CNNMoney.com - February 19, 2010
The Federal Reserve took its first baby step on Thursday toward finally raising its most important interest rate.
Wall Street, surprisingly, didn't get too worked up. Stocks fell slightly at the open Friday morning, and turned positive soon after.
The dollar has rallied sharply against the euro and a basket of other major global currencies this year. The Fed's first step to raise rates could lead to further dollar strength.
One might have expected a big move down: Higher rates equal increased borrowing costs and that equals a sluggish economy. So the logic goes.
Investors may be dismissing the Fed's boost to the so-called discount rate as largely a symbolic move because the Fed has not indicated any willingness to raise its more important federal funds rate anytime soon.
But make no mistake. The days of ridiculously easy money appear to be coming to an end. Can I get an Amen to that?
The Fed is still taking a slow and steady approach to rate hikes. That's probably smart. Rates are going to remain near historic lows for a long time.
So it seems silly to worry about how future rate hikes could kill the nascent consumer spending recovery and lead to a double-dip recession.
Instead, it may be time to salute the Fed for at least getting the rate hike wheels in motion. It seems to finally realize that it is time to pull back on stimulus programs that, while necessary at the worst of the credit crisis, could cause inflation problems down the road.
"This is good news. Presumably this is a sign of strength and confidence but It's also a sign of necessity," said Karl Mills, the manager of the Counterpoint Select Fund and president and chief investment officer for Jurika Mills & Keifer in Oakland, Calif. "The Fed has to improve its balance sheet. The only way to get the fiscal house of the U.S. in order is to do that."
Concerns about heavy debt levels in Greece and other nations in Europe have dominated the financial headlines this year. But the United States also has a rising debt load, and some experts worried that the Fed was going to make matters worse.
That no longer seems to be as big of a concern.
"We have this scenario where the recovery is working. It's not monstrous but it's good enough. So some of the stimulus can be removed," said Jason Pride, director of investment strategy for Glenmede, a Philadelphia-based asset management firm. "This is a very surgical step. The Fed wants to signal it is tightening but doesn't want to move too fast."
Sure, the Fed isn't likely to raise the federal funds rate, the overnight lending rate that influences many consumer and business loans, just yet.
It's probably going to hike the discount rate, which is what banks pay to borrow directly from the Fed in an emergency, two more times before boosting the federal funds rate.
That will put the spread between the discount rate and the federal funds rate back to is normal level of 1 percentage point. The discount rate is now at 0.75%, while the federal funds rate stands at between 0% and 0.25%.
But widening that spread is going to be key. The fact that many big banks enjoyed gargantuan profits last year was in large part due to the Fed keeping rates so low. And that has led to a populist backlash against the financial services sector and the Fed itself.
0:00 /3:12Fed holding pattern may prove costly
By raising the discount rate, even by just this tiny fraction, Federal Reserve chairman Ben Bernanke appears to be sending the message that it's time to stop treating banks with kid gloves. It's time to reward fiscally responsible individuals and defend the dollar as well.
Low rates punished anyone trying to earn interest in a savings account. Low rates also helped to weaken the dollar and fuel a rise in commodities prices, most notably oil and gas. But the dollar is finally showing some signs of life -- a recognition of the bigger fiscal problems in Europe.
If that trend continues, oil prices could head lower. And the signal from the Fed that more tightening is inevitable should lead to more gains for the greenback. While a stronger dollar may worry some investors, it's welcome news for consumers.
"The stock market has been going up but people on Main Street haven't been getting a lift," said Keith McCullough, CEO and founder of investment research firm Hedgeye Risk Management and a vocal Fed critic.
"With higher rates, people with savings accounts will earn more and with the dollar going up, you'll pay less at the gas pump," he added. "I've been tough on the Fed but I have to give Bernanke a pat on the back."
Fewest January foreclosure filings countywide since '07
The Daily Transcript - Tuesday, February 2, 2010
Foreclosure filings in San Diego in January were down a combined 14 percent from December, according to the latest data from the county assessor’s office.
January 2010’s 3,008 notices of default (NODs) and trustee deeds filed were 31 percent fewer January 2009 and 37 percent down from January 2008.
NODs were down to 1,868 in January from 2,050 in December. The 9 percent decline marked the seventh month in a row NOD totals went down or were flat month to month.
Trustee deeds, which are filed as the last step in the foreclosure process, have been more volatile over the past few months.
After a 27 percent increase in trustee deeds from November to December, there were 1,140 trustees deeds filed in January -- a 20 percent decline in the number of foreclosures recorded from December.
However, January 2010 had 14 percent fewer foreclosures than the same month a year ago.
In a sense, the numbers are positive, said Alan Nevin, director of economic research for MarketPointe Realty Advisors, but the low number of foreclosures could pose a problem.
“First all, we desperately need more foreclosures because the Realtors need more inventory to sell and buyers need homes to purchase,” he said. “We have far more demand than supply.”
Alan Gin, professor of economics at the University of San Diego, agreed, saying the combination of fewer foreclosures on the market combined with a lack of new-home construction over the past three years would likely cause constraints on inventory.
“Prices have already been inching up, but construction is virtually dried up and, pretty soon, if we continue to see the decline in foreclosures, it’ll cause prices to start rising,” he said.
Gin said he does not expect prices to rise as fast as they fell, partially because move-up buyers who have been waiting to sell will be more likely to put their homes on the market, adding to inventory levels.
Some industry observers have mentioned “shadow” inventory, or distressed homes that have not been released for sale by banks or other lenders. However, Nevin said there is no need to worry about a glut of properties suddenly flooding the market.
Nevin said most banks would have wanted to release their distressed properties on the market since it would negatively affect their capital ratios.
However, since government entities Fannie Mae, Freddie Mac, the FHA and VA control about half the nation’s mortgages, Nevin said they are not pressured to release their distressed assets.
"They're very much afraid that if they dump a huge amount of properties at once it could hurt prices -- that thinking makes sense for other locales, but not here," he said.
Foreclosure filings in San Diego in January were down a combined 14 percent from December, according to the latest data from the county assessor’s office.
January 2010’s 3,008 notices of default (NODs) and trustee deeds filed were 31 percent fewer January 2009 and 37 percent down from January 2008.
NODs were down to 1,868 in January from 2,050 in December. The 9 percent decline marked the seventh month in a row NOD totals went down or were flat month to month.
Trustee deeds, which are filed as the last step in the foreclosure process, have been more volatile over the past few months.
After a 27 percent increase in trustee deeds from November to December, there were 1,140 trustees deeds filed in January -- a 20 percent decline in the number of foreclosures recorded from December.
However, January 2010 had 14 percent fewer foreclosures than the same month a year ago.
In a sense, the numbers are positive, said Alan Nevin, director of economic research for MarketPointe Realty Advisors, but the low number of foreclosures could pose a problem.
“First all, we desperately need more foreclosures because the Realtors need more inventory to sell and buyers need homes to purchase,” he said. “We have far more demand than supply.”
Alan Gin, professor of economics at the University of San Diego, agreed, saying the combination of fewer foreclosures on the market combined with a lack of new-home construction over the past three years would likely cause constraints on inventory.
“Prices have already been inching up, but construction is virtually dried up and, pretty soon, if we continue to see the decline in foreclosures, it’ll cause prices to start rising,” he said.
Gin said he does not expect prices to rise as fast as they fell, partially because move-up buyers who have been waiting to sell will be more likely to put their homes on the market, adding to inventory levels.
Some industry observers have mentioned “shadow” inventory, or distressed homes that have not been released for sale by banks or other lenders. However, Nevin said there is no need to worry about a glut of properties suddenly flooding the market.
Nevin said most banks would have wanted to release their distressed properties on the market since it would negatively affect their capital ratios.
However, since government entities Fannie Mae, Freddie Mac, the FHA and VA control about half the nation’s mortgages, Nevin said they are not pressured to release their distressed assets.
"They're very much afraid that if they dump a huge amount of properties at once it could hurt prices -- that thinking makes sense for other locales, but not here," he said.
You lost your house - but you still have to pay
NEW YORK (CNNMoney.com) - February 3, 2010
Vanessa Corey sold this house but still owed some of the mortgage balance. Now the bank is coming after the $65,000 difference.
As terrible as it is to lose your house to foreclosure, at least it's a relief to put your biggest financial headache behind you, right?
Wrong.
Former homeowners may still be on the hook if there's a difference between what they owed on their mortgage and what the bank could sell it for at auction. And these "deficiency judgments" are ticking time bombs that can explode years after borrowers lose their homes.
It can even happen to people who got their bank to approve them selling their home for less than it is worth.
Vanessa Corey, for example, short sold her Fredericksburg, Va., home in April 2008. She and her husband built the house in 2004, but setbacks, both personal (divorce) and professional (housing bust), made it impossible for the real estate agent to keep her home. So she negotiated the short sale and thought that was the end of it.
"My understanding was that the deficiency was negotiated away," she said. "Then, last November, I got a letter from a lawyer telling me I owed my lender $65,000. I had to declare bankruptcy. There was no way I could pay it."
Where the foreclosure plague is spreading
Many homeowners are now in the same boat. And not just those who took out bigger loans than they could afford or who did so called "liar loans" where they didn't have to verify their income.
Because of falling home prices, borrowers who always paid their mortgage but who have run into unforeseen circumstances -- like unemployment or a job transfer -- can no longer sell their homes for what they owe. As a result, they are being forced to short sell or foreclose and are getting caught up in deficiency judgments.
"After the banks foreclose, it's very common now to have large deficiencies with houses not worth the balances owed," said Don Lampe, a North Carolina real estate attorney.
Lenders mostly declined comment. Although Corey's lender, BB&T did indicate it was pursuing more deficiency judgments.
"They follow the rise and fall of foreclosures," said the spokeswoman, who would not discuss Corey's account.
Can they come after you?
Whether banks can and will pursue deficiency judgments depends on many factors, including what state the borrower lives in and whether there's a second mortgage or other liens. But if borrowers ignore the possibility of deficiencies, it could haunt them.
"Once they have a judgment, they can pursue you anywhere," said Richard Zaretsky, a board-certified real estate attorney in West Palm Beach, Fla. "They can ask for financial records, have your wages garnished and, if you fail to respond, a judge can put you in jail."
In the case of foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms.
Some states, such as California, are "non-recourse" and don't allow deficiency judgments. But, even there, if the if the original loan was refinanced, some or all of it may be subject to claims.
Deficiency judgments on short sales and deeds-in-lieu can happen in many more places. In these cases, extinguishing the debt is often a matter of negotiating with the bank.
But even when lenders are willing, many borrowers may not be aware that they have to ask for release. So, if you are pursuing a short sale, be sure your attorney asks the bank to release you from any further obligation.
"People shouldn't have a false sense of security that a deficiency judgment may not be later sought," Zaretsky said.
He expects many will be filed over the next few years, based on the fact that banks have sold many of these accounts to collection agencies and other third parties, at discount.
"The parties who bought those notes wouldn't have paid money for them unless they had the intention of acting," Zaretsky said.
Ticking time bomb
What can be scary is that the judgments don't have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.
It doesn't have to be a large amount of debt for a lender or collection agency to come after borrowers. Richard Varno and his wife short sold their Nashville home back in 2004 after he lost his job.
It wasn't until 2008, when the second lien holder asked him for $25,000, that he realized he still was liable.
"I told them, 'Hey, you guys released the title,'" he said. "As far as I know, I'm off the hook."
He wasn't. Releasing title does not necessarily end the debt. It's complicated because of variations in state law, but, generally, a mortgage has two parts: a pledge of collateral, represented by the home, and a promise to pay off the loan.
Lenders may release property liens in order to facilitate short sales without releasing borrowers from their obligations to pay under the promissory notes. The secured debt can convert to an unsecured one after the sale.
Zaretsky had one client who was so relieved to have arranged a short sale that he signed every paper his real estate agent shoved at him, even a confession that clearly stated he still owed the debt.
"He had no idea what he was doing," said Zaretsky. "All the lender had to do was go to court to convert the confession into a deficiency judgment."
Lenders are also very inconsistent. One of Zaretsky's short-sale clients was ready, willing and able to pay, but the bank did not even ask; another lender always reserves the right to pursue the deficiency.
Strategic defaults
Sometimes lenders go after borrowers walking away from their homes if they have other assets, according to Florida real estate attorney Larry Tolchinsky.
"Banks are pulling credit reports to see if it's a strategic default," he said. "If you're behind on all your other payments, you're okay. But if you're not, they'll come after you."
If borrowers have any doubts about their risks, they should seek legal advice. Or, at least, call non-profit organizations such as NeighborWorks for advice. According to Doug Robinson, a NeighborWorks spokesman, its counselors always try to negotiate away deficiencies when they facilitate short sales or deeds-in-lieu.
"We don't favor any short-sale contracts that leave any deficiency that can be pursued," he said.
Robinson himself knows what can happen. He paid off a deficiency after his own New Jersey house went through foreclosure 11 years ago.
Vanessa Corey sold this house but still owed some of the mortgage balance. Now the bank is coming after the $65,000 difference.
As terrible as it is to lose your house to foreclosure, at least it's a relief to put your biggest financial headache behind you, right?
Wrong.
Former homeowners may still be on the hook if there's a difference between what they owed on their mortgage and what the bank could sell it for at auction. And these "deficiency judgments" are ticking time bombs that can explode years after borrowers lose their homes.
It can even happen to people who got their bank to approve them selling their home for less than it is worth.
Vanessa Corey, for example, short sold her Fredericksburg, Va., home in April 2008. She and her husband built the house in 2004, but setbacks, both personal (divorce) and professional (housing bust), made it impossible for the real estate agent to keep her home. So she negotiated the short sale and thought that was the end of it.
"My understanding was that the deficiency was negotiated away," she said. "Then, last November, I got a letter from a lawyer telling me I owed my lender $65,000. I had to declare bankruptcy. There was no way I could pay it."
Where the foreclosure plague is spreading
Many homeowners are now in the same boat. And not just those who took out bigger loans than they could afford or who did so called "liar loans" where they didn't have to verify their income.
Because of falling home prices, borrowers who always paid their mortgage but who have run into unforeseen circumstances -- like unemployment or a job transfer -- can no longer sell their homes for what they owe. As a result, they are being forced to short sell or foreclose and are getting caught up in deficiency judgments.
"After the banks foreclose, it's very common now to have large deficiencies with houses not worth the balances owed," said Don Lampe, a North Carolina real estate attorney.
Lenders mostly declined comment. Although Corey's lender, BB&T did indicate it was pursuing more deficiency judgments.
"They follow the rise and fall of foreclosures," said the spokeswoman, who would not discuss Corey's account.
Can they come after you?
Whether banks can and will pursue deficiency judgments depends on many factors, including what state the borrower lives in and whether there's a second mortgage or other liens. But if borrowers ignore the possibility of deficiencies, it could haunt them.
"Once they have a judgment, they can pursue you anywhere," said Richard Zaretsky, a board-certified real estate attorney in West Palm Beach, Fla. "They can ask for financial records, have your wages garnished and, if you fail to respond, a judge can put you in jail."
In the case of foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms.
Some states, such as California, are "non-recourse" and don't allow deficiency judgments. But, even there, if the if the original loan was refinanced, some or all of it may be subject to claims.
Deficiency judgments on short sales and deeds-in-lieu can happen in many more places. In these cases, extinguishing the debt is often a matter of negotiating with the bank.
But even when lenders are willing, many borrowers may not be aware that they have to ask for release. So, if you are pursuing a short sale, be sure your attorney asks the bank to release you from any further obligation.
"People shouldn't have a false sense of security that a deficiency judgment may not be later sought," Zaretsky said.
He expects many will be filed over the next few years, based on the fact that banks have sold many of these accounts to collection agencies and other third parties, at discount.
"The parties who bought those notes wouldn't have paid money for them unless they had the intention of acting," Zaretsky said.
Ticking time bomb
What can be scary is that the judgments don't have to be obtained immediately. Lenders or collection agencies may wait until debtors have recovered financially before they swoop in. In Florida, the bank can wait up to five years to file. Once the court grants a judgment, the lender has 20 years there to collect, with interest.
It doesn't have to be a large amount of debt for a lender or collection agency to come after borrowers. Richard Varno and his wife short sold their Nashville home back in 2004 after he lost his job.
It wasn't until 2008, when the second lien holder asked him for $25,000, that he realized he still was liable.
"I told them, 'Hey, you guys released the title,'" he said. "As far as I know, I'm off the hook."
He wasn't. Releasing title does not necessarily end the debt. It's complicated because of variations in state law, but, generally, a mortgage has two parts: a pledge of collateral, represented by the home, and a promise to pay off the loan.
Lenders may release property liens in order to facilitate short sales without releasing borrowers from their obligations to pay under the promissory notes. The secured debt can convert to an unsecured one after the sale.
Zaretsky had one client who was so relieved to have arranged a short sale that he signed every paper his real estate agent shoved at him, even a confession that clearly stated he still owed the debt.
"He had no idea what he was doing," said Zaretsky. "All the lender had to do was go to court to convert the confession into a deficiency judgment."
Lenders are also very inconsistent. One of Zaretsky's short-sale clients was ready, willing and able to pay, but the bank did not even ask; another lender always reserves the right to pursue the deficiency.
Strategic defaults
Sometimes lenders go after borrowers walking away from their homes if they have other assets, according to Florida real estate attorney Larry Tolchinsky.
"Banks are pulling credit reports to see if it's a strategic default," he said. "If you're behind on all your other payments, you're okay. But if you're not, they'll come after you."
If borrowers have any doubts about their risks, they should seek legal advice. Or, at least, call non-profit organizations such as NeighborWorks for advice. According to Doug Robinson, a NeighborWorks spokesman, its counselors always try to negotiate away deficiencies when they facilitate short sales or deeds-in-lieu.
"We don't favor any short-sale contracts that leave any deficiency that can be pursued," he said.
Robinson himself knows what can happen. He paid off a deficiency after his own New Jersey house went through foreclosure 11 years ago.
Market update & advice from our brokerage
As is my custom what follows is my take on the local real estate market. Keep in mind that I stress the "local" part as all local markets are different and react to many unique factors. When you read that the real estate market is "soft" or "hot" on a national level that is like saying the average temperature is 70 degrees and to imply from that the temperature everywhere is 70. Sometimes our market is better, sometimes worse than others.
It looks like our local market is still strong. As of today there are 5,339 detached homes available on the market. 1,562 went into escrows during January and another 2,350 went "contingent" (short sales awaiting lender approval) during the month. Using just the new escrow number we have a 3.42 month supply of detached homes on the market. A supply of less than 4 months is normally considered a moderately strong market with prices on the upswing. If you add the 2,350 new contingent listings to the new escrows we come up with a supply of 1.36 months.
The attached (condo) market shows 2,591 units now on the market with 839 opening new escrows and another 1,874 going into the "contingent" status. The new escrow index shows a supply of 3.09 months and 0.96 months when we add the "contingent" listings. Both are strong with prices starting to increase. Multiple offers are still common in the lower price range with sales occurring above the listed price in many cases.
Activity is slower in the higher price ranges with longer on market times being common, due at least in part to tougher financing requirements that make it difficult for move-up buyers to make aggressive moves.
It looks like our local market is still strong. As of today there are 5,339 detached homes available on the market. 1,562 went into escrows during January and another 2,350 went "contingent" (short sales awaiting lender approval) during the month. Using just the new escrow number we have a 3.42 month supply of detached homes on the market. A supply of less than 4 months is normally considered a moderately strong market with prices on the upswing. If you add the 2,350 new contingent listings to the new escrows we come up with a supply of 1.36 months.
The attached (condo) market shows 2,591 units now on the market with 839 opening new escrows and another 1,874 going into the "contingent" status. The new escrow index shows a supply of 3.09 months and 0.96 months when we add the "contingent" listings. Both are strong with prices starting to increase. Multiple offers are still common in the lower price range with sales occurring above the listed price in many cases.
Activity is slower in the higher price ranges with longer on market times being common, due at least in part to tougher financing requirements that make it difficult for move-up buyers to make aggressive moves.
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