Mortgage Financing Blog

The global credit crunch has some serious global effects brewing.  This Op-Ed piece in the New York Times describes the financial behind the scenes dealings of the World Bank and how it works to assist developing nations with their currency and finances. Read the rest of this entry »

The shift from condo to condo-tel marks yet another level of capitulation in the Miami condo market. One of the buildings that I’ve seen, Opera Tower, is held by a very strong developer, and longtime landlord named Tibor Hollow. The other one on Hotels.com is called The Club at Brickell Bay and is a true fractured condominium. Once a condo is converted from residential condo to residential condo-hotel, the prospects for a developer selling end units are pretty dim in the short term. In the case of the fractured condo, if there’s anybody left who bought in cash, it says that the units’ fair market value has hit the liquidation price, since the banks don’t even care to sell them anymore and since the whole building has gone from Prince to Toad, the best way to deal with it is as a pooled rental building with individual owners.

Once a residential condominium becomes a hotel condominium, the financing equations are completely altered, and it becomes nearly impossible (in this market) to sell any product with financing.   Some of the failed condos in downtown Miami are openly marketing themselves as Hotels (as in on Hotels.com) without any fanfare accompanying this.   It marks a dramatic shift in the market, one that I have been predicting. There were so many hotels knocked down in Miami’s central districts to make room for condo developments that there has been a major shortage in affordable rooms in these areas. The average hotel room rate in South Beach rose above the price of Manhattan in the last couple of years. Now, you can rent in a condo-tel in downtown, full kitchen, and all, for $120-160 a night.

At the moment, there’s almost zero financing for condominium hotels in the national or even in the local Miami market, where there are both residential condo-hotels (which are not flagged, units with full kitchens and suitable for year round living) and commercial condo-hotels which are essentially hotel rooms 600 sq. ft. or less that are sold to individual investors. The condo-tel property type has been considered fairly unique nationally, and I wouldn’t call them common here. It’s maybe about 10%-15% of the total condominium market in South Florida and less statewide.

From what I am reading in the reviews, the Condo-tel units that are being converted are not offering much in the way of room services, hotel packages (such as cleaning materials, coffee, etc) and would be more suited to medium term renters who are planning a 5-10 days stay.  There are many other condominium hotels in the downtown Miami area, but they are “flagged” which is to say, operated by a national or international hotel chain and up to their service standards.  They are not to be confused with these new condo-tels, then again, they are bound to be . . .

In this Miami Herald Article, there’s a nice FAQ about who qualifies for the Obama mortgage relief program’s Phase 1.  Although many people are in disbelief, there’s actually a substantial number of people with good credit, who made down payments and have loans with Fannie or Freddie that have fallen under water in the last 12 months:

Under the plan, only first mortgages can be refinanced. Borrowers must not have been more than 30 days late in the previous 12 months.

Grant Stern, president of Bay Harbor Islands-based Morningside Mortgage, said that because lenders have already been modifying loans, the refinancing plank of Obama’s plan would be the most beneficial to South Florida homeowners.

“There are lots of responsible people who put down 10, 20, 30 percent in the last two to three years and wound up losing their equity because the market wiped it out. . . . This will help them trim the sails during tough times.”

It’s nice to see that after all of the bizarre bailouts pushed by President Bush in the name of not bailing anything out, there is finally a sensible plan to offer an olive branch to at least 1 segment of the property owning public.  In particular this is aimed at those who were responsible about home owning, but is also caught in a market like those who speculated and failed, which is driving their home equity into the turf.   This is the first bailout program (or section of a program) that does not have any moral hazard, but is simply aimed at providing relief to those who did the “right thing” by making a down payment to buy, paying on time, and are stuck in fixed rate loans above the current market rates.

In my humble opinion, until lenders start reducing principal balances, or selling loans at a discount, we won’t see a firm floor in the foreclosure crisis.

As noted in my last post, Fannie Mae tightened lending guidelines for condos in Florida, as well as added a specific review process for new condos in Florida that other states’ housing does not have to endure. This new article by Oscar Musibay goes further in depth to explain how developers are responding to these restrictions by turning to the Federal Housing Administration’s mortgage insurance program for condominium lending.

Grant Stern of Morningside Mortgage Corp., just got FHA approval on The Bank, a 73-unit condo at Northeast 81st Street and Biscayne Boulevard in Miami. The process took 35 days. There are 14 units remaining, with three under contract.

He agrees that the new rules are designed to further narrow Fannie Mae’s exposure by creating lender disincentives. Once Fannie Mae approves a building at the request of a specific lender, buyers can use any mortgage.

“Once [the lender] pays, then anyone can lend in there, so there is very little incentive to do it,” Stern said, referring to the lender paying the review fee.

Currently, the only source of mortgage insurance for condominiums in all of Florida comes from this source. My company Morningside Mortgage Corporation does offer a specialized consultancy service aimed at speeding up the approval process for new and existing homeowners associations. Thus far, in only the last week, we have seen applications for 400 new condominium units for FHA approval, and expect to intake close to 10,000 units by the close of business this year. Typically, I don’t post specific plugs onto this blog, but in this case, it’s more a matter of public service to the markets that we work within. We do these approvals for the entire southeastern US.

For those who are looking to buy a home, for their own personal use, the prices are finally in line with incomes. The only way for most people to buy is with a 3.5% down payment loan from the FHA. In the coming weeks, I will fill this space with a little bit more information for homeowners about these loans. They are a little bit more expensive than a “Conventional” home loan, but in this lending environment, they are the “back stop” or lender of last resort, and they are considered an “A” loan, appropriate for borrowers with both good, average and even below average credit.

Yes, the next leg down for the Florida condo market is potentially in sight, unless developers and associations wise up and move quickly to obtain FHA financing approval.  Though this Miami Herald article on the Florida condo financing restrictions does not mention it (though I did tell Monica), there are no FHA restrictions on the Loan to Value (up to 96.5%) or age of condo projects that are eligible for loans insured by the FHA endorsement.  Here’s a clip of the article, related to the effects that the new Fannie Mae condo finance restrictions which are primarily made up of a new system called PERS :

POTENTIAL FALLOUT

Peter Zalewski, whose Condo Vultures realty specializes in bulk sales of distressed condos, said his figures show that as many as 41 new buildings between the Julia Tuttle and Rickenbacker causeways, and from I-95 to Biscayne Bay, may be ineligible for Fannie Mae approval because they don’t meet the new 70 percent ownership threshold.

”It’s devastating,” Zalewski said.

Fannie is not the only source of funding for lenders who want to make condo loans. But John Bancroft, executive editor with trade publication Inside Mortgage Finance, said No. 2 mortgage guarantor Freddie Mac typically follows Fannie Mae’s lead and would likely implement Fannie’s guidelines soon.

The two companies owned or backed nearly $900 billion in new home loans in 2008, more than two-thirds of the market overall. Ginnie Mae is the major guarantor for FHA and VA loans. Few new buildings had been able to meet FHA certification requirements either, Zalewski said.

WHO BENEFITS?

Because few lenders are holding loans in their own portfolios, the Fannie vacuum could create new opportunities for cash-rich buyers who will be able to command even greater discounts, predicted Grant Stern, principal broker of Miami-based Morningside Mortgage.

”Fannie Mae declared Christmas for hedge funds who want to buy bulk in these buildings, but it’s leaving everyday investors and people who want to buy for their own personal use in the dust,” Stern said.

Stern added the restrictions further exemplified the self-fulfilling, cyclical nature of the credit crisis because Fannie’s action would bring about further price declines, more foreclosures and potentially more losses for the company.

”It starts with fear, then a reaction. Then the reaction causes that fear to occur, which then confirms the fear and causes a further negative reaction,” Stern said.

Another item that’s left out (amongst many) is . . .

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Yes, Chanukah came early this year in the Stern residence

Mortgage Rates Left in Dust by Treasuries, Failures

Americans seeking mortgages aren’t getting the full benefit of record low yields on Treasuries and government-supported mortgage bonds, blunting U.S. efforts to curb the housing crisis.

More painful for borrowers than the fact that rates aren’t even lower now is that many who would benefit by refinancing at current rates can’t because of a lack of home equity after price drops, said Grant Stern, the owner of Morningside Mortgage Corp., a loan brokerage in Miami Beach, Florida.

“Let me tell you, the good rates are here right now,” he said.

I guess that today was the True Minsky moment that we have all been looking for as the Federal Reserve Chairman Ben Bernanke issued a historic rate cut .  Mortgage bond yields fell to an all-time low toda y too, and yes, the guy quoted in the article, Jacob Miller is a client . . . (Jan 2009 update: Jacob did close his purchase on Jan 20th, one of the last Fannie Mae condo closings in a new construction until at least next quarter).

Interest rates for the 30 year US Government T-bill have hit an all time low ahead of today’s Federal Reserve Bank meeting I have already seen swings of 100 bps (basis points) in mortgage loan pricing just within 20 minute spans this afternoon.  These are truly abnormal movements in mortgages even today.

For those who are actively shopping for a mortgage loan, I think that we will see a leg down in rates this afternoon depending on the market’s reaction to the Fed announcement, OR a leg up (fill in ominous sounding background music here).  The market’s reaction will probably be swift and violent, and likely to roil the markets for days, presenting some prime opportunities for those with skilled loan originators to lock in the Very Lowest Rates . . .

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Dec. 16th Update: The 10 yr t-bill is at it’s All Time Low right now.  Here’s a CNBC Article on Warren Buffet and how many thought he conspired to build a Ponzi scheme early in his career.  

Original Article:

The world is focused on the fate of the Big/Detroit 3, Congress and the President are locked in a game of chicken with automaker’s management and the UAW but today’s EVEN bigger news was practically ignored, except in the bond markets.

Bernard Madoff’s $50 Billion dollar disaster is an epic deception by one of the real pillars of Wall Street.  We are talking about a fraud the size of Enron and it’s barely being reported.

His Ponzi scam was even strongly questioned by Barron’s seven years ago (full Barrons article here on Madoff ), but somehow, the SEC never seemed to find it, even after such a glaring expose’.  Just a classic example of “If it walks like a duck, and talks like a duck, it’s a duck”.

Ultimately, the damage here is trust. (Updated 12/18 read to the bottom, this is Serious).  Damage to Trust in Wall Street, trust in finance in general, trust in instutions, and in pledging capital anonymously around the world to where it is needed the most, the central idea of the efficiency of markets in the capitalist system.

Without Trust, Confidence lags, and without confidence, there’s not much reason or incentive to take economic action.  These are serious times and serious problems, and though it might sound simplistic, it is not.  The erosion of Trust and Confidence in private enterprise is the most serious fight we have had in our lifetimes, and probably will ever see in our lifetimes.

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Today, mortgage interest rates dropped to exceedingly low levels and I took advantage to lock 3 clients in with 5-5.25% interest rates on their home loans.  Anyone out there who is looking for payment relief, should be on the phone with their banks, brokers or whomever they work with on real estate lending.  There is still the possibility of ever lower rates, but today, rate renegotiation and “float down” options are the stock in trade for a saavy mortgage professional to hedge against higher rates while you are in process, but be allowed to take advantage of improvements in the market on rate drops.

I think the bond market is more or less a mystery to the average investor.  For working folks, it’s not even a mystery, but something well out of sight and never even entered to mind.  Ironically, it has the deepest impact from the top to the bottom of our society, in the influence it exerts over the cost of goods, services and contracts in our country.

Bond markets react in sort of an inverse fashion to the stock markets under normal circumstances, for reasons inherent to the contrast between the two.

1. When stocks rise, it usually indicates (a lagging) rise in profits, incomes, gdp, etc.  This rise makes likely the probability that interest rates will rise as demand to borrow rises, along with the interest rate increases that the Central Bank uses to check inflationary growth.  This makes today’s bond’s less valuable, and rates move higher, since the income from the bond remains the same, but the price you pay to secure the income is lesser (more interest is earned with a lesser investment).
2. When stocks fall, it usually indicates (a leading) drop in profits, incomes, gdp, etc.  This rise makes likely the probability that interest rates will fall as demand to borrow receeds, along with the interest rate decreases that the Central Bank uses to stimulate economic growth.  This makes today’s bond’s more valuable, and rates move lower, since the income from the bond remains the same, but the price you pay to secure the income is greater (less interest is earned with a greater investment)

Think of this movement like operating the controls of an airplane, which are usually in reverse.   Pull on the stick to dive, push to climb.  Generally, airplane controls all work the same, and making a control move has a predictable direction and this allows us to jet from New York to Miami in just a couple of hours.  That is until the Bernard Madoff announcement this morning.  Today’s activity took on an ominous tone to those of us who follow the financial markets closely:

Stocks are higher, as the automaker bailout takes center stage, and the fact that our economy is hemorraging jobs, major companies with national brands start filing for bankruptcy (Tribune Co. owner of the Chicago Cubs), or scratching around from cash from anywhere they can get it (GM, New York Times).  Meanwhile, in the bond market prices there was an enourmous rush to safety as investors (pension funds, endowments, money markets, the largest institutional investors) rushed into Government debt driving the 10 year T-Bill yield to lows we haven’t seen since before JFK took office!  The current yield of 2.57% for a 10 year t-bill is an ominous sign for the future direction of our economy, but the rate relief for borrowers should finally begin to ease the cash crunch enveloping our country.

I know that this site is a little off topic of this blog, but I can tell you that this is a real insider’s ironic memoir of the credit crunch.   The blog chronicles “The Spiral” and it’s thinly veiled references to fascism, in portrayal of the credit crisis as a historical.  The blog is written by a gentleman working for Sub-Rosa Capital, LLC and you can find his resume, but you may have trouble finding his real name . . .  Anyhow, I would say to anyone who works in a financial field, this is worth watching for black humor value.The most recent (possibly final??) installment in the series makes it quite clear who is being parodied. For those who don’t think that the first 8 episodes would be of interest, just watch this one.  It is the finale (so far) so it could be a spoiler, but if you know the real life story, I don’t think that this detracts from the entertainment value of seeing all 9 . . .