessary paperwork to ensure that the bank can accurately assess the situation and make a decision that benefits all parties. Sellers who opt for a short sale may best be served by a REALTOR® who has experience working with short sales and is familiar with the required paperwork.

To read the full story, please click here:
http://www.sacbee.com/142/story/1227410.html

AIG STATEMENT ON ANNOUNCEMENT BY FEDERAL RESERVE BOARD OF $85 BILLION SECURED REVOLVING CREDIT FACILITY

Addresses Liquidity Issues and Policyholder Concerns

NEW YORK--Sept. 16, 2008--The Board of Directors of American International Group, Inc. (NYSE:AIG) issued the following statement in response to today's announcement by the Federal Reserve Board that the Federal Reserve Bank of New York is providing a two-year, $85 billion secured revolving credit facility to AIG that will ensure the company can meet its liquidity needs:

"The AIG Board has approved this transaction based on its determination that this is the best alternative for all of AIG's constituencies, including policyholders, customers, creditors, counterparties, employees and shareholders. AIG is a solid company with over $1 trillion in assets and substantial equity, but it has been recently experiencing serious liquidity issues. We believe the loan, which is backed by profitable, well-capitalized operating subsidiaries with substantial value, will protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis. We expect that the proceeds of these sales will be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets. In return for providing this essential support, American taxpayers will receive a substantial majority ownership interest in AIG.

"We commend the Federal Reserve and the Treasury Department for taking this decisive action to address AIG's liquidity needs and broader financial market concerns. We thank them for their leadership during this critical time for the global financial markets. We also thank Governor Paterson, Commissioner Dinallo, Commissioner Ario, the other state Commissioners, and the Office of Thrift Supervision for their willingness to assist AIG.

"Policyholders of AIG companies around the world can rest assured that AIG's commitments will continue to be honored."

It should be noted that the remarks made in this press release may contain projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to management, operations, products and services, and assumptions underlying these projections and statements. It is possible that AIG's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these projections and statements. Factors that could cause AIG's actual results to differ, possibly materially, from those in the specific projections and statements are discussed in Item 1A. Risk Factors of AIG's Annual Report on Form 10-K for the year ended December 31, 2007, and in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of AIG's Quarterly Report on Form 10-Q for the period ended June 30, 2008. AIG is not under any obligation (and expressly disclaims any such obligations) to update or alter its projections and other statements whether as a result of new information, future events or otherwise.

American International Group, Inc. (AIG), a world leader in insurance and financial services, is the leading international insurance organization with operations in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In addition, AIG companies are leading providers of retirement services, financial services and asset management around the world. AIG's common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo.

CONTACT:
American International Group, Inc.
Charlene Hamrah (Investment Community)
212-770-7074

President of C.A.R. comments on financial markets

Sept. 19, 2008

Dear C.A.R. Member:

What a week this has been for the financial markets! I’ve been following the tumultuous events on Wall Street, the 24/7 news cycle, and the actions of our Congress and the federal government. No doubt you have as well.

As you know, in recent weeks Fannie Mae and Freddie Mac were placed into conservatorship, the federal government bailed out AIG, Bank of America purchased Merrill Lynch, and Lehman Brothers filed for bankruptcy. Late this week, the credit market appeared to be on the verge of collapsing.

Like most Americans, I’m concerned about both the near-term and long-term health of our financial system and its impact on the housing market, and I’m sorting though an over-abundance of news and information trying to make sense of it all.

Although it is premature at this point in time to address specifics in an evolving plan, C.A.R. strongly supports the intent of Congress and the federal government to calm the financial markets, address liquidity issues and to begin laying the foundation of a new mortgage finance system.

To that end, I want to assure you that your state Association is closely monitoring the events in our nation’s capital. C.A.R. is taking appropriate steps to ensure that the needs of California are addressed, and to emphasize that housing is a central part of the equation in the federal government’s efforts moving forward. We’re actively engaged in ongoing dialogue with our congressional representatives and other key leaders in Washington.

To recap what’s happened -- so far -- this week:

U.S. Dept. of the Treasury Secretary Paulson today announced that Congress and the administration intend to take poorly performing assets, primarily mortgage-backed securities, off the books of financial institutions. These assets have been a prime impediment to the ability of financial institutions to lend money.

The government also prohibited the short sale of nearly 800 financial institutions for 10 days, and may extend this prohibition to 30 days.

The U.S. Dept. of the Treasury also plans to increase the amount of mortgage-backed securities bought from government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, in an effort to increase the GSEs’ role in the housing market.

The Federal Reserve and other major financial institutions worldwide also made hundreds of billions of dollars in loans available to commercial banks in an effort to improve liquidity.

Our expectation is that Congress and the administration will work together to craft legislation as early as next week addressing these critical issues. We expect to have a good sense of what the legislation will contain by this weekend, prior to financial markets opening Monday morning.

As events continue to unfold, look to C.A.R. as your one-stop source for news and information on these critical issues. Beginning Monday, you’ll receive “Market Matters Daily Briefing,” a daily e-mail that will aggressively monitor the situation and keep you informed as events play out. Your regularly scheduled “Market Matters” e-mail on Thursdays will include tools and information to help you explain and communicate to your clients. You also can check www.car.org for recent headlines and video clips, and Wednesday’s “C.A.R. Newsline” e-mail for additional information pertinent to the ongoing story. Stay tuned for more.

Sincerely,

William E. Brown
2008 President
CALIFORNIA ASSOCIATION OF REALTORS®

Congratulations! You just bought AIG!

Article contributed by Alfredo Ramirez, The Loan Source 9/17/08

If you pay taxes in the United States you now play a small part in the 79.9% share that the Federal Government has taken last night in failing insurance company AIG. After saying this weekend it would not rescue AIG, the Federal government reversed course Tuesday evening and declared the insurance giant too big to fail. The Fed has thrown AIG an $85 billion loantwo-year term at a rate of 8.5% plus LIBOR (or about 11.4% at current levels). AIG is saying they will sell off assets over the course of the next two years, and plan to pay back the loan in full plus interest. The government has the right to veto any such sales, so basically you are still a private company but Uncle Sam is watching closely. over a

The government will have authority to replace executives at will, and they have already made a move to replace the current CEO. They felt that a bankruptcy of AIG would have created too much damage to the already fragile market. Policy holders will be protected, jobs will be saved," New York Gov. David Paterson said Tuesday night.

In other news, Housing Starts for August were below estimates representing a 17 year low. I would venture to say this is probably a good thing has we don't need additional supply of new homes right now.

Mortgage bonds are all over the place today as the volatility in the stock and bond markets continue. They are currently making a positive rally due in part to the dismal stock market performance currently down 350 points as I type. Overall I think the government bail-out is good for us, but it's amazing what we are getting used to. I think this year will go down in financial history as one of the most volatile ever.

So tell me what's the good news? Well, the government has our best interest at heart of trying to shore up credit, financial, and housing markets and they seem to be willing to do whatever it takes to make that happen. We all just need to hang in there and focus on talking to people who are interested and qualified to buy or sell real estate!

On a side note, the LIBOR rates are spiking huge today. LIBOR stands for the "London Interbank Offered Rate." The rate is based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market. Because banks are now concerned about being paid back by other banks due to instability, they are increasing their rates they charge each other this morning. How this ties into us in the United States is most of the 1 year, 3 year, 5 year, 7 year, and 10 year mortgage ARMs are tied to the LIBOR index. Since 30 year fixed rates are relatively low right now, I think it makes sense for people in adjustable loans to consider switching to something fixed if they can qualify for a new loan.

Feel free to contact me with any questions. Have a good one!

Loan Officer

Alfredo F. Ramirez

The Loan Source

477 S. San Antonio Road

Los Altos, Ca 94022

Mobile: (650) 722-1094

EFax: (650) 887-0424

H.R. 3221: Housing and Economic Recovery Act of 2008

Read a summary or the full text of this bill here:

Summary

Full Text

Lender Guidelines as of Sept. 2008 by Alfredo Ramirez of The Loan Source

Alfredo Ramirez, a fantastic lender and one of dsoldit.com's recommended professionals has outlined some excellent "guidelines"....not to be mistaken with specific rules.... for qualifying for loans up to $1MM as of September 2008. Loans change constantly, and guidelines are currently changing approximately every month. For specifics in your situation, call Alfredo directly at (650) 722-1094.

Up to $417,000 Loan
Full Documentation and some stated loans available
Debt to income ratios of over 50%
Down payments of 5% for conventional loans and 3% for FHA loans
Reserves of 2 months PITI (Principle, Interest, Taxes & Insurance)
620 minimum FICO

Loan amount from $417,001 to $729,750
Full Documentation
Debt to income maxed out at 45%
Minimum down payment of 10% (will need mortgage insurance)
Reserves of 2 months PITI (Principle, Interest, Taxes & Insurance)
660 minimum FICO

Loan amount from $729,751 to $1,000,000
Full Documentation
Debt to income maxed out at 45%
20% down payment required (No FHA available)
Reserve requirement of 3-12 months PITI (Principle, Interest, Taxes & Insurance)
680 minimum FICO

How housing bill helps banks, not taxpayers

Sean Olender

Sunday, September 14, 2008

This is the complicated story of how Congress' recent $300 billion housing bill is a theft of taxpayer money.

To understand how it works, you must first put yourself in the shoes of Bank of America, Countrywide Financial, or any of the many U.S. banks facing big losses on delinquent mortgages. If you are a bank, you probably make loans to people to buy homes. You give the borrower money, and the borrower gives you a signed promise to repay - a mortgage - which is secured by the house.

Over the past five years, you got to sell a lot of your mortgages to Wall Street banks that then sold them to international investors. Wall Street paid you well for those mortgages. Because you didn't think you'd get stuck with them on your books, you started loaning anything to anyone.

But as the housing market's parabolic ascent stalled, you got stuck with a lot of mortgages you hadn't yet sold to Wall Street banks. And some Wall Street banks and investors may have forced you to buy back other mortgages, sticking you with hundreds of billions in bad debt. You also know that some of the mortgages that were sold to investors are packed with lies about the appraised value, the borrower's income and other information that may allow investors to force you to buy them back after foreclosure.

You've wisely been dragging your feet on sending out delinquency and foreclosure notices. Foreclosures are recorded on your books, and you're expecting a government bailout, so you are waiting sometimes more than a year to initiate foreclosure proceedings. You don't even know if some of these folks are living in their homes anymore.

You have a lot of friends in Congress. You paid them a lot of money to be your friends. But you know that if they start talking about passing a law that will give you a lot of taxpayer money to make up for your losses, voters might get angry and scare the representatives, who then may refuse to vote for your bill because they're worried about getting voted out of office.

What to do?

You can try to write a bill that is a bailout, but is disguised to appear to not be a bailout, something I call reverse legislating. You can make it look like you are taking a significant loss on the mortgage and that you are helping people keep their homes, but in reality job one is to unload toxic waste on the taxpayer.

After thinking a while, you get an idea: Write the bill so that you reduce the principal of the mortgage to 90 percent of the current appraised value (this gives the homeowner 10 percent equity, the taxpayer a 10 percent cushion against losses and relieves the homeowner from having to scrape together even $10 for a down payment on the new loan). This all makes it look like you are taking a big "haircut" by writing down the loan principal.

Better yet, include a provision that requires borrowers to share half the future appreciation with the government, creating the ridiculous image that there will be appreciation above the appraised value in the next 10 years. But you know that's impossible. You know that because you're the one who picks the appraiser.

You learned during the boom that appraisers are chosen by mortgage brokers, real estate agents, and sometimes banks. Appraisers who don't "hit the number" by appraising the house for the amount needed to close the deal don't get called back and have to get a job doing something else.

A red herring

Some idiot might suggest the creation of a radically different appraisal system. Some lawmakers may suggest that FHA or HUD select the appraiser, that the bill institute civil money penalties, or criminal penalties for improperly influencing appraisals. But you, the bank, know just how to deal with that - with a red herring, of course.

How about deleting these effective provisions from the bill and instead adding a meaningless requirement that appraisers have more education hours? Or maybe we could fingerprint them? It doesn't matter as long as it is irrelevant, but sounds relevant to a voter.

You write into the bill, of course, that only loans you choose can be refinanced in the federal assistance program. Desperate borrowers who can't afford their current mortgage payment and would benefit from this bill aren't entitled to the federal refinancing assistance without you choosing them. You coach your lawmakers to use the word "voluntary" a lot because people generally think that things that are voluntary are good. But the point is that nobody gets refinancing help unless you say it's OK.

Choosing the worst

Which homeowners are you going to allow into this refinancing program? The worst you can find. Not ones merely having trouble repaying. You're going to start with ones who stopped making payments six months ago who will walk away regardless, or better yet who have already walked away and you just haven't foreclosed on yet. You're going to track them down and you may even have to pay them to sign the documents.

If it gets too dirty, you can outsource it to any of thousands of mortgage brokers who've probably been living in their cars for the past year. You can pay big commissions and fees to create a powerful demand to close those deals without you having to get your hands dirty in the details. People who abandoned their homes or who still live there, but haven't made a payment in months, or a year, will sign anything you like if you give them $5,000, or pay the mortgage brokers enough so they can afford to buy the borrower's cooperation. The borrowers, after all, are on the hook for nothing whether they sign or not. The borrower would be wise to sign in exchange for some cash.

So that's how you do it: You, the bank, get rid of your most dubious mortgages by, in effect, transferring them to the federal program - and letting the taxpayers foot the bill.

On June 20, the National Review broke the story that Bank of America had essentially written the FHA bank bailout bill and posted Bank of America's "confidential" proposal on its Web site. The FHA bill is identical in almost all respects. That alone should tell taxpayers all they need to know.

I optimistically predict that within 12 months, half of these refinanced loans will result in default.

"If we had these higher-cost loan limits four years ago, buyers would not have had to go to the subprime market and would have been able to get an FHA loan," said William E. Brown, president of the California Association of Realtors.

But in reality, real estate agents and mortgage brokers steered lots of people into subprime loans with time-delayed, exploding interest rates, because they got paid kickbacks from the lender. The banks paid them extra money - sometimes $20,000 or $30,000 - to take a borrower with a good credit score and put the person into a bad loan with a teaser intro rate that exploded into a 12 percent monster later and included a prepayment penalty.

Why would the banks do this? Because it makes more money for them. Fully 60 percent of subprime borrowers qualified for a lower rate and better loan terms than they were given. Their mortgage brokers and real estate agents never told them they qualified for better. If they did, the borrowers would have gotten better.

Bloated inventory

Recent reports indicate that existing home sales have increased more than expected. Buried deeper was the fact that existing home inventory ballooned to 11.2 months. The record inventory of 11.5 months was reached in 1982. Optimistic economists suggest that an additional 10 percent drop in home prices is coming, while the doomsday crowd claims housing will suffer an additional 20 to 30 percent fall. Nobody knows, because a housing bust this big has never happened before. But inventory doesn't get this large unless sellers are way too high on price. Coming price declines will also sap taxpayer money on these bad loans.

And $300 billion isn't enough. In the same bill, Congress gave the Treasury Department authority to hand limitless taxpayer money to Fannie and Freddie, which can use it to buy mortgage bonds from irritable banks. After finding Fannie and Freddie in bad shape, Treasury Secretary Henry Paulson will allow them to expand their portfolios by $200 billion, like a credit card shopping spree six months before you plan to go bankrupt.

Once again, Congress has delivered the goods to its banker bosses. No lawmaker voted on specific terms for a Fannie and Freddie bailout, because precise terms are the things that get legislators voted out of office. Instead, Congress gave an arguably unconstitutional spending power to the Treasury Department, which is buying worthless mortgage bonds with our tax money. This is how to deliver $500 billion to the banks without leaving fingerprints. It is the art of postmodern democratic oligarchy.

A crazy rationale

Most surreal is the ceaselessly repeated rationale for all this bailing: If we don't give these banks your tax money, they won't be able to lend it to you. And without credit, you're all screwed. Let me get that straight. If we don't give banks our tax money, we will be in dire straits because they won't be able to lend us that money.

Before anyone writes about my wild conspiracy theories suggesting it's laughable and ridiculous that banks would try to offload worthless loans onto a third party by working with mortgage brokers and appraisers to get fraudulent appraisals and false borrower income information, isn't that rather clearly and exactly how we got into this situation?

Sean Olender is Bay Area attorney and writer. Contact us at insight@sfchronicle.com.

This article appeared on page G - 1 of the San Francisco Chronicle