"Seller Financing" Terms

More Seller Financing --
& More Flexible Terms

Sellers Terms: Cash, Contract for Deed, Contract/Deed w/Assumption, Conventional, DVA, FHA

--MLS listing

I'm seeing lots more listings like the one above.

If you don't speak "Realtor," here's a quick glossary:

Contract for deed: Buyer makes monthly payments to the Seller, who retains title; title transfers when the last payment is made.

DVA: Department of Veteran Affairs loan. Great terms, zero down -- for those who qualify.

FHA: Federal Housing Administration. FHA-insured loans are the source of financing in today's housing market.

Conventional: a traditional bank-originated mortgage, typically packaged and re-sold to the secondary markets -- at least when the amount is less than $417k (called "conforming") in most parts of the country.

Shhh!! Don't Tell the Tea Partiers

"Hands Off My Mortga . . . Oops! Never Mind!"

As best I can tell, the tea party movement is angry about out-of-control government intrusion into people's lives.

Apparently, they're not aware of the following factoid:

There were $390 billion in new mortgage origination's in the last quarter of 2009. Excluding home equity lines, Fannie Mae, Freddie Mac, the FHA, and the VA stood behind up to 95% of those mortgages.

"Anyone who looks at the numbers says, 'My God, look what it's come to,'" said Guy Cecala, publisher of Inside Mortgage Finance.

--"Paul Volcker Says Mortgage Market Will 'Have to be Reconstructed"; The Huffington Post (2/19/2010)

The predicament reminds me of a scene from Annie Hall, an early Woodie Allen movie.

A woman is lamenting to a friend that her uncle thinks he's a chicken.

"Send him to a shrink," the friend advises.

"We can't," the niece replies. "We need the eggs."

Wholesale Price of Money Goes Up (A Little)

Fed Rate Bump

Today's leading financial stories are: a) the Federal Reserve's apparently surprise decision to raise interest rates on short-term bank borrowing; and b) the market's reaction to same (playing out now).

My take?

The action itself is relatively trivial: hiking rates on some arcane, overnight interest rate from .5% to .75% (yes, that's less than 1%) does not suddenly make money expensive (the same rates have been as high as 6%(!) in recent years, before "the deluge").

Clearly, then, the concern is that there are more increases to follow.

Given the hair-trigger nature of today's markets ("Explanation for Jumpy Markets"), you'd expect traders to overreact to the news -- like they now do to all news -- then settle down rather quickly.

As far as mortgage rates go, what the Federal Reserve and Treasury are doing (or not) with respect to funding Freddie Mac, Fannie Mae, FHA are much more significant than a trivial bump in banks' overnight borrowing costs.

The Equity Sharing Solution to the Fannnie/Freddie Morass

Revisiting "Capped Upside, Unlimited Downside"

[Note to Readers: this post originally ran Christmas Week, when it was read by . . . no one. In the wake of Barney Frank's announced plan to abolish Fannie Mae and Freddie Mac, I'm "popping" it to the top of the list.]

If you lend someone 97 cents to buy an asset that costs $1, what happens if the value of that asset falls to 95 cents?

How about 90 cents? Or 70 cents?

What if the borrower then loses their job?

Add eleven(!) zeroes . . . and you have the plight of Fannie Mae and Freddie Mac in a nutshell.

Background

One way or another, these so-called Government Sponsored Entities ("GSE's") -- and now FHA -- provide the bulk of the capital that finds its way into the U.S. housing market.

That capital takes the form of loan guaranties, mortgage origination, secondary market loan purchases, etc.; cumulatively, the foregoing aid -- investment, if you prefer -- amounts to hundreds of billions annually.

When dropping home prices -- and now, recession-induced job losses -- blow multi-billion dollar holes in these entities' balance sheets, what should the government do?

It would seem to have three choices: 1) shovel more money in; 2) require higher downpayments, to provide for a higher margin for error; or 3) get out of the housing subsidy business altogether, and pull the plug on the GSE's.

Option #3 has seemingly been taken off the table, because of the threat it would pose to housing prices generally.

Option #2, much less draconian, would also seem to undermine already shaky home Buyers' purchasing power, and therefore has also been rejected.

Which leaves option #1: support the GSE's with unlimited, open-ended capital infusions.

In fact, the government just decided to do exactly that, in an announcement purposely released on Christmas Eve to minimize scrutiny ("Fannie & Freddie, Uncapped").

High Costs, Dubious Benefits

Unfortunately, simply shoveling more money into these GSE black holes may be the worst strategy of all.

In the short run, it turns would-be home Buyers into armchair economists, trying to guess what the government will -- or won't -- do next to support home prices.

In the long run, massive government housing aid distorts prices, crowds out private lenders, and risks debasing the U.S. dollar -- thereby ushering in runaway interest rates.

If you think housing prices are under pressure now, just wait until long-term interest rates -- now around 5.25% for a 30-year mortgage -- hit 8%. Or 15%-plus, as happened in the early '80's.

Option #4

So what is the way out of this morass?

Go back to what happens to Fannie and Freddie as home prices fluctuate.

When housing prices fall, the GSE's suffer major impairments to their capital as borrowers default.

However, when home prices rise (yes, that can actually happen!), the most they stand to recover is the amount they originally loaned.

Heads, borrowers win; tails, the government loses (sound familiar?).

Instead, the GSE's should insist on sharing in any upside that borrowers enjoy.

The Stanford Model

Stanford University long ago established a similar housing subsidy for faculty struggling to afford expensive Bay Area housing.

In return for down payment assistance and low-cost mortgage money, the University effectively becomes a "partner" with the faculty-homeowner, enjoying a cut of the appreciation when the home is sold.

Emulating Stanford's approach not only would help the government's balance sheet, it would relieve pressure on foreclosures while putting borrowers on notice that there's no free mortgage lunch.

Over time, one might expect that realization to curtail their appetites . . .

Exit Strategies

"Surge" or "Stay the Course?"

Depleted and demoralized by the huge sums it has already spent (and arguably squandered) trying to stabilize a still-hostile environment, the U.S. must decide its next move.

The three choices are to: 1) double down ("surge"); 2) "stay the course"; or 3) declare victory and get out.

U.S. forces in Afghanistan?

Try, the federal government and the U.S. housing market.

A partial list of all the direct and indirect financial support provided to the housing market to date includes:

--Record low mortgage rates, courtesy of the Fed's $1.25 trillion purchase of mortgages.
--Zero percent short-term interest rates, intended(?) to resuscitate the banks and promote private sector lending.
--Hundreds of billions shoveled into Fannie Mae, Freddie Mac -- and prospectively, FHA --to enable them to (continue to) fund and guarantee a huge chunk of all U.S. mortgages.
--Tax credits and incentives to home buyers, expanded and extended through April 30, 2010.
--A combination of financial incentives and political muscle designed to induce banks to modify non-performing mortgages in their portfolios.

In light of all the foregoing, the two, $64 billion (times 10) questions looming over the 2010 U.S. housing market -- indeed, economy -- are: 1) how much financial support will the government provide to housing going forward?; and 2) how long can it afford that amount?

Oh, yeah -- one last question: isn't "limited surge" an oxymoron (like "jumbo shrimp?").

Et Tu, FHA?

Hemorrhaging at FHA

FHA runs low on cash, fueling bailout concerns.

--Headline, The Boston Globe (11/13/09)

Here we go again.

First come the rumors of funny accounting and huge, buried losses.

Then come the vehement denials from company executives.

Finally, the truth comes out: the critics are vindicated, the losses are toted up, the discredited executives are booted (or not) . . . and the government provides a multi-billion dollar bailout.

Are we talking about Fannie Mae? Freddie Mac?

Well, yes. But this time, the embattled government agency is FHA.

Background

As you may or may not know, Fannie Mae and Freddie Mac -- the two biggest government-sponsored players in the housing market -- finally hit the (accounting) wall and were taken over by the government more than a year ago.

Both ultimately required tens of billions in government bailout money -- money they denied needing practically up until the end. In fact, they are still in business, still incurring losses, and still in need of more bailout money.

As Fannie Mae and Freddie Mac lending slowed down, much of the slack the last year has been taken up by FHA.

In fact, something like 30% of all mortgages made in the U.S. in the last year were backed by FHA.

Its appeal? Government insurance, plus low, 3.5% down payments.

No Margin for Error

Unfortunately, lending into a declining housing market to Buyers putting down a very slim down payment is a recipe for disaster.

In fact, my first-grader could do the math: 3.5% down, minus the drop in the local housing market (call it 5% to 20%), equals the amount FHA borrowers are underwater.

Throw in millions of recession-induced job losses, and the picture suddenly isn't very pretty.

Even if things aren't quite so dire, after Fannie Mae and Freddie Mac, I doubt that many people are going to give FHA executives the benefit of the doubt.