Any concerns?

What do you want to know about residential real estate, finance,

valuation, or the mortgage crisis?

Homeownership is central to the American dream, and Republicans want to make it more accessible for everyone. That starts with access to capital for entrepreneurs and access to credit for consumers. Our proposals for helping millions of low-income families move from renting to owning are detailed elsewhere in this platform as major elements in my program for a New Prosperity. For those families, and for all other potential homebuyers, low interest rates make mortgages affordable and open up more housing opportunities than any government program.

-George W. Bush August 3, 2000

“Everyone should own a home.”

The mentality pushing the train down the track.

• REPUBLICAN PLATFORM 2000• Renewing America's Purpose. Together.• Preamble

The American Dream: Prosperity With a Purpose     Old Truths For The New Economy      The Republican Congress      Taxes And Budget: Render to Caesar, But Let The People Keep Their Own      HomeownershipHomeownership      Small Business: Where Prosperity Starts      Work Place of the Future      Trade: The Force Of Economic Freedom      Technology And The New Economy: The Force For Change       Privacy and Secure Technologies

The American Dream

…on the hood of a car.

US Census Bureau, homeownership rate since 1960

• 4th Quarter 2004—all time high 69.2%

• 1960: 62% 2005: 69%, only 7% difference

• The financing behind it changed . . . .

What happened? Why did it happen?The 12 Step Program

• John Tuccillo

• Great summary—article in RE Pro

• We are not brothers.

• We belong to the same club.

12 Steps1. Gen X, better homes/price, loosen credit.2. Unique mortgage instruments, not widely used, yet!3. Homebuilders go public.4. Home prices vs. personal incomes not keeping up.5. Get in the game. Prices high, how to afford?6. Back to step number 2. 7. Alphabet soup money . . CDO, MBS, SIV, risk shifted.8. Builders, hot markets, phantom demands, flippers.9. Mid-2005 (Detroit earlier), prices too high, buyers

withdraw, inventories rise, prices falling.10. Economy slows, less jobs.11. Teaser rates adjust + equity erased + can not refinance

+ can not make payments= Foreclosures/losses.12. Problems on Main Street ripple effects on Wall Street.

The Players• Realtors®

• Real estate agents.• Appraisers (human) (non-human)• Lenders-banks, mortgage bankers,

mortgage brokers, loan officers.

• Too easy to enter the game.

• “Greed is good!” -Gordon Gecko Wall Street

Real Estate Licenses• Salesperson—30 to 90 hours class (most

states), Pass exam.• 40 in Michigan, $300-$1,000• Broker—90 hours class, 3 years full-time real

estate experience, pass exam• 6-12 hours continuing education per year. $40-

$100• Mostly self-policed by local Association of

Realtors, Code of Ethics, Standards of Practice, minimal fines.

• State Licensing Board (DLEG-Michigan) Department of Labor & Economic Growth

Hard to be good.• 80/20, 90/10 rule

• 50% turn over every 2 years . . . Dr. James Webb, Cleveland State University

• RE/MAX Int. & RE/MAX First, Inc.• Metro Detroit: 1/3 drop in members since

January 2007. Source: Walt Baczkowksi, CEO M.C.A.R.

Real estate industry allowed the lenders to take more control & take the lead in the transaction—perhaps a natural progression.

Mortgage Industry• 50,000+ mortgage brokerages• 400,000+ employees (Mom/Pop)• 70% of all residential loans (broker)• 30% lender retail channels. (banks)

“Home Loan Centers”, many closed.• Loan officer vs. mortgage broker.• Typically no licensing for individual

employees or education required.

Start your own mortgage company.

• Some states small amount of classroom study/short test, surety bond, minor fees, background check

• Michigan--$450 application fee, personal investigation, background check, financial net worth $25,000+

• Net branching, instant start up, per deal fee, nationwide lending possible, access to

Appraisers• Most changed in last 15 years.• Use to give the license away.• Many are still practicing but

evolved.• Multiple levels of licensure. As little

as 75 hours training.• Effective January 1, 2008 changes to the

Real Property Appraiser Qualification Criteria by the (AQB) Appraisal Qualifications Board of The Appraisal Foundation—for minimum qualifications for all states.

Appraisal Licenses• Limited Appraiser—75 class hours including

15 hours U.S.P.A.P. (Uniform Standards of Professional Appraisal Practice) Rights

• State Licensed—90 class hours including 15 hours USPAP, 2000 hours appraisal experience including 1500 hours residential appraisal experience. Pass state exam. Rights

• Certified Appraiser—120 class hours including 15 hours USPAP, 2500 hours appraisal experience including 2000 hours residential appraisal experience over 24 months. Pass state exam. Rights

License cont.• Certified General—180 class hours

including 15 hours USPAP, course covering narrative writing and at least 90 hours non-residential course(s), 3000 hours of appraisal experience including at least 1500 hours of non-residential experience obtained over a minimum of 30 months. (Commercial real estate appraisals)

Good loans gone bad.• FICO (Fair Isaac & Co.) (The determiner.)

• Conventional/Conforming/ARM• EA-1,2,3• Concessions (legal fraud)?• Fannie/Freddie (FNMA/FHLMC)• Govies (FHA & VA) (GNMA) (Federal Housing Administration & Veteran’s Administration) (Government National Mtg. Ass

• Down Payment Assistance Programs (Nehemiah Foundation, Ameridream, Dove Foundation, et al in conjunction with FHA)

• Appraisals--fault in the process of valuating residential real estate.

• Order process, P.I.W., A.V.M., U.R.A.R., Drive-by only.

F.I.C.O. (Fair Isaac & Co.) (The determiner.)

• 350 on up to around 850• Some people—no score (Alt-Doc)• Jesus Christ, Bill Gates, Warren Buffet• Magic numbers: 580, 620, 720• Middle score (Trans/Exper,Equifax)• Almost nothing else matters or

mattered.

FANNIE MAEFREDDIE MACGINNIE MAE

• Government sponsored entities.• Do not lend money directly.• Provide liquidity, standards, guides• Packages/sells securities• Entity guarantees payments of

principal & interest to investors. • Misconception—no explicit or implicit

guaranteed by USA.

F.N.M.A (Fannie Mae)• Federal National Mortgage Association• Created in 1938, Government Agency• Known as “conventional loans” or

“prime”-better borrower/better interest rates, only buys “conforming” loans.

• Provides the engine (DU) and underwriting guidelines.

• Compete with sub-prime or non-conforming.

FNMA Basic Guidelines

• 20% down pmt. • <20% down pmt. (PMI)• 620+ credit score• 3% limit on seller concessions• 1 year job, 2 year* job history• 28% housing/36% debt to income• Max. loan amount: ?• 140 pages—if this, then that

FNMA Basic (cont.)

• No reserve requirement however 2 months for lower interest rate

• 2 paystubs or phone VOE• 2 months bank statements (season)• Gifted funds okay, 5% investment• EA-1 (now), EA-2, EA-3 (before)

FNMA Fixed ProductsTypes of loans they buy/bought

•7-Year Balloon •10-Year •15-Year/Fixed•20-Year/•30-Year •40-Year •Biweekly •Community Living® •Community Renovation™ •Community Seconds®

•Expanded Approval®• Flexible 97® &100™ HomeStyle®•Construction-to-Perm• HomeStyleRenovation• Interest-Only •MyCommunityMortgage™ •Native American/Section 184 •Native American/Section 248 •Rural/Section 502  

JUMBO• Typically mortgages above $417,000

(FNMA limit)• Up to $650,000 in Alaska, Hawaii,

Guam, US Virgin Islands??• Until 31.12.2008—Bush Stimulus

Package up to $729,750 (high cost areas or 125% median??)

• Private bank portfolio

FNMA ARM/Flex Products

• 1/1 • 3/1 • 5/1 • 7/1 • 10/1 • Community Renovation™ • Community Seconds® • Expanded Approval® • Flexible 97® & 100™ • HomeStyle Renovation • Interest-Only • MyCommunityMortgage™ • Native American/Section 248 • Uniform Hybrid 5/1

FREDDIE MAC• Federal Home Loan Mortgage

Corporation (1970)• Formed to expand mortgage market

and competition to FNMA• Similar guidelines to FNMA but has

unique and varying products, different money pools, different names, similar products.

• Now buying small portion subprime ARM mortgages (max. rate qualify)

Ginnie MaeThe Best Bet

• Government owned (HUD)• Guarantees on MBS consisting of

loans made by FHA, VA, Farms, Public Housing, Indian* Housing

• Cut out of FNMA in 1968• MBS of GNMA—risk of 0, USA • 35+ Million homes, $2+ Trillion• GNMA I—all same, GNMA II-varies

FHA Basic Guidelines• 97.75%LTV, 2.25% Down Payment• Self-insured, financed and monthly MIP

(1.5% and .50%)• 29/41 Debt-to-income ratios*• Medical collections okay, installments less

than 10 months, not considered debt.• Ability to pay more important than FICO

(past)• No EA-1, 2, 3 but REFER

Appraisal Order Form

System flaw?

New Lender Appraisal Code (XI Articles)

A Few Clicks to Mortgage Approval

Inside Fannie Mae’s D.U.Federal National Mortgage Administration Desktop Underwriting/Electronic Underwriting

Subprime a/k/a Non-Conforming

• Borrower or loans do not meet conforming or conventional lending guidelines—poor credit, high debt, income, interest rate, special terms

• Typically by mortgage broker or mortgage banker—via a warehouse line of credit passing on risk to investors via a REMIC’s which issues MBS’s, SIV’s, CDO’s

• REMIC-”controlling class”/controlled by financial institutions servicing the mortgage, making fees for managing payments, taxes & insurance escrows.

Subprime Products• 2/28• Interest only• 40 Year, 50 Year• N.I.N.A. (no income, no asset verification a/k/a NO DOC)

• 125% LTV (-25% equity position, not a joke)• B/C paper (bad credit, grade of loan, 5%-15%, ARM/FIX)

• Option ARM (adjustable interest with a twist)

• Stated Income (Can a waiter make $125,000/year?)

• JUMBO’s (big-ass mortgages)• ALT-Doc (alternative credit scoring, income verification)

• 1-DOB (one day out of bankruptcy mortgage)

• Seller 2nd (forgiven, unforgiven)

Predatory Lending• Pre-payment penalties• Loaning in the best interest of

commission, not consumer need.• Is subprime lending predatory

lending? Hey buddy, wait!• 2006-61% who received

subprime loans qualified for conventional loans.

Source: Wall Street Journal

Option ARMKey Subprime Culprit

1. Option ARM Calculator

2. Option ARM Amortization

A Losing Battle• Default factors, payment issues• Help me! Why workout, what workout.

• Loss Mitigation, loss initiation.• Short sale (shorting mortgage) …

as good as it gets.• Asset management (special servicers of

“controlling class” workouts, process foreclosures, manage/sell properties for lenders—lots of fees)

• Next—Foreclosure process & timeline.

Foreclosure (MI)Day 1 Missed payment.Day 30 Late fee, contact borrower.Day 60-91

Demand letter-pay past due, all fees, impending doom.

Day 121 Referred to lawyer, pubic noticeDay 148 Sheriff's sale, start of redemptionDay 237 End of redemption if abandonedDay 329 End of redemption occupiedDay 343 Start eviction process.Day 523 +4 units or +3 acres

In theory, it usually

takes longer!

Source: RealtyTrac

Cash for keys.• Wall Street Journal Video—Marc

h 28, 2008

How does this happen?

Schimmel

Black mold

How does this happen?

What is missing?

Why?

What’s missing?

Where did they go?

Aluminum stolen.

Maintenance

Sold for $1.00

How?

1.5 Meters of wasser—warum?

Costs of foreclosure

• Homeowner’s insurance coverage for these damages?

• Extremely high cost vac prop/ liability insurance (get costs) and compare to owner occupied.

• Attorney fees, winterization, property securing, taxes (back), insurance, asset management, utilities, grass/snow removal.

R.E.O. PROPERTIES“Buying a house is not the

same as buying a house that is on fire.”

-Jamie Dimon, CEO JP Morgan Chase • Talking about low bid for Bear Stearns? • Sums up the real estate market, buyer’s market, vultures.

Thousands of these.

Will sell for <$20,000

Follow the loss.

A big one.

Expired

Did not sell.

Not so big anymore

For Sale

DOM= Days on market

>$250,000 loss

This is in an area of million dollar homes. Note the marketing efforts.

Fraud Alert

Note name of Grantor

The Demoralization of the Big D

• Ford, Chrysler, GM, loss of manufacturing• Unions• Tax Base—leaving, not attracting• Gas prices • Operation Iraqi Freedom• Taxes (business, property, etc.)• Unemployment (highest in U.S.)• City of Detroit—29% graduation rate • Kwame Kilpatrick—mayoral scandal

• Election year blues.

Metro Detroit statsMarch 24, 2008

• 3 Major counties: Macomb/Oak/Wayne• For Sale: 19,413 (Single MLS)• 4,000 to 6,000 is normal• Pending: 2,880 w. avg. list price

$120,690• Closed last 30 days: 1,481 avg. sold

price $107,221• Saturation rate: 14 months

FOR SALE

Oakland County Stats(Homes only)

• One of richest counties in USA.• For Sale: 13,912• Pending: 1,448• Sold: 2,134 since 1/1/2008• Sold 04/2007-04/2008: 10,034

w./avg. sale price: $250,916• Sold 04/2006-04/2007: 9,605 w./avg sale price: $226,419

Clearance sale!

Clearance sale!

2007 vs. 2006

17% House

45% Condo

Property Taxes: Affecting defaults & sales

• Michigan taxation-simple prior to 1994.• Non-Homestead vs. Homestead rates• State Equalized Value & Taxable

Value• Pop-Up Tax• Complicated to understand, tough on

owners, surprise to buyers.

Michigan’s Pop-up Tax

Sold for $106,700 11/05/2007 Al Block.

$3,543 $5,194

Tax AssessorThe norm, not the

exception.

MORTGAGE FRAUD U.S.A.

• 2007: 52,868 reports• 2006: 37,313 reports• 42% increase• Source: U.S. Treasury Dept., Financial Crimes Enforcement Network

• Job security for auditors

Mortgage & Real Estate FRAUD in the BIG

F.B.I (Federal Bureau of Investigation)

has its Grand Opening of a special Detroit field office dedicated to mortgage and real estate fraud. –Spring 2003

http://cmsimg.detnews.com/apps/pbcsi.dll/bilde?Site=C3&Date=20071128&Category=BIZ01&ArtNo=711280402&Ref=V2

Types of Fraud• Property Flipping………• Silent 2nd……………..• Straw Buyers………….• Stolen Identity………..• Inflated Appraisals/Erroneous Appraisal…• Foreclosure Schemes……….• Equity Skimming…….• Air Loans…………..• Mortgage Debt Elimination Schemes….• House Stealing……..

We do it better in Detroit.

The cowboys are tightening the noose.

• Collateral based interest rates.• FHA loans: 580 minimum credit score

for automated approval—was 520.• FNMA/FREDDIE: Eliminate EA-1,2,3• Elimination of 80/20 loans.• Elimination of 100% N.O.O., -2.75• 100% O.O.—good luck (PMI)• Elimination of Stated Income/NINA

Double Edge Sword• Protecting lenders, safer securities.• Restricting credit, reducing buyers

in a market flooded with inventory.

Pricing loans based on down payment.

Rewarding the higher down payment.

Rate changes

Priced out or no price.

Paying the price.

Minimum Credit ScoresEFFECTIVE MARCH 19, 2008 1. The minimum acceptable credit score for FHA & VA mortgages is 580. 2. Government loans with credit scores less than 580 must have a DU, LP or Clues accept decision. 3. A limited number of investors will continue to accept manually underwritten FHA mortgage applications with no credit score and a non-traditional credit file; however significant price adjustments will apply. 4. Streamline refinances are unaffected by the minimum credit score requirements. Ericka Staton

Keeping people at home.

• Do most people want to keep it?• Pushing off foreclosure.• How to refinance upside down. • Lenders and services-outside the box.• Write-downs, new terms, forget

traditional loss mitigation.• Next slides—more debt is first step.

FHA to the rescue?

• FHA expands loan limits allowing consumers to borrow more (+35%)

• Up to $700,000+ in some areas.• Is it a government bailout?• Govt. assumes risk, good/bad?• The most recent news below:• http://www.inman.com/news/2008/03/17/democrats-back-massive-expansion-fha-guarantees

• http://www.inman.com/news/2008/03/4/hud-rolls-out-new-limits-fha-backed-loans

So what’s out there?Estimated Purchase Dollars Originations,

2006

Prime JumboSubprimeGovernmentConformingAlt-A

Source: Mortgage Bankers Association

So what’s out there?Estimated Purchase Dollars Originations,

2002

Prime Jumbo

Subprime

Government

Conforming

Source: Mortgage Bankers Association

What to worry?

FNMA—finally!!!

Future of Financing the American Dream.

• Better mortgage lending may continue to damage property values, less buyers for a long time.

• Prices in line with income, but not expenses (inflation).

• More government guarantees.• Lower returns on mortgage securities.• 5% of GDP, but most of A.A.P.W.

It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.

- Charles Darwin