Expanding on the first time home buyer tax credit which cost tax payers $8.5 billion over the course of last year, the new credit would increase income limits, sales price limits, and include move up buyers who already own a home.   The new parameters would begin after the expiring plan ends November 30, 2009, and would continue through April 30, 2010 to sign contracts allowing for an additional 60 days to close.  Highlights of the plan are summarized below:

• First time buyer tax credit would remain equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
• Existing home buyer tax credit would equal $6,500 and be available to homeowners who “move up” by selling their existing home to buy new.
• To qualify for the existing home buyer tax credit you must have lived in the home you are selling for 5 of the last 8 years.
• The credit is available for homes purchased on or after December 1, 2009 and before April 30, 2010.
• The credit does not have to be repaid.
• The credit has income limits of $125,000 a year for individuals, $225,000 a year for married couples.
• Persons earning up to $145,000 individually or up to $245,000 jointly would get a smaller credit that decreases as income rises.
• The tax credit will apply to home purchases of $800,000 or less

Reviews of the tax credit and the need for an extension have been mixed.  In a recent article for TIME magazine Janet Morrissey writes, “About 1.4 million households used the credit between February (when the program was launched) and September. And from 350,000 to 400,000 of those transactions involved purchases that would not have been made without the credit, says Lawrence Yun, chief economist with the National Association of Realtors (NAR)”

Ms. Morrissey goes on to also suggest the existing tax credit has been a “fraudster’s dream” referring to Treasury Department reports identifying 167 cases of fraud and over 100,000 potential civil violations.   These reports were delivered to Congress by inspector general Eric Thorson this past September.

Several economists assert the credit will have much less an impact on sales and home prices going forward, while also suggesting “this doesn’t mean that the credit is useless, only that it is inefficient.”  Most trade groups in the beleaguered housing industry are expected to hail the extended plan as a much needed stimulus to a still suffering market.  Only time will tell if they are correct.

The report also provides beneficial insight to the goings on at the court steps.  Third party sales increased month over month by 3.27 percent.  More impressive, the increase represents a 215.38 percent increase year over year as cash investors continue to reap discounts averaging 20.5 percent to current market value.  On the flip side, it remains clear why third party sales don’t account for a larger volume.  Properties that go back to the bank at auction are, on average, priced 23 percent more than current market value.

Other findings in the report are summarized as follows:

• NOD’s – an 1.08 percent increase from August to September.  37,417 total filings, which is a 123.44 percent increase over September 2009.
• Trustee Sales – a 5.10 percent decrease from August to September. 32,457 total filings, which represents a 64.97 percent increase over September 2008.
• Cancellations – a 13.47 percent decrease from August to September. 8,639 total cancellations occurred in September.
• Auction sales that went back to the lender reached 13,123, representing a 8.61 percent decrease month to month and a 40.61 percent decrease from September 2008.
• Auction sales sold to investors at the court steps increased 3.27 percent from August to September and a whopping 215.38 percent over September 2008.
• Lenders have discounted opening bids at trustee sales an average of 50.4 percent lower than the loan balance and 20.5 percent below current market value on properties sold directly to third party investors.

Other observations from this months report, the HAMP Program seems to be having little to no impact on foreclosure losses as homeowners complete the 3 month trial period.  Expectations were a strong increase in foreclosure cancellations, the actual result has been less than stellar (down 13.5 percent) indicating the program is having no significant impact.

With current market values hovering around 2004 levels it isn’t surprising to see the majority of foreclosure activity (nearly 91 percent) on loans of the 2005-2007 vintage.  It is also worth noting that few loans made after banks began tightening credit standards have fallen into default.

A long way from being “out of the woods,” it’s seems less likely we will be in for an REO inventory avalanche from suspected shadow properties.  On the flip side increased defaults suggests that investors and brokers working the short sale markets should stay in business for some time to come.

The latest push comes in the form of the Home Affordable Refinance Program or HAMP.  Per the Treasury press release, the $75 Billion program aims to prevent foreclosures and help responsible families stay in their homes.  The program will do so by partnering directly with the lenders carrying non-performing loans, via the GSE’s (Fannie and Freddie), FHA, and the FDIC.

How does it work you ask?  HAMP will reach from 3 to 4 million at-risk homeowners using a five prong strategy.  Here are the highlights:

Five Prong Strategy

1. Create clear and consistent guidelines for loan modifications
2. Require that banks use the US Treasury guidelines when modifying loans
3. Allow judicial modifications during bankruptcy when borrowers have no other options
4. Require strong government oversight at banks to monitor compliance
5. Strengthening FHA programs by providing support for local communities

Who is Eligible for the Program

• At risk homeowners suffering from serious financial hardship.  These hardships includes financial shock from temporary loss of income, those experiencing increases in monthly expenses, and/or those suffering from payment shock resulting from an interest rate adjustment or reset on their mortgage.  The at risk definition also applies to homeowners deemed “underwater” (with a combined mortgage balance higher than the current market value of the house).
• Homeowners facing imminent default of their mortgage.  You are not required to be behind on your mortgage payments to be eligible for a loan modification.  Quite the opposite in fact.  Studies show that modifications are actually more likely to succeed when done by borrowers before they miss payments.  Therefore regardless of whether you are current or behind on your mortgage, you may call your lender to request a loan modification.
• Owner occupied homeowners ONLY! No flippers - The government calls this a “common sense restriction.”  If you are a speculator, which I assume is their broad term for investor, and/or a house flipper you are out of luck when it comes to the HAMP program.  This isn’t to say banks won’t modify your loan too, rather the incentives from the HAMP program will not apply.
• FHA conforming loans ONLY! No jumbo mortgages - Another of the so called “common sense restrictions” the HAMP program does not help homeowners who needed jumbo loans when purchasing their home.  The incentives in the program are targeted towards helping buyers within the FHA loan limits.  To clarify, it does not require that a homeowner have an FHA loan, simply that the loan balance fall within the loan limits of the FHA program guidelines.
• High debt level borrowers who agree to enter HUD certified consumer debt counseling - This is a special provision for individual homeowners who also meet the other provisions of the program.  If their back end debt, which includes all monthly expenses in addition to their mortgage, is equal to 55 percent of more of their total income, homeowners will be required to enter debt counseling to receive a loan modification.

How it Works

The simple goal of the program is to keep homeowners paying on their mortgages.  The theory is that most defaults are not a result of homeowners choosing to walk away because they owe too much on their home, rather a belief that these defaults occur because the borrower cannot meet the monthly financial obligation.  By adjusting monthly payments, fewer defaults will occur and housing markets will be stabilized.

The government and lenders will share the effort to lower monthly mortgage payments to between 31 percent and 38 percent of a borrowers’ gross monthly income.  The first burden will be on the lenders with the government batting clean up.  Steps involved in reaching this goal are as follows:

1. Lenders will reduce interest rates on the current loan to as low as 2 percent hoping to reach DTI ratios of 31 percent
2. If interest rate reductions don’t accomplish the goal, amortization periods will be extended to 40 years to reach the proper ratio
3. If after completing steps 1 and 2 DTI ratios still have not reached 31 percent, lenders may forbear principal at zero interest until ratios are met
4. the federal program will supplement lenders efforts by sharing the costs involved with reducing ratios from 38 percent to the desired 31 percent ratio
5. modifications will be kept in place for 5 years.  After 5 years interest rates can be increased by 1 percent each year to the conforming loan survey rate in place at the time of modification.

Incentives for Success

As incentive to loan servicing companies, the HAMP program will reward each servicer with an upfront fee of $1,000 for each successful modification made within the guidelines.  Further servicers will be given an additional $1,000 per year up to 3 years, called a “Pay for Success” incentive as long as the borrower successfully remains in the program.  These success incentives will also be available to servicers who modify, FHA, VA, or agriculture department loans, and/or refinance loans according to the Hope for Homeowners programs.

Lenders and servicers willing to reach out to borrowers not currently in default may receive an additional $2,000 incentive payment ($1,500 to mortgage holders and $500 to servicers) by completing successful loan modifications before a borrower misses a payment.  Borrowers themselves will receive further incentive by successfully staying in the modification program.  An additional $1,000 per year, up to five years, will be given to borrowers going straight towards reducing the principal balance on the mortgage loan.

Addressing Further Value Erosion

One of the outstanding issues concerning lenders is the risk of further value erosion if modifications fail and they are forced to ultimately foreclose at a later date.  To address that issue the US Treasury Department will fund up to $10 Billion dollars for a program set to partially offset losses realized by lenders who experience steeper losses on foreclosed loans after completing a modification.  Structured as a simple cash payment, it will be received by mortgage holders on each modification, linked to the declines in the home price index.

Junior Liens

Although junior lienholders are not required to participate, lenders and servicers participating in the HAMP program will receive additional incentive to extinguish junior liens in order to reduce the overall indebtedness of the borrower.  Servicers will be reimbursed for the release according to a specified schedule and will receive an additional $250 payment for obtaining the release from a valid second lienholder.

Thoughts and Issues

Preferential treatment towards one class of borrower and geographic inequity across the 50 states are the two most glaring problems with the HAMP program.  Although well intended and very much needed in the residential markets, the program will continue to be viewed as biased and raise resentment among the majority of borrowers, currently not eligible for the program.  Clearly directed towards homeowners in the most dire of circumstances and with the fewest alternative solutions, wealthier borrowers and more sophisticated professional investors are left to fend for themselves.

If lenders and the federal government encourage HAMP qualifying borrowers to place themselves in a better financial position by changing the terms of their agreed up on loan, and then paying them to do so, shouldn’t wealthier borrowers and investors be encouraged to do the same?  If one group of borrower is “villainized” while others are forgiven for the same behavior isn’t it human nature for that first group to protect themselves against perceived unfair attacks?

The message of the current administration is hope and change.  Those of us encouraged by the message hoped that change would apply to all of us equally when reflected in public policy.  Their required agenda includes the stemming of a financial meltdown in the financial markets driven by catastrophic losses in the residential real estate markets.  Unfortunately the piecemeal approach to the problem has only encouraged more bad behavior by many who feel left out or villainized.

In theory we all pay taxes and we all have an equal vote.  In practice the policies and programs which spend tax payer money and address issues facing all groups of American citizens should be available equally and without bias or should not exist at all.

This past Friday I was fortunate to attend an industry event hosted by real estate investor and author Bruce Norris at the Nixon Presidential Library in Yorba Linda. As I listened to panelist after panelist admonish lax standards in appraisals and lending it seemed fitting to be sitting in a monument to the President responsible for eliminating the gold standard for American currency.  The event featured seven panelists representing various trade groups and professional sectors, each willing to share their perspective on the state of the industry and share their insight on how we might find a way towards prosperity.

More interesting though was the odd sense of too many doctors in the room.  One after the other, experts in their field gave descriptive accounts of what happened to the patient and why it was most important to be treated by their specialty first.  I envisioned an accident victim lying in an emergency hospital bed with ailments from head to toe.  The cardiologist focusing intently on the heart, the anesthesiologist making sure the patient is resting and stable, and the podiatrist yelling over everyone’s shoulder, “the foot is broken, we must do something about the foot…”

To be fair, not every speaker seemed self-guided or myopic in focus. Most speakers did share very insightful perspective, relating to accountability, opportunity and a need for a free market system.

Accountability

The startling quote of the evening was provided by David Kittle, President of the Mortgage Banker’s Association.  A regular on Capital Hill testifying on subjects like strengthening oversight and fraud prevention, Mr. Kittle suggested to the crowd, “85% of loans in default have some form of mortgage fraud.”  An astounding figure regardless of blame, this issue points directly to the problems unwinding bad bank loans both for lenders and the investors that backed them.

The room also heartily supported the idea of appraisers becoming more accountable for valuations, including sore spots like HVCC and AVM’s.  Joseph Magdziarz Vice President of the Appraisal Institute asserts this accountability comes from experience and education.  He went on to make a very good point - unless we all take an active roll in enforcing accountability by notifying AI when under-experienced or unqualified appraisers are assigned to your transaction, they cannot enforce these requirements.

Opportunity

Terms like “land grab” and “single greatest invest opportunity in our lifetime” were thrown around all night by guests and panelists.  Remembering this was an event for investors, the focus was on investment opportunity going forward and more specifically circled around the information shared by Rick Sharga, Senior VP at foreclosure experts Realtytrac.  Mr. Sharga noted, nationwide foreclosure activity has increased for 43 consecutive months and suggested we aren’t finished yet.  He warned of a double dip and pointed towards foreclosure activity increasing into 2010; hinting tremendous backlogs of shadow inventories and continued foreclosures will keep real estate markets in California struggling until 2012.

A clear opportunity for well funded investors, both Mr. Sharga and fellow panelist Christopher Thornberg, noted that the ultimate result for California will be more affordable housing for homebuyers as they re-enter the marketplace during the recovery.

Event host, Bruce Norris also proposed several interesting ideas to help banks address their backlog of non-performing loans. In particular ending the Fannie Mae 10 loan limit placed on investors, noting that the most skilled and successful investors have already maxed out and are forced to buy at steeper discounts using all cash, or left to find more expensive means of financing.  This ultimately erodes values and keeps the most successful and capable investors out of the market.

Mr. Norris also pointed to the seldom-used FHA 203k loan, suggesting that opening this loan to investors could be an opportunity to bring more buyers into the market absorbing the dilapidated bank inventory that plagues the marketplace.  This note was of particular interest to me.  My first purchase, though owner occupied, was a bank REO bought using a 203k loan.  A property I could not afford without the program, my next 30+ rehabs would not have been possible without it.

A Free Market System

Consensus was clearly reached regarding views on government intervention.  The panel pointed to tax credits, moratoriums, and bank bailouts, as short-sited fixes that only exacerbated the problems in the market.  One panelist suggested, “if there was no TARP money the problem would likely have been worse, but it would also likely have been over by now.”

The panel also unanimously agreed that moratoriums are creating a backlog in the system preventing an efficient resolution.  One panelist noted that it was likely we would be much closer to recovery by now had the process not been slowed by moratoriums.

Another panel member suggested a return to free market systems without government interference will lead to real valuations, solving many appraisal issues facing buyers and sellers.  Not missing a beat, the golden-throated Tommy Williams, President of the National Auctioneers Association offered, “The best way to resolve these appraisal issues immediately is auction.”

There were also stern warnings about cram down legislation and the potential impact on available credit in the future.  Imagine the risk premiums and conservative standards that would result if lenders knew there was the potential that bankruptcy courts could modify loan terms and / or loan balances at their discretion.

Overall, the guiding light across the real estate industry is one of reserved absolution.  As the finger pointing subsides and the industry retools for a new, reality based investment horizon home buyers, their lenders and everyone else involved in the transaction process will certainly be held more accountable for their actions as new investment capital searches for opportunity.  What’s left to be determined is how involved the government will be in shaping policy, influencing decisions, and directing efforts.

Traditionally, the mechanics of a real estate transaction allow for a seller to financially gain by selling their asset to the highest bidder. In these cases the broker/agents role includes advising on how to best position the property for sale, qualifying the potential buyers, negotiating for the highest price, and maneuvering through the logistics of escrow. But what happens when profit is removed from the equation?

What is a Realtor’s® fiduciary responsibility in a short sale?

First and foremost, a real estate professional should understand how the term is defined. According to the 2004 edition of California Real Estate Practice by Lowell Anderson, Daniel S. Otto, and William H. Pivar, a fiduciary duty is one of good faith and trust. “The agent must be loyal to his or her principal, placing the principals interest above those of the agent. An agent’s actions, therefore, cannot be inconsistent with the principals interests. The agent cannot act in a self-serving manner to the detriment of his or her principal.”

According to the National Association of Realtors a fiduciary responsibility is like an OLD CAR. the acronym used to account for the six duties outlined by NAR. These responsibilities include:

1. Obedience - the duty to promptly obey and follow all legal instructions of the principal
2. Loyalty - the duty to act in the best interest of the client, putting their interests above others, including your own
3. Disclosure - the duty to disclose all relevant facts affecting decisions of the principal during the transaction
4. Confidentiality - the duty to safeguard a principals secrets, unless doing so violates disclosure laws
5. Accounting - the duty to account for all funds and proceeds entrusted to you by the principal
6. Reasonable Care and Diligence - the duty to use all of your real estate skills in pursuit of the principals affairs, including the responsibility of knowing when you are beyond your scope of knowledge

Two Transactions

Short sales actually involve two separate transactions that occur simultaneously. The first is a real estate transaction, where the defaulted seller enlists a Realtor® to find a ready, willing, and able buyer to purchase real property. Most agents are very qualified to handle this part of the equation as it falls squarely within the scope of expertise shared by all. Like most other non-short sale transactions the agents and brokers are paid for this work by way of a real estate commission earned upon the successful completion of a sale.

The second transaction in the short sale process is a financial transaction. This occurs between the principal and the one or more lien-holders with financial claim against the real estate in question, over and above the net purchase price offered by a buyer in the first transaction mentioned above. Unfortunately many Realtors® attempting to handle this transaction do not have the technical expertise nor the experience to dutifully represent the principal in this matter. This transaction has legal ramifications, tax consequences, and can carry significant financial impacts. Additionally, unless an agent imposes a negotiation fee, paid by the lender on the HUD-1, they do not get paid for the work on this second transaction.

Understanding Who the Client is

In a world of REO’s it’s sometimes lost on the listing broker that his or her client is not the bank during a short sale. Quite the contrary. If you were to ask a loss mitigation representative at your local bank how they view a defaulted seller requesting a short payoff you might be surprised to find that the relationship is considered adversarial. Anything and everything collected by the banks representatives can and will be used against the defaulted seller when negotiating a settlement.

Effective customer representatives, asset managers, and loss mitigation specialists while sometimes warm and pleasant are building the banks case against your client with each and every financial document you share. You are not working together to find a solution. They are looking for ever last possible dime they can extract from your client before writing off the balance as a loss. Agents would be well advised to understand the dynamics of this relationship and exercise the utmost care with their approach in negotiating debts.

What Constitutes the Best Offer?

As I mentioned above, a defaulted seller walks away from a completed short sale with the same amount of money in their pocket regardless of the purchase price. Zero, zilch, nada. The short lender in the transaction will, as condition of their approval, specifically address this point and strictly prohibit the defaulted seller from any form of financial gain. As is the case in most distressed sales, the best deal is often not the highest priced offer, rather it is the offer that presents the greatest “surety of closing” to both the distressed seller and bank accepting the loss. My point here is not to contend that price is completely irrelevant; rather i’d suggest when reviewing multiple offers, consider how much staying power the potential buyers possess along with other intangible assets like buying / investing experience, and patience.

I’ve seen short sales completed in less than 90 days and I’ve heard of short sales that have taken longer than a year to complete. In most cases, the difficulty in closing a short sale is keeping an interested buyer motivated to close. It is not uncommon for retail buyers to submit offers on several short sale listings hoping at least one in the group will be approved by the lender absorbing the loss. The unfortunate reality is that many families cannot wait for months to make a housing decision. Parents need to accommodate work needs, kids have school schedules, and families, especially in this market, have other options.

How to Get the Ball Rolling - Offer Tactics

The short lender has no interest in discussing a short sale transaction unless a qualified offer is in hand. To address this issue, temptation sometimes drives a distressed seller and their agent to submit an offer, any offer, to the bank even if the buyer isn’t real. The use of “straw buyers” is a dangerous practice and walks an agent and their client down a slippery slope. Even if the principal suggests or demands the use of these tactics, the agent has a fiduciary duty to be obedient along the letter of the law. It is the agents responsibility to be aware of both legal and illegal practices and inform the client when such lines are crossed.

Only substantiated offers from real buyers should be accepted and/or submitted to the lender with a completed short sale package. If a home is languishing on the market, an agent has a responsibility to investigate and inform the seller what may be causing the problem, why buyers have not written offers, or why agents are avoiding showing their property. If a defaulted seller has waited too long into the foreclosure process to allow for normal marketing time, the agent has a responsibility to price the listing appropriately to allow for maximum interest from the buying community.

Putting it All Together

Fiduciary responsibilities require a broker / agent to enact a responsible business plan incorporating a full awareness of the real estate process. Understanding what can be done legally, determining who exactly is the client, discerning the clients objectives, protecting client interests, and diligently advocating on their behalf are primary to the agent / client relationship. Although the agents expertise and experience are relied upon for guidance through the real estate transaction, the agents fiduciary duty is to put the clients interest and desires above their own.

Short sales present a unique set of circumstances that likely contradict common practice due to the absence of profit for the principal, and the cumbersome financial transaction that accompanies the real estate sale. Broker / agents taking short sale listings bear the burden of responsibility to their clients to know when they are in over their heads. It’s not enough to simply declare yourself a short sale expert because distressed assets are the only properties selling in your marketplace.

Brokers and agents must understand the primary objective of the seller in a short sale is to avoid foreclosure. This objective is met only if and when a bonafide offer from a real buyer is submitted and approved by the lender modifying a debt. If you take a short sale listing, the bank is not your client and is not working in tandem with your principal to accomplish their goal. It is incumbent upon the broker / agent to understand this adversarial relationship, protect the interests of their client, and maintain a modicum of confidentiality on their behalf. A broker / agent who accepts a short sale listing must be willing to put subjective viewpoints aside and present all potential options objectively to the client. Finally, a broker / agent must understand from both the buyer and seller’s perspective the correct legal procedures necessary to complete the sale of property in imminent default.

The responsibility is great, but the reward of helping a client avoid foreclosure is even greater. If you educate yourself, understand the process, remain objective, and focus on the client’s goals your fiduciary duty can easily be maintained.

But first the stats:

National median home price is now $210,100 down 11.5 percent from July 2008 and .1 percent below June 2009 numbers.  As expected the drop in prices have shrunk inventories of available homes across the nation.  271,000 units are available, a 3.2 percent decrease June 2009 matching the lowest level since March 1993.  According to the commerce department, the supply of homes, measured by how many months it would take to exhaust the entire inventory of homes currently available for sale given the current pace of homes sold, stands at 7.5 months, the lowest since April 2007.

This information was released with news that the pace of new homes sales in July exceeded analyst expectations jumping 9.6 percent month over month, a fourth straight monthly gain, representing a 433,000 monthly rate of sales.  This is compared to a June 2009 rate of 395,000.  Not to be outdone, existing single-family homes sales in California increased 12 percent in July 2009 compared to July 2008, and the Golden State’s median price rose for the fifth straight month.

California’s supply of existing homes now stands at 3.9 months for July, compared to 6.9 months in July 2008.  The state’s median price is now $285,480 a 19.6 percent drop from a year earlier but a 3.9 percent increase over June 2009.

This continued increase in sales volume and shrinking inventories could boost home prices if the economy holds up but an unemployment rate of 11.9 percent in July and growing foreclosures continue to loom large.

Tuesday’s release of the Case Shiller numbers, though negative when compared to the previous year, are beginning to show positive trending.  Home prices on the 20 city index improved in the second quarter of 2009, the first quarter-over-quarter gain in three years.  Improving on the record decline in the first quarter (19.1 percent), the index posted a 14.9 percent decline in the second quarter of 2009 compared with the second quarter of 2008.  Still concerning, all 20 cities on the index posted annualized losses of value with 15 of the 20 posting in the double digits.

Now back to those underlying issues.  Many experts point to the $8,000 tax credit as explanation for increased sales activity.  The biggest question being what will happen when and if the credit expires this coming November.  In a recent article from the California Association of Realtors, C.A.R. President James Liptak said “The federal tax credit for first-time buyers played a critical role in the purchase decision of many buyers.  Nearly 40 percent of first-time buyers said they would not have purchased a home if the tax credit was not offered.”
Additionally, interest rates remain low as a the Fed continues to pump extraordinary amounts of capital into the bond markets.  The question remains will interest rates rise precipitously once the buying spree ends?  The free fall has ended for now and stimulus measures have had a positive impact on the recovery.  What remains to be seen is if the extended recovery will look like a “V” or a “W”.  The answer to that question depends on how effectively we unwind government spending in the bond markets, the end of stimulus bonuses to homebuyers, and how effectively we address unemployment and foreclosures.

Stay Tuned.

Negative equity continues to be the impetus behind defaults as many homeowners consider their real estate holdings too far gone to save.  Last month the average California residential foreclosure had a total loan balance of $425,134 compared to a current market value of $236,739 - meaning the average household owes the bank roughly 80 percent more than what their property is worth.  Staggering.

You may read the full California Foreclosure Report, or scan the highlights below:

• NOD’s – an 1.5 percent decrease from June to July.  44,996 total filings, which is an 11.9 percent increase over July 2008
• Trustee Sales – a 31.6 percent increase from June to July.  39,294 total filings, which represents a .7 percent increase over July 2008.  Also indicating the fleeting impact of the California Foreclosure Prevention Act.
• Auction Sales – a 22.7 percent decrease from June to July. 17,239 total sales representing $8.08 billion in value.  This decrease follows three consecutive months of increased sales at the court steps.
• Auction sales that went back to the lender reached 14,555 totaling $6.93 billion in loan value.  This amounts to 84.4 percent of all sales at auction.
• Auction sales sold to investors at the court steps were flat in July 2009.  A total of 2,683 properties sold to investors or junior lien holders.  Although a small percentage of total sales, third party sales continue to increase
• Lender discounts at auction averaged 39.1 percent of the defaulted loan balance. 45 percent of sales were discounted 50 percent or more
• Scheduled foreclosure sales rose 10.4 percent from June to July.  Total scheduled sales have reached 124,874 which is a astounding 93.3 percent increase from July 2008.  July 2008 had set the previous record for scheduled sales until it was eclipsed this July.
• Cancellations - July 2009 posted a record for cancelled foreclosure sales with 10,789 cancellations, a 24.8 percent increase over June 2009 and an 86.3 percent increase over July 2008

The good news in all of this is the apparent willingness banks are showing to attempt to work out foreclosure problems via loan modifications, or short sales.  If homeowners can’t find a solution to stay in their homes they may find an opportunity to minimize damage to their credit by avoiding a foreclosure via these means.  I would also expect that banks are preparing for bulk releases of residential assets, either defaulted loans or foreclosed assets in the coming months as prices continue to show signs of stabilizing, spreads between bank expectations and investor valuations decrease, and confidence is regained.

The brown spot on the banana is the growing backlog of problem assets.  As the summer buying season winds down and banks look to right their balance sheets at year’s end, we could see increases in supply and dramatic decreases in demand.  for those of you who skipped economics 101, this is bad for value.  Regardless, there continues to be very strong demand and plentiful cash available from the investment community ready for the Great Re-Pricing of America.

For the first time since 2006 I’m able to report that home prices in the Case Shiller 20-city index have improved month over month.  Yes, you’ve read that correctly.  In addition to the increased home sales for June, increases in the median home price, also this past June, Case Shiller now tells us that pricing may be stabilizing.

According to the Wall Street Journal “most Wall Street economists who discussed the survey focused on the April-to-May rise, saying it represents a significant change in direction. Home prices in 15 of the 20 areas in the survey rose or remained stable.” The stats were somewhat unexpected, surprising the study’s co-creator Robert Shiller himself.  In the same WSJ article Mr. Shiller states “The change in momentum here is very significant.”   The Journal goes on to say “Mr. Shiller forecast sustained home-price declines into the next few years, which he said now looks less plausible. He said he expects home prices to remain near current levels for the next five years.”

Although Los Angeles wasn’t a winner, many cities seem to be benefiting from price levels which induce investors back into the marketplace, low down payment government insured loans, and tax incentives that entice home shoppers continue to entice shoppers to jump in.

But it would be foolish to assume all is well as many key issues continue to haunt the housing markets.  In a recent LA Times article Maureen Maitland, vice president of index services at Standard & Poor’s cautioned, “in terms of a sustained recovery, we’re not out of the woods yet, What we need is for this to continue for quite a few months.”  The National Association of Realtors reports that 31% of all home sales in May and 33% in June were either foreclosure sales or short sales.  Unemployment rates are still incredibly high and according to Mr. Geithner this morning jobless claims may not peak until the second half of 2010.

Clearly we have not seen the end of the housing slump, yet the summer of 2009 has given us signs of what the bottom may look like once we’ve resolved our unemployment issues and worked through the mounting mortgage defaults looming before us.   Los Angeles prices are 42% below their peak in 2006.  By reaching that level buyers have shown their willingness to buy.  Further enforcing current price levels, investors have jumped into the market full force buying properties for the income it generates, or at wholesale levels willing to cure physical and financial defects so they may return the asset back to market ready for retail home buyers.

For me the most promising signals include the return to fundamental investing and prudent home buying decisions.  The market is clearing the system of speculation and artificial means which over inflated demand and drove prices to the ethers.  The investors that remain have large sums of investment capital and a working strategy for distressed markets.  Home buyers with verifiable income are qualifying for fully documented loans and in many cases are buying with significant down payments.

Two things we can all agree on are 1) things are bad and 2) they will get better.  If buying decisions are made in difficult times, with prudent and conservative projections on growth, new investments should have staying power.  You may get lucky now and then, but overall it’s a losing proposition to try and time the market.  Make your buying decisions expecting no appreciation or even temporary declines.  If you buy for investment make sure you can truly add value by physical improvement or by removing distress.  If you are buying a home to live in, assume you won’t be able to sell for a profit for another five years.   Do a rent vs own analysis and make sure you don’t stretch too far on your monthly payment (another hint: assume the worst regarding future interest rates).

More simply - Buy smart!

Think about that for a second…  Nearly one of every three homes sold last month was sold for less than what was owed to the lender.   According the the National Association of Realtors 4.89 million homes were sold in June, meaning 1,515,900 times the banks agreed, or were forced, to take a loss.  To put this in perspective, if you sold every home in New Hampshire, North Dakota, and Vermont for less than the owners paid, you would still have to sell all of the houses in Wyoming for a loss before you reached the same number of losses the banks took in June.  These figures are simply staggering.

But what does this all mean to home buyers and sellers?  If you are a homeowner in Southern California and purchased your house within the past seven years, it’s very likely that your home is worth less that what you paid.  Worse yet, if you borrowed 90% or more against your house, you owe the bank more than it’s worth.  Understanding that most families buy and sell every five years this means that if you bought around 2004 or 2005 you’re likely to consider moving.  If you wish to do so, the statistics show you won’t be leaving with any money and you will have to convince the bank to take less or face foreclosure.

If you haven’t lost your job, don’t have a loan that resets to a higher interest rate, or if you aren’t paying less than the full monthly freight (see negative amortization loans), you may decide to stay.  That is unless you face a personal reason you must move, like job shifts or other personal family matters.  Unfortunately for many this choice is not that simple.

Many families live month to month.  Even the slightest shift in income can offset the ability to pay for the most basic of needs.  Gas, heat, food, all become difficult purchases, and the largest expense, our mortgage payment, becomes nearly impossible to meet.

As our recession continues, each of us becomes less insulated against the downturn and we begin to see how interwoven our economy has become.  How dependent our upper-middle and upper class families are on the large consumer pools found in the lower and middle class working families.  When greater America stops buying goods, the business owners who sell them quickly fold.  Even the most mighty of companies begin to falter.

However, Americans are opportunistic people.  The drive to succeed and freedom to do so make us a unique and resilient nation.  When faced with adversity we re-think the problems and find a new solution.  Eventually a new brand of commerce emerges from the ashes and people get back to work.  The solutions are rarely dictated by oversight committees or government intervention rather, they are driven by the force of the American will and the desire to survive.  What emerges from this will is a firm footing and return to sound fundamentals.

In commercial real estate this translates into investments that generate income based on actual information, not speculative projections.  in housing it means that borrowers and home-buyers rely upon their actual ability to pay the mortgage as compared to the the ease at which they can borrow money to make their housing decisions.  In city planning it means that public funds will go towards projects of need not political fancy.  Finally in development it means that the Field of Dreams mentality has left the building.  Now you only build if they’re there….

Ultimately the result is the continued re-pricing of America.  The need and desire for real estate assets does not dissipate or disappear, it simply expands or contracts as needs shifts within our economy.  Many factors continue to challenge the real estate industry and many concerns are yet to be addressed.   Amid the chaos, slivers of light continue to find their way through the clouds.

This weeks home sales figures indicate a convergence of two key components of the housing market - the desire to buy and the ability to pay.  Without a willingness on the part of consumers to place their funds, transactions do not occur.  Without the ability find those funds even the most determined consumer cannot buy.  America’s housing market, which led us into this recession, seems to be telling us that we may have found a bottom.  Even though lenders have tightened the purse-strings and job losses abound, prices have dropped to a level where more of us are willing to take the plunge into home ownership, more and more with each passing month.

But what about those foreclosures?  First, it’s important to note that we are not out of the woods yet.  Many homeowners still face foreclosure and many banks hold large inventories of non-performing assets.  Second, pace is a very important factor.  We are in the peak of of the summer home-buying season and banks have slowed the pace at which they foreclose or deliver REO properties to market.  If banks dump foreclosures en masse on the marketplace when home buyers all but disappear in the winter months we may see reversal of trends.

For now, if you feel it’s the right time to jump into the home market, you’re not alone.  If you’ve waited and watched over the past five years wondering if you’d ever have a chance at the American dream, feel vindicated that your chance is now before you.

Happy shopping.

The first, home sales.  A total of 23,262 new and resale houses and condos closed escrow in San Diego, Orange, Los Angeles, Ventura, Riverside and San Bernardino counties last month; a figure representing roughly 53 percent of all the sales in the state. This figure is up 12 percent from 20,775 in May and up 29 percent from a revised 18,032 a year ago.  Interestingly, home sales have increased year-over-year for 12 consecutive months.

Foreclosure resales are waning (albeit temporarily) yet still represent 45.3 percent of Southland resales in June.  this is the second consecutive monthly drop down from 49.7 percent in May and down from a peak of 56.7 percent in February 2009.  The June level was the lowest since foreclosure resales were 43.7 percent of all resales back in July 2008.

The next big stat, the median home price, reflecting the price which half of the sales were lower and half were higher, also edged upward.   Likely the result of fewer foreclosures and lower end homes finding a bottom, we should all be careful not to assume this means values are again rising.  For the better part of the past 6 months the higher end housing market in California was effectively frozen.  Few new listings hit the market, lenders were nowhere to be found and more buyers waited on the sidelines.  Now that the prime selling months are upon us it would be expected that more patient sellers would test the waters.

From a more pessimistic perspective, unemployment continues to hamper the ability of wealthy homeowners to pay their mortgage.  The fortunate few able or willing to wait out the worst of our housing slowdown may now be coming to grips with the fact that prices will not likely rebound significantly in the near future.  The result is that more expensive homes come to market.

As I read through the information earlier today, I was reminded of a 10 year conversation I’ve had with a longtime friend and client about the real estate market in Southern California.  My good friend has spent the better part of that time supporting his argument that the housing market is ridiculouly overpriced and that the bubble would soon burst.  My stance was that housing prices fluctuate from time to time, however Los Angeles as a long term housing bet is simply a good one.

Feeling vindicated my friend is finally willing to become a first time homeowner.  However, given enough time isn’t every prediction correct?  The clear issue affecting value today is the amount of foreclosure or distressed properties on the market.  The general public can’t or won’t pass up a bargin, so when available these bargins are pursued.  However one item of interest I pull from the statistics is the resiliency of the marketplace.  I don’t assert that we will see an immediate jump in values or a quick return to the heady days of the real estate boom, but I do believe that Los Angeles, and the greater six counties, will always attract people to live here.

Unlike the great expanse of middle America or northern climates that produce dreary weather and limited commerce, sunny Southern California boasts the 17th largest economy in the world.  The LA region also has a larger population than 47 of the 50 states, excepting California itself, New York and Texas.  Yet beyond the gravitational pull for both economic and climate reasons, Southern California, is an essential part of the American urban fabric.  It is one of America’s great character cities.

Like New York, Chicago, Philadelphia, and San Francisco, Los Angeles is the vibrant public image of America.  One of the great cities that allow citizens to be a part of something bigger than themselves.  For that reason, the LA region will continue to be a hub and connector to other great cities around the world.  It’s proximity to the Far East means that it, along with San Francisco, will be the American link to the world’s largest population and the fastest growing economic region.  Positioned for importance and comfortable with the limelight Los Angeles is securely fit among the best for urban, social and cultural importance.

Although timing currently favors buyers over sellers, Los Angeles and it’s housing market continues to be a good bet.