Looking back at some of the financial events of the past year or so, I recalled this article from Wired which dicusses the  Gaussian copula function, a formula which is used to price CDO's. The article shows that one should look quite deeply into the underlying data rather than look only at a correlation between to pools. As the article notes, we have to understand the reality that the numbers we see represent. That's why I like working at the street level too. Mathematics for the sake of mathematics is just a puzzle for enjoyment. Pretty interesting history.

On a further note regarding the ABX, an index that tracks credit default swaps, a recent article shows that the ABX predicts greater losses than what are realized in the securities. The authors imply that the index is imperfect for marking-to-market mortgage portfolios. The article can be found here. Its a pretty big bite of technical sandwich so fill the coffee pot. As accounting rules change, this could be a bigger deal.

The Conference Boards leading economic index pointed up again in June, registering 100.9, up from 100.2 in May. This is the third month that the index has shown increases. This is a welcome sign, however it would be premature to say that we are out of this mess. The coincident and lagging indicators still point downward. However, the coincident index is showing smaller declines than the beginning of the year.

Some observers point to this as evidence that the recession may end sometime at the end of this year. Housing starts have also been noteably higher, though still far less than June 2008, which makes sense since some areas still have excess inventory. I don't see these as signs that a "V" shaped recovery is possible but outside of the employment figures, the pace of decline looks like it is slowing. In local markets, we have to keep an eye on commercial real estate losses, which regional and community banks tended to have exposure too.

In Las Vegas, record home sales are a sign of confidence in the long-run potentials of the area. After a recent weekend in Los Angeles, I find it noteable how much better looking the infrastructure in the Las Vegas Valley is. I also find that compared to a lot of larger metros, Las Vegas looks quite clean and is reasonably efficient, despite years of trying to keep up with an increasing population. We look forward to the local population estimates this summer so we should have an idea of how the economy may have effected population growth. 

Link to Housing Starts: http://www.census.gov/const/newresconst.pdf

Link to Conference Board: http://www.conference-board.org/pdf_free/economics/bci/begweek.pdf

The administration is struggling on how best to handle our current real estate market and correct the errors of the past.  The HVCC (Home Value Code of Conduct) is under great scrutiny and with some luck on the verge of repeal.  This, as well as, tightening guidelines was an attempt to make the home valuation process “less biased” for those who stand to profit from the real estate transaction (e.g. Mortgage Lenders and Real Estate Agents).  The aftermath is a much slower appraisal process al la the VA appraisal process where the lenders have no idea which appraiser is hired to perform the appraisal until the finished report ends up in their email box.  We applaud the efforts to “fix” what happened in the past this process just doesn’t achieve its intended purpose.

In another attempt to make the real estate purchase process more “transparent” for buyers is the new Mortgage Disclosure Improvement Act (MDIA because we could all use another acronym!).  MDIA has a basic numeric identifier 3/7/3. 

The lender has 3 days from the date of application to disclose the Truth In Lending (TIL-see another acronym) disclosure showing financed amount, and Annual Percentage Rate.

The borrower has to wait a minimum of 7 days to close on the loan.

IF for any reason the APR adjusts more than .125 percent a new TIL must be issued, the buyer MUST wait 3 additional days before they will be allowed to close AND can cancel the mortgage if they so choose!  If they chose to cancel PHH would charge their cancellation fee and the buyer would not be (FHA excluded) entitled to their earnest money back.

The new MDIA goes into effect at the end of this month (July 30th) and poses another challenge to our being able to close in a timely manner.

SOLUTIONS to the MDIA and the HVCC:

MDIA- Write your contracts with a 45 day close of escrow or if you receive an REO acceptance of offer with a close date less than 45 days out IMMEDIATELY write an addendum for an extension of close of escrow especially when there is a per diem penalty written into the contract. 

HVCC-  To minimize the impact of the HVCC write your contingency periods for 15 days and/or if you have not received your appraisal from your lender within 10 days write up an extension.

Dave Reichert CMP & Ray Melton

Mortgage Advisors

PHH Mortgage

While the data still shows that single family new home permits in Las Vegas were below 500 for the 10th consecutive month, we did see an increase from May to June and sales activity at new home communities is also increasing.  This trend is occurring across the country.

One of the advantages Developer Services has, being part of a highly successful general brokerage, is that we constantly glean information from our sales professionals who are making it happen every day.  With the substantial reduction in resale inventory since the first of the year and many homes receiving multiple offers, some buyers are opting to purchase a new home to avoid the hassle of purchasing an REO property along with numerous other advantages. 

Our friends at Wells Fargo recently provided us with some of the top reasons today's buyers are considering and purchasing a newly built home including:

• Conforms to today's building codes and often have more safety features and fewer health hazards than older homes.
• Offers warranties in case certain problems develop over time - - and the home's major appliances and systems are typically covered by manufacturer's warranties.
• Reflects the latest in modern architecture and layout.  Great rooms, bigger closets and additional bathrooms often replace the formal dining and living rooms found in older homes.
• Is more energy efficient in design with better windows, more efficient heating and cooling equipment and a more extensive use of insulation.
• Is built with materials requiring less maintenance, such as aluminum siding, vinyl windows and pressure-treated wood decks that resist rot and insects.
• Has the ability to be customized more easily than a resale home, since you can often select many options and details ranging from floor plans and paint colors to faucets and light fixtures.
• Boasts wiring for today's technologies such as multiple phone lines, high-speed Internet connections and extra cable outlets.
• Provides additional opportunities to meet new friends as the neighborhood develops and new households move in. 
• With energy costs near the top of consumer concerns, it's good for them to know that today, new homes are more energy- and resource-efficient than ever before.  Through the use of new materials and construction techniques, today's homes are built twice as energy efficient as new homes a generation ago, making them more affordable to own and operate. 

New home construction has and always will be a key driver of GDP for the U.S. economy.  Purchasing a new home supports local jobs and the local economy.

While a large segment of the market will continue to be driven by foreclosures, the new home market, while having experienced its toughest test to date in its history, will survive and eventually stand tall again.

Last month sales of homes in the Las Vegas Valley were the highest recorded. Even higher than those go go years of the middle decade. The market for many types of homes appear to be below long-run trends, so in addition to giving back the gains made during the bubble, home values have extended that into an overcorrected phase. Supply was excessive from myopic overbuilding, exacerbated by credit constraints effectual demand hurt by unemployment. Currently, the affordability scenario has improved so much that many buyers are back in the market.

Months of supply of marketed homes is now at levels not seen in years. Banks are dribbling out the inventory and many buyers have to put offers on a lot more homes before they can get one excepted. There is a lot of inventory not listed for sale but they are entering the MLS slowly. It is likely that if more REO inventory was supplied, the sales figure would be even higher. The exhibit below shows how far we are below the peak of months of supply for single family homes.

Source: GLVAR, Coldwell Banker Premier Realty.

A lot of folks are asking why banks will not work with them in alleviating their mortgage burden. Statements like, "if they just knocked off a couple grand I would be happy to stay and pay the loan"  or "please help me stay in my home" is nearly commonplace language for people who bought during the bubble. Some observers have blamed the banks for being incompetent or irrational or outright nefarious. If we understand that firms are profit maximizers then there must be other reasons for banks not working with struggling homeowners.

One of the popularized explanations is securitization. That you cannot modify a loan when it has been pooled with other loans. PSA's or pooling and service agreements dictate how modifications can be performed and sometimes a services can only perform modifications on a certain number of mortgages. While it sounds plausible that this would be an obstacle in working with borrowers, authors Adelino, Gerardi and Willen find evidence that this is not necessarily the culprit.

In a Boston Federal Reserve Paper, Adelino, Gerardi and Willen posit that the reason lenders do not work with deliquent buyers is that (direct quotes after the numbers):

1. lenders expect to recover more from a foreclosure than from a modified loan.

2. renegotiation exposes the lender to two types of risks that can dramatically increase its cost.

    a. "Self-cure" Risk: 30% of seriously delinquent buyers make up the missed payments without a modification. This implies that money spent on the modification is simly wasted by the lender.

   b. Borrowers redefault. In their sample, a large proportion of the modified loans went into default six months after the modification.

In a land of falling home prices, delaying a foreclosure actually costs more money. Further, as homeowners are aware that they may be walking from the home, they put less expense in maintaining the home or in some cases, they deliberately damage the property. This is a reason why banks would rather foreclose on a home and market it as soon as possible.

Currently, we are seeing banks use a short sale process more and more and this may be due to accounting requirements as well as Federal oversight or in some cases lenders may find that the servicing of short sale properties is more efficient than REO's. One thing is for sure, in a dynamic environment like this, we really have to be quick to educate ourselves.

The Adelino, Gerardi and Willen paper can be found at http://www.bos.frb.org/.

We recently presented our Premier Investment Series to our retail army of 330+ sales professionals.  The following provides a summary of what was shared:

• Market IQ - From monthly market synopses, quarterly regional and economic housing summaries, consumer demand reports and more, we have the information that will satisfy the most discerning and analytical clients including builders, developers, investors and financial institutions.
• Key market indicators:   With the resale median price in Las Vegas approximately $125,000 and the bulk of sales and listings under $100,000, there has never been a better time in the history of Las Vegas real estate to purchase rental investment properties.  
• Gross Operating Income Report:  This report conveys a strong value proposition to investors illustrating the cash flow opportunities available in purchasing single family homes and condominiums in Las Vegas.  We have segmented this report by zip code to assist in targeting the location(s) of choice.  While this report is based upon averages it provides a powerful tool to assist investors in acquiring the right assets for their portfolio.
• Advantages and areas of concern of investing in residential rental properties:  It is important to know each of these, particularly if you are a first time investor.  More wealth in our country has come with investing in real estate than any other investment and today presents a unique environment that we may never see again in our lifetime. 
• Investment Strategies:  Purchasing with the intent to hold and rent or lease-to-own will most likely be the primary strategies of today's investor.  Some may desire to purchase with the long-term goal to convert to a 2nd home or primary residence at a later date.  Regardless of an investors exit strategy, the primary objective is to make their liquid assets work for them today to generate positive cash flow while taking advantage of the numerous benefits associated with owning residential rental property.
• Rental Investment Analysis:  CBPR has created an Investment Analysis worksheet to assist investors by understanding cash flow before taxes, cash flow after taxes, taxes due on sale and a performance summary that will highlight how utilizing cash and leveraging the asset will yield significant returns once the property is sold after a reasonable holding period.
• Partnerships to Success:   Leveraging the professional relationships CBPR has with our Concierge partners will assist investors with any legal, tax, property management, insurance, inspection, financing, and property improvement questions they might have. 

Email us at info@cbprds.com for any of the related market reports.

Well in another attempt to "help" the embattled mortgage process to be more forthright and transparent for buyers something akin to a purchase "rescission period" is on the horizon that goes into affect July 31st 2009.  While very much well-meaning and a good idea in theory, there may (will) be times when this new act will slow your transactions down.  I am going to paste a good synopsis from the big guns at PHH and post a summary and how you can use this to make money at the end...
 
For applications taken as of July 30, 2009, new requirements about the delivery and the accuracy disclosures will apply. One of the new requirements is that the borrower must be provided with an accurate APR disclosure at least three business days prior to closing. It must be in their hands three business days prior to closing and they are permitted to close on the 3rd business day after receiving it or later
 
An easy way to remember new rule is 3/7/3. This means

3 days after application – An initial truth in lending statement must be provided no later than 3 business days after receipt of the application. Our current process which generates an auto-compliance package complies with this requirement so no changes are needed.

7 business days after initial application – Waiting period - the borrower is not permitted to close until at least seven business days have passed since the TIL was placed in the mail or provided to the borrower.

3 business days prior to closing – Waiting period - The borrower must receive an accurate APR on their TIL at least 3 business days prior to closing. If it was provided before that period of time because the loan terms were locked in earlier in the process, no new TIL is required if there is no change to the APR or the change is less than 1/8th (¼ for construction loans).
 
If the final loan terms cause the TIL APR to be understated by more than 1/8th, a revised TIL with an accurate APR must be provided to the borrower so they receive it at least three business days prior to closing. It must be in their hands at that time and they may close on the 3rd business day after it.

Things to consider.  Fees determine the APR so if for any reason (title charges for a bank owned transaction for example) fees are more than anticipated at the time of the first Truth in Lending disclosure a new one must be sent and the buyer has to consider the purchase for 3 days BEFORE they can sign loan documents.  This new rules applies to all lenders.  Changes made at the closing table to appease a customer and having new documents sent to the title company that day are not an option after 7/30/2009.
 
Set yourself up for success and do not write any contracts with a 30 day escrow when financing is required; I have been saying this for roughly a month now.  Now am I saying that the 30 day escrow is done?  No.  Is it on the ropes and ready to go down for the count...most assuredly.

Use this new information as weapon in your arsenal to let your buyers that require financing know that the longer they wait the more likely a new lending wrinkle may sideline them as a buyer for the foreseeable future.  Interest rates are still at historic lows and prices are back to circa 2004 pre boom; what better time than now what better place than Las Vegas!?!?!

Contributed by Dave Reichert at PHH Mortgage

Preliminary June numbers (not all the sales in June are recorded yet) demonstrate that the recent several months increase of home sales continues. Single family home sales suggests have topped anything we have seen, even going back to 2004. A lot of homes are receiving multiple offers, particularly in the affordable home tier below $200,000. This is not just anecdotal info from real estate agents as you can see the manifestation of what is essentially a silent auction process in homes selling over the list price. Thirty five percent of the single family homes sold last month went for greater than list price. In the past year, sellers, mostly banks, were chasing the market downward. Now they are getting in front of the market and many homes go into a contingent or pending sale status within less than a month. While pending home sales dipped slightly, the amount of contingent sales indicates that the next couple of months should continue to see strong sales.