Top 7 Things You Should Know about Financial Regulation Overhaul

Top 7 Things You Should Know about Financial Regulation Overhaul
By Kevin G. Hall Print Article
RISMEDIA, July 17, 2010—(MCT)—With final Senate passage of the broadest overhaul of financial regulation since the Great Depression, the hard work really starts. Regulators must fill in the blanks in the legislation, and a new agency to protect consumers must be erected from scratch. The landmark legislation will bring lots of changes. Here are some answers to common questions about the changes that will come about under the overhaul of financial regulation, and how it will address some root causes of the deep financial crisis.
Question: What does the legislation do for ordinary folk?
Answer: The most significant change is the creation of a Bureau of Consumer Financial Protection, which will be independent but housed in the Federal Reserve, the nation’s central bank. This new bureaucracy will have a single mission: consumer protection for credit products such as mortgages and credit cards. That responsibility had rested with multiple bank regulators, none of whom treated it as a priority.

Q: What does that mean for home buyers?
A: The law includes a number of provisions that restrict predatory lending. The question is how aggressively the new bureau oversees mortgage lending. For example, will it set ironclad limits on so-called “liar loans,” in which there was no income verification for mortgages? Will it ban adjustable-rate mortgages with low teaser rates that allowed borrowers to get into homes they couldn’t afford? The bureau is also expected to force lenders to use clear language about borrowing costs.

Another important change is tough regulation for mortgage brokers. Many borrowers erroneously assumed that these brokers had their best interests at heart, when in fact there was no fiduciary duty to borrowers. Rather, lenders rewarded many brokers for getting borrowers into ill-suited mortgages.

The new law “ends steering payments that put mortgage brokers’ interests out of sync with buyers’ interests,” said Sen. Jeff Merkley, D-Ore. He also authored some of the tough restrictions on what banks can invest in if they’re also investing money on behalf of clients.

The new bureau is expected to be most aggressive on mortgages, after the Fed failed to use the power it’s had since 1994 to rein in reckless mortgage lending.”We can’t have that happen again. We’ve got to be very, very tough and consistent on this point,” said Sen. Jack Reed, D-R.I.

To the ire of consumer advocates, however, the new agency will have only limited powers over auto lending.

Q: Would this legislation have prevented the financial crisis?
A: That’s hard to say for sure, but it certainly would have given regulators the power to break up large failing financial firms, and there would have been transparency about who owes what to whom. The absence of such factors amplified the crisis of September and October 2008.

Q: How does this legislation fix what went wrong?
A: Various federal regulators will sit together on a “systemic risk” council that will police threats to the entire financial system. They’ll also get so-called “resolution authority” that allows them to deconstruct a failing large financial firm in orderly fashion.

During the crisis, bankruptcy was the only option. That would have pitted creditors against shareholders and created panic. The Bush administration orchestrated the fire sale of investment bank Bear Stearns in March 2008, preventing panic. It tried to do the same with Lehman Brothers in September 2008, but when that failed, Lehman went bankrupt.

The ensuing panic nearly caused the collapse of global finance. That was prevented only by a massive government bailout program that was deeply unpopular with voters, and by the Federal Reserve’s direct intervention in financial markets.

Those dark days occurred in an environment of little transparency about complex financial instruments called “derivatives.” Investors, regulators and even CEOs of major financial firms were in the dark about some of these instruments. Absent clear information, everyone ran scared.

Q: We hear about transparency all the time. Why does it matter?
A: The lack of information about complex bets made on the probability of bond defaults was one reason the Federal Reserve stepped in and took majority ownership in insurance giant American International Group (AIG). Trillions of dollars’ worth of private two-way bets were occurring outside regulators’ view, and AIG was the biggest player. Today, taxpayers could still be on the hook for about $162.5 billion, partly due to AIG’s involvement in credit-default swaps.

Under the new law, however, deposit-taking institutions will be forbidden from significant involvement in the market for these swaps, which are bets on the chance of a bond default. Most derivatives transactions will have to occur on an exchange or central clearinghouse. There’ll be real-time information about any given trade and, more broadly, about the swaps market—data that didn’t exist when the meltdown hit in 2008.

Greed or malfeasance won’t disappear from Wall Street, but regulators and investors will have more information than ever before to combat it.

Q: How does the legislation deal with Fannie Mae and Freddie Mac?
A: The Obama administration and congressional Democrats opted to leave Fannie and Freddie out of the bill, ostensibly to address them in separate legislation once the housing market recovers.

Fannie and Freddie buy mortgages originated by banks, then bundle them for sale to investors as bonds. From 2000-2006, Wall Street banks jumped aggressively into this business and out-competed Fannie and Freddie. In 2007, these Wall Street bonds backed by pools of U.S. mortgages began blowing up, and on came the financial meltdown.

Right now, Fannie and Freddie are the only mortgage-bond game in town. The private sector’s secondary market, where Wall Street banks passed on their mortgages, is frozen. When this market revives, banks and other mortgage originators will have to keep a portion of what they generate on their own balance sheets to ensure they have capital at risk. This wasn’t required during the run-up to the crisis.

Q: Will the bill prevent financial crises?
A: Probably not. The legislation mostly fights the previous crisis, not the next one, and Wall Street always finds innovative new ways to make markets spin. Regulators are empowered with new authority to police for risk. Banks will be required to have more cash on hand to cover losses. This will limit their risk-taking capabilities, and the authorities can order big financial firms to get smaller or face government intervention.

Financial markets are highly complex and ever-innovating. A hard lesson of the financial crisis is that markets are profoundly interconnected, and in unexpected ways.

When Lehman Brothers filed for bankruptcy in September 2008, an unpleasant surprise followed days later.

Investors fled money market funds that pay 2 or 3% interest. To pay that interest, the funds take deposits or contributions and invest them in short-term debt issued by corporations called commercial paper. This sort of activity was always viewed as risk free.

However, Lehman was an issuer of commercial paper, and when it went bankrupt, panic ensued in places no one expected. Big manufacturers such as General Electric suddenly couldn’t find buyers for their short-term debt, and investors frowned on putting savings at risk for the small returns offered in the money market funds that days earlier had been considered as safe as cash.

That’s all to say that linkages are often hard to see. The best the legislation can hope to achieve is to provide regulators with an ample tool box, and it appears to do that. It will be up to the regulators to use the tools wisely.

(c) 2010, McClatchy-Tribune Information Services.

Posted by Mark Gipple on 07/17/2010 in — Add a Comment

Simplifying the Process: Lowe’s and RE-buildUSA Streamline the 203k Loan Process for Agents and Th

Simplifying the Process: Lowe’s and RE-buildUSA Streamline the 203k Loan Process for Agents and Their Clients
By Stephanie Andre
RISMEDIA, May 7, 2010—In today’s stringent credit climate, the process of securing a loan approval involves many details that can be easily overlooked by prospective home buyers. The 203k loan—an FHA loan that enables home buyers to purchase and renovate properties—adds a new dimension to the loan approval process. From finding licensed and trusted contractors to detailing the scope of work involved in the renovation plans, obtaining a 203k loan requires a special degree of knowledge.

So why not simplify the process? Well, that’s just what industry veterans Dennis and Teresa Walsh did last year by launching RE-buildUSA, a designation/membership program that turns agents into 203k Specialists.

Together with Lowe’s, the Walshes educate real estate professionals and prospective home buyers about 203k, most recently on the West Coast where Lowe’s recently launched its 203k initiative in a region that encompasses major metros such as San Francisco, Salt Lake City, Sacramento, Lake Havasu and Las Vegas.

“Lowe’s is partnering with RE-buildUSA to help facilitate the home-improvement needs of home buyers acquiring distressed properties,” explains Nick Mraz, Lowe’s regional sales director who works extensively on the 203k initiative. “The Walshes brought a real asset to the table…the 203k certification. It’s an asset to both an agent’s clients and to the community as a whole.”

Why It Works
The reason the 203k certification works is because it’s comprehensive training that offers an agent entrance into RE-buildUSA’s 203k program and online member center. The full program includes a Project Portal and access to marketing ideas and materials, blogs and forums and information on the program’s additional partners, such as Lowe’s, Oakley Sign, Pillar To Post, Merrill, Obeo and PODS.

“We’ve been working for a long time to build the technology platform to support the program,” explains Dennis Walsh, CEO of RE-buildUSA. “The way the program is structured, the real estate professional only becomes a member after completing the five-hour certification course. It’s only at that point that he or she gets full access to the RE-buildUSA Membership Center and Project Portal.

“One of the frustrations when working on a 203k loan is finding licensed contractors and handling the paperwork and financing,” adds Walsh.

From Lowe’s perspective, the program is a win for all involved.

“We fit in this scenario perfectly,” says Mraz. “Lowe’s is a perfect fit because we can help the lender by outlining what they need and help the customer by taking away the stress of trying to find a contractor or installer*, or both.”

Simple as Filling Out a Form
A key component to the 203k certification is access to what RE-buildUSA calls the “Project Portal.” It’s there that the truest value comes into play.

The idea is that once the agent has a 203k deal ready to go, the process takes just minutes to complete. From the Project Portal, the agent fills out an online form, which includes detailed information on the buyer and project. From there, once the offer is accepted, it becomes contingent on inspection, the submission of the scope of work and the 203k financing itself.

“It can be a challenging process for the average buyer or untrained agent,” says Walsh. “This was the reason we created the Project Portal. We said, ‘We really have to simplify this process.’ Using the Project Portal, our 203k Specialists can easily submit key project information in less than five minutes. That information then gets disseminated to our partners in the program to help expedite the process in a much faster and streamlined way.”

For example, once the Project Portal data is received by Pillar To Post, RE-buildUSA’s home inspection partner, the company immediately contacts the agent to conduct the home inspection, which, in this case, is designed specifically to meet the FHA standard requirements of the 203k loan.

“Their entire inspection revolves around making sure the home meets proper FHA standards and guidelines,” says Walsh. “While there, they’ll also make additional recommendations about repairs that may make sense to include in the 203k renovation. Rather than being confronted with costly repairs a few years down the line, the homeowners can roll these expenses into their mortgage at a lower cost and interest expense.”

While all of this transpires, Lowe’s is working for the client at the same time.

“Lowe’s contacts the customer immediately,” Walsh says. “The idea is to help them immediately begin the process of choosing flooring, cabinets, appliances, etc., so they can move quickly to the closing table. The product specialists at Lowe’s help customers finalize their choices, review their scope of work and ensure that each customer has all the proper documentation and paperwork needed for the lender to finalize the deal.”

Lowe’s also is able to track the customer’s 203k progress through the Project Portal to schedule appointments, access project data and coordinate communications.

All Points East to West…and Soon, in Between
Already a success in Florida, in late March, Lowe’s rolled out its 203k initiative on the West Coast, starting in San Francisco at Prudential California/Nevada Realty.

According to Prudential California/Nevada Realty President and CEO Ed Krafchow, Lowe’s and Re-BuildUSA rolled out the program to more than 120 agents at an event this past April. Of those 120 in the room, 94 of them signed up on the spot for the Walshes’ 203k training. For Krafchow, education in the 203k area is an essential next step for agents who want to succeed in the current marketplace.

“This company went through a process of certifying more than 1,000 agents as short sale specialists,” Krafchow explains. “We wanted to go into where the market is selling, and short sales are selling up a storm. We have to give agents tools and the ability to speak to people with good knowledge. We believe the 203k program is right behind short sales in terms of what the market will become. The Walshes’ 203k training will allow people to go into their communities and support people who really want to buy a house to get the house they want and have it fixed up and repaired at the same time.

“This rebuilding process is critical to changing the valuation process. Everyone knows that a house with recent repairs is more valuable than a house in disrepair.”

The event at Prudential CA/NV is just one of many to come as Lowe’s and RE-buildUSA continue to educate real estate professionals and consumers on the power of the FHA 203k.

“Our relationships with real estate professionals all across the country have really blossomed over the past year,” says Mraz. “We’ve received a lot of interest from people who have heard about what’s been happening with our program in Florida, so we’ll be moving pretty quickly this year to expand the program.”

Lowe’s is clearly ready for a larger rollout, having an already well-developed installation services department that boasts more than 10,000 installers nationwide who specialize in over 40 product categories across the store.

Down the Road
For the Walshes and Lowe’s, the ultimate goal is to make 203k education viral and have it spread through the people actually doing the deals—the agents.

“One example is that our 203k Specialist can use a customizable, consumer-directed PowerPoint presentation we provide in the Membership Center to put on their own seminars,” says Walsh. “Many have done this successfully with first-time buyers’ seminars. 203k seminars appeal to a broad segment of prospective buyers and are a great opportunity to drive more business.”

In fact, at press time, Krafchow’s company was getting ready to put on the first in a series of consumer seminars geared toward learning about the 203k loan.

“The nature of our relationship with Lowe’s is very positive,” Krafchow explains. “We’re planning on doing consumer-facing workshops based on the 203k program where Lowe’s will come in with samples, and consumers in the room will literally be able to pick out colors, fabric and tile…and then buy the house.”

“His company is going to have 203k-certified agents put on the seminar and have their local lending partners sponsor it,” says Walsh. “It’s a great way to inform the public, and also help loan officers and certified agents connect with consumers.”

*Lowe’s installers are licensed, bonded and insured. The company also stands behind the quality of its work with a 100% satisfaction guarantee.

Posted by Mark Gipple on 05/06/2010 in — Add a Comment

Pending Home Sales on an Upswing

Pending Home Sales on an Upswing

RISMEDIA, May 5, 2010—Pending home sales increased again in March 2010, affirming that a surge of home sales is unfolding for the spring home buying season, according to the National Association of Realtors®. The Pending Home Sales Index (PHSI) forward-looking indicator based on contracts signed in March, rose 5.3% to 102.9 from 97.7 in February, and is 21.1% above March 2009 when it was 85.0; this follows an 8.3% increase in February. The data reflects contracts and not closings, which usually occur with a lag time of one or two months.
Lawrence Yun, NAR chief economist, said favorable affordability conditions have been working with the tax credit. “Clearly the home buyer tax credit has helped stabilize the market. In the months immediately following the expiration of the tax credit, we expect measurably lower sales,” he said. “Later in the second half of the year, and into 2011, home sales will likely become self-sustaining if the economy can add jobs at a respectable pace, and from a return of buyer demand as they see home values stabilizing.”

The PHSI in the Northeast declined 3.3% to 75.1 in March but remains 27.2% higher than March 2009. In the Midwest the index increased 1.2% to 98.9 and is 18.5% above a year ago. Pending home sales in the South jumped 12.7% to an index of 121.2, which is 28.3% higher than March 2009. In the West the index rose 1.9% to 99.9 and is 8.8% above a year ago.

“Another encouraging sign is the improvement in the availability for jumbo and second-home mortgages,” Yun said. “As bank balance sheets strengthen, it is just a matter of time before lending of non-government-backed mortgages steadily opens up.”

The National Association of Realtors, “The Voice for Real Estate,” is one of America’s largest trade associations, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.

The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing.

The index is based on a large national sample, typically representing about 20% of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity parallels the level of closed existing-home sales in the following two months. There is a closer relationship between annual index changes (from the same month a year earlier) and year-ago changes in sales performance than with month-to-month comparisons.

An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales.

Posted by Mark Gipple on 05/05/2010 in — Add a Comment

Existing-Home Sales Down in January 2010 but Higher Than Year Ago

RISMEDIA, March 4, 2010—Existing-home sales fell in January 2010 but are above year-ago levels, according to the National Association of Realtors. Existing-home sales- including single-family, townhomes, condominiums and co-ops- dropped 7.2% to a seasonally adjusted annual rate of 5.05 million units in January from a revised 5.44 million in December, but remain 11.5% above the 4.53 million-unit level in January 2009.

Lawrence Yun, NAR chief economist, said there is still some delay between shopping and closing that affected current sales. “Most of the completed deals in January were based on contracts in November and December. People who got into the market after the home buyer tax credit was extended in November have only recently started to offer contracts, so it will take a couple months to close those sales,” he said. “Still, the latest monthly sales decline is not encouraging, and raises concern about the strength of a recovery.”

Total housing inventory at the end of January fell 0.5% to 3.27 million existing homes available for sale, which represents a 7.8-month supply at the current sales pace, up from a 7.2-month supply in December. Raw unsold inventory is 9.6% below a year ago, and is at the lowest level since March 2006.

“Activity should be picking up strongly in late spring as buyers take advantage of the tax credit, which is critical to absorb distressed properties reaching the market and to continually chip away at inventory,” Yun said. “With a downtrend in the number of homes on the market, especially in the lower price ranges, values are beginning to firm but with great variance around the country.”

The national median existing-home price for all housing types was $164,700 in January, unchanged from a year earlier. Distressed homes, which accounted for 38% of sales last month, continue to downwardly distort the median price because they typically are discounted in comparison with traditional homes in the same area.

A parallel NAR practitioner survey shows first-time buyers purchased 40% of homes in January, down from 43% in December. Investors accounted for 17% of transactions in January, up from 15% in December; the remaining sales were to repeat buyers. The survey also shows that buyer traffic increased 9.4% in January.

NAR President Vicki Cox Golder, owner of Vicki L. Cox & Associates in Tucson, Ariz., said buying a home in the current environment has become more challenging. “First-time buyers and others who need a mortgage are increasingly losing out to all-cash investors for the best bargains in many areas, particularly for foreclosed homes where cash is king,” she said. “Inventory conditions vary by price range, and of course there are major differences depending on location. Realtors are the best buyer resource for strategies on winning bids in increasingly competitive markets,” Golder said. “The bidding for more desirable homes will only accelerate between now and the April 30 contract deadline to qualify for a tax credit of up to $8,000.”

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage edged up to 5.03% in January from 4.93% in December; the rate was 5.05% in January 2009.

Single-family home sales fell 6.9% to a seasonally adjusted annual rate of 4.43 million in January from a level of 4.76 million in December, but are 8.6% above the 4.08 million pace in January 2009. The median existing single-family home price was $163,600 in January, down 0.4% from a year ago.

Existing condominium and co-op sales dropped 8.1% to a seasonally adjusted annual rate of 620,000 in January from 675,000 in December, but are 38.1% above the 449,000-unit level a year ago. The median existing condo price was $172,400 in January, which is 1.4 % higher than January 2009.

Northeast
Regionally, existing-home sales in the Northeast fell 10.9% to an annual pace of 820,000 in January but are 22.4% above a year ago. The median price in the Northeast was $245,300, a gain of 8.8% from January 2009.

Midwest
Existing-home sales in the Midwest declined 6.9% in January to a level of 1.08 million but are 8.0% higher than January 2009. The median price in the Midwest was $130,300, which is 1.0% below a year ago.

South
In the South, existing-home sales dropped 7.4% to an annual pace of 1.87 million in January but are 12.0% above a year ago. The median price in the South was $140,200, down 2.0% from January 2009.

West
Existing-home sales in the West declined 5.2% to an annual rate of 1.28 million in January but are 7.6% higher than January 2009. The median price in the West was $203,400, down 5.8% from a year ago.

Posted by Mark Gipple on 03/04/2010 in — Add a Comment

C.A.R. Reports January Median Price Increased 15%; Home Sales Decreased 10.6%

C.A.R. Reports January Median Price Increased 15%; Home Sales Decreased 10.6%

RISMEDIA, March 2, 2010—Home sales decreased 10.6% in January 2010 in California compared with the same period a year ago, while the median price of an existing home rose 15%, the California Association of Realtors® (C.A.R.) recently reported.

“Many sales that closed escrow in January were on homes with offers accepted during the holiday season- a time when many house hunters are first-time buyers,” said C.A.R. President Steve Goddard. “First-time buyers typically purchase homes priced below an area’s median home price. Reflecting this, the percentage of homes priced under $500,000 increased to 77% of all sales in January, compared with 75% in December. “Despite the year-to-year decline, sales remained above the 500,000 unit threshold for the 17th consecutive month, holding steady at pre-peak levels from early in the last decade,” said Goddard.

Closed escrow sales of existing, single-family detached homes in California totaled 539,040 in January at a seasonally adjusted annualized rate, according to information collected by C.A.R. from more than 90 local Realtor associations statewide. Statewide home resale activity decreased 10.6% from the revised 602,660 sales pace recorded in January 2009. Sales in January 2010 decreased 3% compared with the previous month.

The statewide sales figure represents what the total number of homes sold during 2010 would be if sales maintained the January pace throughout the year. It is adjusted to account for seasonal factors that typically influence home sales. The median price of an existing, single-family detached home in California during January 2010 was $287,440, a 15% increase from the revised $249,960 median for January 2009, C.A.R. reported. The January 2010 median price decreased 6.3% compared with December’s $306,820 median price.

“The story for the median price in January was mixed. In year-over-year terms, California’s median home price saw the greatest percentage increase since December 2005,” said Leslie Appleton-Young, C.A.R. vice president and chief economist. “However, the median fell by 6.3% from the December 2009 median price. Although the monthly decline was large, it was less than the declines for the same time period in both 2008 and 2009 when the median price fell by more than 11%.

“The median price still is 17.2% ahead of the trough in this cycle,” added Appleton-Young. “However, the expiration of the federal tax credit for home buyers and the impact of the Federal Reserve’s withdrawal from the mortgage market continue to be the wild cards as we move through the year.”

Highlights of C.A.R.’s resale housing figures for January 2010:

-C.A.R.’s Unsold Inventory Index for existing, single-family detached homes in January 2010 was 5.8 months, compared with 7.3 months (revised) for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.

-Thirty-year fixed-mortgage interest rates averaged 5.03% during January 2010, compared with 5.05% in January 2009, according to Freddie Mac. Adjustable-mortgage interest rates averaged 4.33% in January 2010, compared with 4.92% in January 2009.

-The median number of days it took to sell a single-family home was 33.8 days in January 2010, compared with 50 days (revised) for the same period a year ago.

For more information, visit http://www.car.org.

Posted by Mark Gipple on 03/03/2010 in — Add a Comment