Self-Help Article in The News & Observer

Self-Help was featured in the Raleigh News & Observer over the weekend. Our mantra when selling homes and lending money is to use common sense and always look at the big picture. It's kept us afloat so far, and hopefully will allow us to continue to do good things for the people and communities that need our services. As an organization, we usually go out of the way not to blow our own horn, but I'm glad the N&O decided to do a story on us. I think it's good for people to know that not all lenders have acted irresponsibly, and that it is possible for a lender to succeed by caring about people as much as it cares about its bottom line.

A blurb from the article:

"One year into the credit crunch and mortgage meltdown, a Durham financial institution that banks on neighborhoods at risk is still doing business as usual.
How so?
Common sense, said Martin Eakes, co-founder and CEO of Self-Help, a Main Street nonprofit that has, according to its Web site, provided $5.24 billion to 60,130 homeowners, small businesses and nonprofit enterprises since it started the practice in 1984.
And it's still buying, rebuilding, selling and lending for and to just the sort of people in just the sort of places who are caught up in the sub-prime lending mess. Yet, with much of the country's banking, developing and real-estate industry in crisis, "Financially, we're doing fine," Eakes said in an interview this week.
Not that he doesn't feel depressed and keep his fingers crossed.
"So far, our borrowers are doing pretty well, but I'm anxious for them a little bit," he said; but, "I'm depressed for those communities we have helped to build up." "

See the full article at http://www.newsobserver.com/978/story/1180193.html.

FHA Loans Make A Comeback?

I started in the real estate business at the height of the creative financing boom. 100% (and more!) financing was all the rage, and homebuyers were signing up for adjustable rate mortgages with low monthly payments. Stories floated around my office about buyers that walked into the closing with no money and walked out with the keys to a new home. In this environment, the old-fashioned FHA mortgage was rarely mentioned – it just couldn’t compete with the less expensive, more exciting loans that were dominating the market.

Now that exotic mortgages have largely disappeared from the landscape, the federal government is doing what it should have done years ago – reforming FHA loans to better reflect today’s homebuying reality. If you’re considering purchasing a home, it may be time to consider an FHA backed loan.

We’ve seen more buyers that have been qualified for an FHA loan recently. This should come as no surprise. While many lenders are now requiring credit scores in the mid-600’s and up, FHA borrowers may be able to secure financing with credit scores as low as 580. Lenders are also requiring larger downpayments of 5% or more, while FHA borrowers still have the opportunity to make a 3% downpayment.

The federal government is doing its part to make FHA loans available to more people, at least in the short term. As a part of the recently passed Economic Stimulus Act of 2008, the government increased the amount buyers can borrow with an FHA loan. The increase will expire at the end of the year, although it can be extended. The U.S. Department of Housing and Urban Development (HUD) has also been working on permanent changes to the FHA program.

Higher loan limits, low downpayments, and flexible credit guidelines – if you are shopping for a mortgage, an FHA loan should be one item on your list.

Pick-A-Pay Part II

And the other shoe drops. Wachovia has just reported a $393 million first quarter loss, and plans to cut 500 jobs. Much of the loss is attributed to Wachovia's expansion into the mortgage industry, just as this sector was about to collapse. I reported on Wachovia's ill-timed acquisition of Golden West Financial and its flagship Pick-A-Payment loan product over the weekend.
The Pick-A-Pay loans were portfolio loans for Wachovia, meaning that the lender kept these loans in house instead of selling them to outside investors. Wachovia received the benefit of the higher interest rates on these loans, but also had all of the risk if borrowers defaulted. In their earnings report, Wachovia noted that the number of mortgage defaults on their loans nearly doubled in the first quarter. With the information I have, I can't say what percentage of these defaults were Pick-A-Pay loans. It is noteworthy, however, that Wachovia is experiencing defaults with their Golden West portfolio, which is heavily invested in hard hit West Coast markets. The losses are enough that Wachovia is curtailing or eliminating the Pick-A-Pay loan in several of these markets.

FairClosingCosts.com Launches in May

Inman News reports that a new website, FairClosingCosts.com, will launch in May. The site aims to allow home buyers to shop independently for providers of their closing services. The site won't sell your information to vendors; instead, it will act as an "online Rolodex" allowing visitors to research and find contact information for vendors.
Most buyers go as far as choosing a real estate agent, lender, home inspector, closing attorney, and insurance agent. They then allow those service providers to choose the rest of their service providers.
In a best case scenario, everyone is looking out for the buyer's interests, and selecting high quality service providers with fair and competitive pricing. In reality, buyers are often unaware of exactly who is doing what for them. This encourages vendors to form cozy business relationships of the "you scratch my back and I'll scratch yours " variety that serve the vendors more than their clients. There is a law that governs these "third party" vendor relationships - how vendors should disclose their relationships to clients, and whether vendors can pay each other for referrals (see RESPA).
It looks like FairClosingCosts.com wants to take it one step further, essentially allowing buyers to cut out the middle man, or at least check prices and keep them honest. I think most service providers are up front about these things anyway, but adding more transparency to the process can only help to avoid any miscommunication and cut down on abuse of the system.
Here's a quiz. When you bought your last home, which of these services did you shop for, price, and hire yourself?

• Real estate agent
• Lender
• Appraiser
• Insurance agent
• Home inspector
• Home warranty provider
• Notary public
• Surveyor
• Attorney/settlement company/ title examination
• Title insurance company
• Wood infestation (termite) inspector
• Septic inspection
• Well water inspection

Wachovia Reigns in Pick-A-Pay?

When I saw the television ad for Wachovia's Pick-a-Payment mortgage, my jaw hit the floor. I saw the commercial at least a month ago, but couldn't formulate a coherent blog entry until now - I was that irritated.
In the midst of the fallout over shoddy lending practices, Wachovia chose to push THIS? For those who have never encountered a pick-a-pay loan, let me explain. The real name for this loan is an option ARM. Each month, the borrower gets four payment options:

1) Pay the fully amortizing principal and interest payment (basically as if you were paying on a 30 year fixed mortgage).
2) Pay a set amount higher than the amount in 1), which pays off the loan in 15 years.
3) Make an interest only payment.
4) Make a minimum payment that doesn't cover principal or interest.

Numbers 1) and 2) are beautiful things. Numbers 3) and 4) can ruin your life. Get into the habit of not making a fully amortizing payment, and your loan balance will actually go up. Combine this with the fact that for the privilege of having a ballooning loan balance, Wachovia will actually charge you a HIGHER interest rate on the loan.
Now, for the right borrower, these loans can be a useful financial tool. By right borrower, I mean someone who gets the concept of negative amortization, and uses numbers 3) and 4) as a strategy in managing their investment portfolio. For example, if a borrower wants to pump some additional funds into their stock portfolio, or they have an investment property that has a vacancy and want to use the extra money for the mortgage payment on that property. Not that they can't get the money elsewhere - they make a CHOICE to get it from this source.
But that's not who Wachovia is aiming this product at. They are targeting people that need to rob Peter to pay Paul. People that need the extra money to pay the minimum balance on their credit card bill. People that need the extra money to buy gas or pay for groceries. People who are not consistently bringing in enough money to cover their expenses. People who could easily end up using the last two options every month, instead of once in a while.
Why would Wachovia do such an irresponsible thing? A nationwide ad campaign that glosses over the risks of the product. A cutesy name that makes it sound like a game on "The Price is Right". Forcing bank employees to push this product on customers or risk losing their jobs.
Let me answer my own question. Back in 2006, Wachovia bought a company called Golden West Financial. Golden West specialized in - you guessed it - Pick-A-Payment mortgages. Wachovia spent years cultivating a conservative, by the books image centered around customer service. But in the world of super-charged creative financing, the standard 30 year mortgage didn't fly. It didn't get you noticed, it didn't pump up your stock price, it didn't make enough MONEY. So Wachovia traded for a marquee player - an exciting, creative superstar that brought it instant fame, glory, and edge.
Wachovia is not offering you this loan because it cares that you can't pay your credit card bill, or that the price of gas keeps going up. Wachovia is offering you this loan because it paid $25 billion for Golden West on the eve of the mortgage market collapse and now needs to make MONEY.
Luckily, a lot of people think Pick-A-Payment is a bad idea. Wachovia seems to be coming to its senses. It has stopped making the loans in some places, and will institute new underwriting guidelines including minimum credit scores and verification of employment.
If you want to do your part, here's a suggestion. If you are ever offered an option ARM (or Pick-A-Pay, or whatever they call it) and you are not independently wealthy, or don't at least have a investment portfolio worth six figures or more - 401(k)s don't count - run away from said offeror like your hair is on fire and your a** is catching. Not to be too blunt, but I'll sleep better at night knowing I might have saved one person from this disaster in a box mortgage.

New Durham and Triangle Housing Numbers

The Triangle Multiple Listing Service has published the newest market stats, based on MLS activity. If you don't want to read the fine details, I'll summarize: there isn’t much good news here.

Still with me? OK, let's dive in...Durham is feeling the effects of the housing downturn, as is the rest of the Triangle. The downtrend is now hitting segments of the market that we hoped would not be affected.

February Home Sales
Sales in February were down almost 27% compared with February 2007. That puts Durham in the worst position of the major Triangle counties:

Durham County -26.7%
Johnston County -3.2%
Orange County -16.7%
Wake County -15.6%

Breaking sales down by price groups offers some explanation as to why Durham is down so much more than other areas. 81% of the February sales in Durham involved properties priced under $250,000. First-time homebuyers typically buy in the sub 250k price range. Some of these buyers have had their financing options severely curtailed by the issues in the mortgage market. Others sense that aggressive price reductions are on the horizon, and want to see how much lower the market will go.

In contrast, 47.5% of buyers in Orange County and 36.4% of Wake County buyers paid more than $250,000 for their homes.

Johnston County shares Durham’s price spread – 84% of their sales were in the under $250,000 range. Johnston has become a preferred bedroom community for workers in Raleigh and RTP – before recent events, it overtook Durham’s position as the Triangle’s second most active new construction market. This may be why its decrease in sales is minimal.

Market Indicators
I was surprised when I opened the latest market update from Stacey Anfindsen, the real estate analyst for the Triangle MLS. Mr. Anfindsen has been realistic about the excess inventory in the market and the need for price drops. However, he forecasted that the strength of the Triangle job market, low interest rates, and relatively affordable housing stock would shield us from the worst of the fallout.

The sub-title of this month’s report: “Is there any good news?”. Which usually means there isn’t.

First line of the report: “Our local market seems to have finally fallen prey to the conditions seen nationally. While year end numbers were fairly positive, 2008 has not gotten off to a good start.”

The new numbers are a bit of a blindside. Up until the end of 2007, the market remained pretty balanced, even though there were a lot of homes for sale. Sales prices continued to rise. There was a five month supply of homes on the market – wonderful, given that a 6 month supply is considered a perfectly balanced market. And again, interest rates were comparatively low. While the subprime market was tanking, we were blessed with a well educated and well compensated workforce that could still access financing.

But at the start of 2008, the market changed. Sellers came in; buyers pulled out. Durham now has an 11 month supply of homes on the market (compared with 10 for the Triangle as a whole). Durham has three big trouble spots right now: homes priced over $250,000 (13-18 month supply), condos (34 month supply), and townhomes (19 month supply).


Mortgage Bailout?
The Senate is currently considering a $15 billion dollar housing relief package to assist homeowners and local governments in battling the depressed housing market. Although a final deal is still being negotiated, here are the current major points and how they might impact the local market:

New FHA guidelines. Will it help Durham? No
The government is advocating an increase in the amount buyers can borrow under the FHA program. The required downpayment on an FHA backed loan will increase from 3% to 3.5%. FHA backed loans are not typically credit score driven, although they do have underwriting standards (like no collections on your credit or no late payments in the past year). Many buyers opted for subprime solutions because the FHA guidelines would have required them to delay their purchase while addressing their bills and credit. Today, even with a more generous loan amount, that same buyer will still have to work to meet the guidelines – they won’t be running out to buy a house tomorrow. FHA backed loans are a small segment of the market here – I don’t expect this provision to have a major impact.

Bonds for refinancing. Will it help Durham? Maybe
The states get $10 billion dollars in tax-free municipal bonds. The proceeds can be used to help homeowners refinance. Usually, this type of government aid is limited to first-time homebuyers and homes in distressed areas. I have seen some wonderful first-time homebuyer programs come out of government subsidies. If the same opportunities were offered for people wishing to refinance, that would be great. The challenge: the best first-time homebuyer programs require that buyers clean up their credit and attend homebuyer education courses BEFORE they get the money. How do we ensure that subprime borrowers get that framework for success in a refinance?

Tax credits for buying distressed properties. Will it help Durham? Yes
I’m not a tax policy wonk, so I’ll play this one at surface level. There will likely be a rise in newer foreclosures and short sales that are in good condition. Buyers of these properties will probably get them at a discount. Add on a 7k tax credit, and it’s even more of an incentive. Who doesn’t love to save money?

Property tax deductions for non-itemizers. Will it help Durham? Yes
Again, another no-brainer. As the spouse of an accountant, I never realized how many taxpayers don’t itemize on their tax return. Some of us comb through every gas station receipt looking for one more write-off. For those that speed through your return in 15 minutes at the local storefront tax prep place, you could claim an easy deduction for your property taxes - $500 for single filers, $1000 for couples filing jointly. In a year where many have seen their tax assessments rise, this would be welcome news.

Tax breaks for homebuilders and related businesses. Will it help Durham? Yes
Yes, a little. Durham hasn’t experienced the pace of new home construction and the influx of builders Wake County has. Of course, helping to keep the builders that are here solvent would be good, and a healthier market in Wake might mean a healthier market in Durham.

Rehab grants to local and state governments. Will it help Durham? No
Unfortunately, our local government has shown time and again that it lacks the experience and bandwidth to successfully undertake rehabilitation of residential real estate. To its credit, the city has reorganized its troubled housing department. But the new organizational structure has not been tested on a rehabilitation of any quantity.

More money for consumer counseling. Will it help Durham? No
Right now, lenders are working with delinquent borrowers on a voluntary basis, and they are not volunteering much in the way of helping homeowners keep their homes. If a homeowner has a mortgage that eats up 50% or 60% of their monthly income, you are not going to counsel them out of that situation. Only if lenders have the same motivation as borrowers will we get both sides to the table to find a meaningful solution. Right now, lenders are not set up to accept the intervention of counselors on a large scale – they don’t have the expertise in negotiating, they aren’t organized to conduct long term conversations with their clients, and they are bombarded with the task of handling borrowers who are already in the throes of foreclosure.

More information for borrowers. Will it help Durham? Yes, if…
Now this would be a great place to have a counselor. Loan documents that spell out in plain English the terms of the loan. A law (with teeth) that requires the lender to give those documents to the borrower a week before closing, and to not change them after that. A counselor that has reviewed the borrower’s spending habits, provided information and education, and is there to review the loan documents with the borrower. I’m thinking that the proposed measure provides none of the things I just mentioned (aside from loan docs in plain English), but at least it’s a step in the right direction.

So that’s the story. The market has too much inventory, and we have to work through it. The local market is not strong enough to overcome the pressure of the national market. The federal government is trying to figure out how to help without sending us into a decade long tailspin (Google Japan housing bubble for a cautionary tale). We’ll see what happens as we move into what is traditionally the most active three months in the Durham real estate market.