GLG News by Howard Liggett

Implications: The government takeover of ailing mortgage giants Fannie Mae and Freddie Mac was no surprise and has been jumped all over by the mainstream press. This move was intended not to cause something to happen, but to prevent something from happening. That something was the imminent bankruptcy of the two entities that account for about 80 percent of U.S. mortgage issuance.  What does it mean for those who watch from afar in locales like Omaha,Denver,Orlando and Atlanta?

Analysis:  Mortgage rates may adjust downward a bit, but from a big picture standpoint, it will be business as usual. That is, until the new government-owned entity starts writing down mortgage principal balances for defaulted borrowers and other unintended consequences.  Home prices will continue to decline but not as sharply had Freddie and Fannie been allowed to collapse.  The problem is that the government, and by extension the taxpayer, is now on the hook for whatever losses Fannie and Freddie suffer. The Treasury Department tells us that they will not suffer any losses, but their forecasting track record has been horrendous both before and throughout the mortgage crisis.  Remember, that just a few weeks ago the Feds stated that such a bailout would not be necessary.  The amount of exposure is unclear,but some estimates put the dollar amount at $300 billion!  The U.S. government does not have that much money to cover this private sector loss.  My children,grandchildren, ad infinitum will work much of their lives to cover the losses incurred by those risk takers who gambled and were declared "not responsible" by Uncle Sam. Admittedly, allowing  these two GSE's  to fall would have been disastrous in the short term.  But that is our problem in assessing these financial firestorms---short term thinking.  With time,much pain and sacrifice,the market would have prevailed and the taxpayers would have dodged a very large bullet.

Implications: July 1 marked the beginning of a new fiscal year for most states and about one third of local governments, and, as a result of declining economic conditions, ushered in a period of cutback management and difficult decision making for many state and local leaders. Reduce taxes,reduce spending is the hue and cry from John Q. Public and understandably so.  However,we as voters sometimes shoot ourselves in the foot when it comes to government reform predicated solely on the idea "not if it impacts me".   Reductions in infrastructure funding,cutbacks in nonessentials such as public parks, street festivals,art appreciation events can spell doom for commercial developers and retailers who had earlier held plans to locate within municipal boundaries.

Analysis:  To date, the scope of the problem is most evident at the state level, but it will become more evident for cities, particularly when the remaining municipalities turn over new fiscal years October 1 and January 1, 2009. The Center on Budget and Policy Priorities in Washington, D.C., reports that 29 states are facing a combined $48 billion shortfall in fiscal year 2009.  Subprime defaults and the subsequent foreclosures have stripped citites and counties across the nation of much needed tax revenue.  The center’s report points to declining state sales tax revenues, increased pressures stemming from local property tax-housing revenue declines and the prospect of income tax revenue decreases if the economy continues to weaken. Since states, like cities,can’t run annual budget deficits, the gaps will have to be closed by cutting spending, raising taxes, drawing down reserves, or some combination of the three.  Raising taxes is really unthinkable given the severity of today's downturn.  To escalate ad valorem tax rates on the backs of families already hurting from foreclosure woes will most certainly escalate the loss of properties through tax foreclosure sales and auctions.

In Indiana, where local governments had been leading efforts to provide homeowners with property tax relief while providing local governments with additional revenue authority through the sales tax, the state response essentially took the easy road by cutting local property taxes, but leaving local governments with a large hole in their budgets and no tools with which to respond. Declining and decaying cities destroy new development.  So,what is the answer?

Webster's defines conundrum as an intricate and difficult problem.   That it is and maybe all we can do is wait and see how bad it gets before constructing any real and lasting solutions.

Implications: In their first quarter results, several banking organizations reported stunning losses and provisions generated by these loans, with predictions of much more to come in future quarters. Indeed, national banks, which hold about half of all home equity loans, sustained as much loss from this type of credit in the first quarter of this year than they did in all of 2007.  Home equity lending has grown dramatically in recent years, more than doubling since 2002 to about $1.1 trillion outstanding!

Analysis:  To provide some perspective, that total is about 12 percent the size of the roughly $9.5 trillion dollars in first mortgages outstanding.  Unlike the many first mortgages sold to third parties, home equity loans almost always stay on the balance sheet of the lenders that originate them, which means they keep all the credit risk. And by definition, because they nearly always stand behind first mortgages, home equity loans tend to be riskier.  How this all happened is old news but worth summarizing.   Rapid house price appreciation generated lots of home equity for millions of homeowners nationwide. Interest rates were low generally, and the secured nature of home equity loans made interest rates on this product considerably lower than interest rates on other types of consumer credit. And tax deductibility for the first $100,000 borrowed was just one more attraction.

 Relaxed  underwriting standards helped more people to qualify for loans, and more people to qualify for significantly larger loans.  Many loans were made with limited verification of a borrower’s assets, employment, or income. Higher debt-to-income ratios became the norm.   Finally, a number of lenders began using brokers and third-party correspondents to ramp up their market share numbers quickly and with relatively lower costs or at least that’s what they thought at the time.  Putting it in very candid language--retail bankers became lazy and now there future customer base has been eroded by that outsourcing action. While engaging third party origination channels is not a problem by itself;at least not if the relationships are managed appropriately. When they are not, however, the risk of loss can increase significantly. It’s now apparent that a number of lenders did not manage the broker and correspondent relationships nearly as well as they should have, making loans from these third party channels considerably riskier than loans originated through their own retail offices. In short, there were a number of relaxed underwriting practices that significantly contributed to the rapid growth in home equity lending.

Fully one half of the HELOCs are held by national retail banks.  The exposure figures are growing each quarter.  Looked at in dollar terms, losses on all home equity loans, including HELOCs and junior home equity liens, rose from $273 million in the first quarter of 2007 to almost $2.4 billion in the first three months of 2008 representing almost a nine-fold increase. And the largest home equity lenders are now saying that they expect losses to continue to escalate in 2008 and beyond.

The American Dream may be alive and well,but for many it will remain just that---a dream whose attainment has been made more difficult by the very lenders who were depended upon to achieve it!

Implications: Kerri Panchuk's article addresses the most significant intangible loss brought about by the subprime mortgage failures.  Namely,the loss of consumer borrower trust which may never be fully regained as long as predatory mortgage horror stories continue to capture headlines and replace mortgagor confidence with skepticism and even disdain.

Analysis: How bad has it gotten?  California offers some stunning examples of how blatant the hucksters have become.  Earlier this year California Attorney General Edmund G. Brown Jr.  shut down Lifetime Financial, Nations Mortgage, Greenleaf Lending, Virtual Escrow, Olympic Escrow and Direct Credit Solutions, accusing the predatory lending companies of pushing homeowners into “illegal and unconscionable loans." The companies ran a complex predatory lending scheme using bait and switch tactics to victimize thousands of consumers in California, many of whom have already lost their homes. In March of this year the attorney general froze all the companies’ real estate and bank accounts and enjoined them from engaging in further predatory practices. The freeze order also included expensive cars and millions of dollars in private real estate. The AG also seeks an estimated $20 million in penalties and restitution.

So,how did these companies pull off the hijacking of so many borrowers?  Lifetime Financial, Nations Mortgage and Greenleaf Lending operated lending schemes to cheat homeowners by promising unrealistically low mortgage payments and then switching them to loans that do not match the original agreement. Telemarketers lure consumers by telling them that they are preapproved for a fixed rate loan of 5% to 6% which could lower monthly payments by hundreds of dollars.  Lifetime Financial arranged loans with hidden fees of up to $20,000. In addition to these fees, consumers found themselves with loans that had worse financial terms than their original mortgage. In some cases, consumers were saddled with monthly payments that exceeded their entire monthly income! Many borrowers either lost their homes to foreclosure or are facing foreclosure as a result of engaging in these transactions.

Telemarketers initially request only a nominal payment for a home appraisal. Appraisers then inflate home values to qualify the homeowners for much higher loans than are appropriate. The companies never provide copies of theses appraisal reports to consumers. Next, a salesperson shows up at the victim’s house, sometimes as late as 11:45 at night, with documents that are incomplete or contain terms that are vastly different from those originally promised. If consumers complain about the terms, the salespeople tell them that there is a mistake but they should just sign the paperwork to “keep this great deal.” If a consumer refuses to sign the documents, company employees forge the customer’s signature. In some instances, the forgeries are so blatant that the victims’ names are misspelled.

Sadly,these examples are not isolated to California.  Not at all.  They are cropping up across the nation.  It would be comforting to end this article with a bit of hope by saying something glib like
"One rotten apple can spoil the entire bushel",and that we must simply cull and prosecute the rotten apples.  However,I am afraid that the bushel is rotten and is now threatening the entire orchard!  The mortgage lending industry has a high hill to climb and it must do everything within its power to recapture the confidence of the American consumer.  No,the stain will not be easily removed.

Implications: It easy to think nationally when reading of the foreclosure number increases;the glut of homes and the downward impact on price point when,in fact,there are many regions of the country that have not been as adversely affected by speculator development and inflated land values.  Connecticut is one of several states that have weathered the storm and continue to have considerably healthier residential markets.

Analysis:  The ‘doom-sayers’ are always there and will always make predictions about the coming collapse of the market and other insurmountable catastrophes, but when rational thought prevails, we recognize that we are simply in a weak part of a traditional business cycle. Yes, these still happen, and this cycle will run its course. In the meantime, one thing is certain: people will continue to move and purchase homes. Connecticut hasn’t been a speculative marketplace and this stands in stark contrast to some other areas of the nation. The state is also  not overbuilt with large standing inventories of new homes on the market, another characteristic of other locations nationally. Connecticut is also very fortunate to have an economy that has been performing relatively well.

 Looking at the rate of deposit activity in March and very early April, the state of Connecticut reflected an increase in the rate of deposits. For example,as of May 15th there were some 4,600 pending single-family sales and 1,600 pending condo sales. While there may well be some that don’t close, the numbers still look pretty good. There is still a market out there.

We have also been hearing that there is almost a 10-month supply of inventory nationally. When this number is run for the state of Connecticut, on an overall basis, it comes out to about a 5-month supply of inventory on the market. Clearly, even if all of the pending sales do not close, Connecticut is well outperforming the national figure. There have not been significant inventory increases which is certainly more  good news.

It is important to understand that Connecticut is not alone in bucking the national trend.  New Mexico has also offered encouraging news.

The glass is still half full!

Implications: Foreclosures,tax increases,land devaluations and a sour economic outlook  for the remainder 2008 have forced municipalities and counties to look at fat trimming measures which hurt the least number of citizens.  The recently passed Amendment One forces local governments to limit tax increases to a 10% cap.  Critics say the amendment's provisions are draconian,but Florida taxpayers demanded relief.  The frills get cut first and tax subsidized golf courses are the easiest of targets.  The weather along with escalating gasoline prices will change the "look" of golf as many have come to expect.

Analysis:  As of April 2008, the Southeast of the U.S. continues to suffer the effects of an unprecedented severe drought. During 2007 some golf courses were allowed to water only their tee boxes and greens, resulting in the loss of some fairway grass. Access to water is not only a problem for drought stricken areas of the Florida,Alabama and Georgia.   Municipalities across the country are imposing restrictions on water use that will limit watering of public and private membership golf courses.  Course conditioning practices are being affected not only by the scarcity of water, but also by the rise in fuel prices and other course maintenance materials – fertilizers, etc. Not only is water becoming scarcer, it will eventually cost more as a diminishing resource. Also, if it costs more for gas to take a mower out to cut the grass three times a week, maybe a course can only afford two times a week in the future. Course designers have for some years dealt with wetlands issues and water access, so planning for water retention areas for irrigation purposes is not new, but we are entering an era of overall tighter budgets for maintenance. That will impact everything from how high the grass will be in the rough to landscaping with flowers along the side of a tee box. The perfectly manicured courses shown on television for professional tournament golf may not be affordable for most clubs.  Government run courses will begin to look like traditional European fairways with more brown and less green,rougher fairways,and longer grass lengths.

Bottom line---Florida's municipal course golfers have to change their expectations because whether it is water becoming scarcer or more expensive costs for maintenance, the overall circumstances for golf have changed. Again, some private courses may have members that can tolerate any price point to have a certain golf experience, but most facilities cannot pass along all costs.

Implications: The nation's homebuilders have an enormous inventory problem and it is not limited to only completed homes sitting idle on the market.  Many builder-developers with planned for housing communities have seen the blueprints shelved as existing home sales have stalled and new homes garner little more than drive-by attention.  As the misery index rises,many of the large land tracts committed to subdivision housing are being sold as cash starved builders try to weather the storm.

Analysis: These land tracts may come with or without infrastucture such as underground utilities,paved streets,etc.  In either form,these land acquisition prospects present unique and profitable assets for REIT managers to consider.  Several real estate investment firms now are starting to invest in residential land. They range from firms raising specialized distressed residential land funds such as Everest Market Street and TriPacific Capital Advisors LLC. to firms investing their main real estate funds, such as Prudential Real Estate Investors, Colony Capital LLC and Blackstone Group.

Residential land nationwide is now estimated to be worth 25% to 33% less than it was two years ago. The value of some properties has been reduced by as much as 75% according to the International Association of Assessing Officers (IAAO). Investors' current interest in residential land is a departure from traditional institutional investment in commercial real estate that is close to fully leased in primary real estate markets.

Many builders simply need to liquidate this land as cash is in such  short supply.  Between 1999 and 2006, publicly held homebuilders spent $160 billion on land. Now, as new home building has slumped, they are trying to unload some of that property. Up for sale is raw land as well as building sites complete with water pipes, electric lines and other infrastructure.  For example,in November of last year Lennar Corporation sold 11,000 home sites to Morgan Stanley Real Estate for $525 million.  The reported net book value on these properties was $1.3 billion!

2008 will offer unheard of land buying bonanzas and the discounts will only continue downward.  Will Rogers was REIT!

Implications: Vacant properties invite a host of ills including vandalism,neglect,arson,and even destruction by former owners.  REO managers must have a set of preemptive security tools at hand to protect against deliberate damage and,as much as possible, the unpredictable forces of nature.  Grafitti artists,homeless vagrants,and litterbugs will never be eliminated,but being alert,aware,and incorporating sound property preservation techniques can greatly reduce loss to the portfolio.  

Analysis: Basics should include new locks on every REO entrance as well as security bars for patio glass sliding doors.  Garage door openers should be disengaged and manual door jams installed to prevent vandals from garage access to the property.  Older homes in the inventory may even require updated security locks for the wood framed windows.  Regular and predictable surveillance is perhaps the best tool in your arsenal of damage prevention tools.  I cannot emphasize enough this idea of predictability.  Remember,that you are not trying to catch someone in the act of property damage,but,rather,preventing such activity in the first place.  This means morning, midday,afternoon and evening monitoring of properties.  Whether they are called loss mitigation,property preservation or damage control specialists,the important thing is to hire a subcontractor who specilaizes in offering this type of property protection service.  Begin with and demand a property by property inspection with reports of preexisting damage for each parcel.  Contractors should all be background checked and REO experience is a huge plus.  Establish in writing your service expectations with each contractor at the outset.  This eliminates the many problems associated with miscommunication.  Finally,realize that damage will occur no matter how much you invest in property preservation. 

Preventive measures will,however,reduce the level of loss to any portfolio of real estate holdings.  After all,its your asset in the sling!

Implications: Home sales have continued to be sluggish this year, with existing home sales down nearly 24% in February compared with February 2007, according to the National Association of Realtors. New home sales fell to a 13-year low in February, according to the U.S. Commerce Department.  Federal legislation has now been introduced to ostensibly aid the hurting residential real estate market.  The measure would extend home buyer tax credits to first time purchasers,but is it merely a band aid with a very short shelf life? 

Analysis:     The bill's sponsors are Rep. Vito Fossella, R-N.Y., and Bill Pascrell, D-N.J. The temporary credit would apply only to those planning to live in the home and could only be claimed by taxpayers one time, making speculators and flippers ineligible for the perk.    But the tax benefits won't last for long; the credit would expire one year after enactment.   The short time frame is meant to press fence-sitters into making their first home purchase ASAP.  A major hurdle does exist in that the tax credit is up against tighter lending standards for these same would be home buyers.  To be eligible for the credit, home purchases would have to meet the new temporary conforming loan limits approved in the federal economic stimulus package.  The limits are now equal to 125% of the geographic area's median home price, up to $729,750.

This rush to assist the ailing residential market is very predictable given the enormity of the 2008 Presidental and U. S. Senate races.  For that reason,however,it is with caution and even some bit of pessimism that the home credit idea should be considered.  It may very well make the "wait and see" prospects move a little faster if they can meet the stiffer lender requisites,but it will offer no hope to those who cannot afford to stay in there homes presently.  It will help, somewhat, in reducing inventory levels,but it cannot erase or even mitigate the liquidity problem. 

Bottom line,liquidity from investors is all about confidence in the marketplace and home credits will not offer much to help resurrect  this most important intangible!

Implications: There are several reasons to consider the student housing and dormitory construction market as niche real estate investments that will continue to prosper despite the downturn we are currently experiencing.  First,there is a real shortage of dormitory space at both public and privately run campuses across the nation. Second, the college-age population is increasing and so is the number of individuals who will be attending college. 

Analysis: Third, the returns posted by three of the biggest REITs in the specialty student housing sector are impressive. American Campus Communities, Inc., GMC Communities Trust ,and Education Realty Trust, Inc. have all provided dividend yields over 5% to their investors. Perhaps the most attractive feature of this market segment rests with the indication that it may be much more resilient and less connected to the larger machinations of the U.S. economy as is the case with more traditional housing. Mr. Douglas Culkin, president of the National Apartment Association, stated in a recent interview about dormitory facilities--- "It's the fastest growing niche market in housing."

Despite a growing institutional presence, the student dormitory market is still fragmented and dominated by small, underleveraged companies, whose portion of the market would be very susceptible to takeover by larger and better financed developers and investors. Educating the institutional firms has also been a challenge and it was not until just a few years ago that student housing was even accepted as a distinct investment class of real estate.

REIT managers should place this asset group on their watch list.

Implications: Now is the time for creative innovation within the public and private sectors.  It behooves the related industries of home construction,mortgage,and banking to uncover strategies that put in play will allow distressed homeowners to cut their payments and,at the same time, cut lender losses that increase substantially when foreclosure actions are initiated.  Consider fractional ownership.

Analysis: The concept is an old-fashioned quid-pro-quo type of transaction that could work wonders for banks and homeowners.  The fractional ownership strategy works by allowing distressed homeowners to convert part of their loans into equity; thereby, cutting their loan amounts and monthly payments significantly. In turn, banks get to keep homeowners in their properties, while also avoiding the expenses that inevitably come with foreclosure or with having to sell a home in a lackluster real estate market at a reduced price. Utilizing this philosophy, banks decide not to take the write-downs now, but rather to wait and deal with the properties at a time when they'll be selling them at a better price.

The lenders will actually take a partial ownership stake of the property, allow the borrower to get back into a timely payment, and then ride the market back up again to a future,possibly 3-5 years away, when the market in that area is back and they can refinance that borrower out, let the borrower buy them out, or they can dispose of the property through a sale.

Again,we must tap all our innovation to restore hope for homeowners and stability to the lending industry which continues to help deliver the American Dream.

Implications: For builders looking for a smooth landing spot amid today's softening market for new construction, it makes good dollar sense to examine the  green market opportunities available on existing office and commercial space.  The LEED (Leadership in Energy and Environmental Design) rating is spreading among commercial construction projects throughout the State of Florida.  This green fever is catching on and for some very sound reasons.

Analysis: There are several reasons why an existing building should examine the opportunity of going green.  Retrofitting will and does reduce energy consumption,including utilities and water.  Making sure that a building is working efficiently benefits both employers and employees.  It reduces the negative impact on all occupants;especially work environment related illnesses or "sick building" syndrome.  As we all know,healthier employees are happier and more productive employees.  Industrial psychologists have known for decades that even the statement by an employer to his or her workforce that changes to improve the work environment are being considered results in greater production.  The LEED certification program offers various levels of compliance including certified,silver,gold or platinum. The designations are conferred by the US Green Building Council and the labeling of a commercial office or professional building as LEED certified has created a new value-added marketability for the leasing agent.  Simply put,LEED certified buildings are attracting greater numbers of tenants.  Employers taking the lead in this effort have,to date.been primarily public educational and public utilities such as the University of Florida and the Jacksonville Electric Authority.  However,the trend is catching on as questions regarding the costs associated with retrofitting are understood.  According to the USGBC,building owners can expect at least a 5% increase in new construction costs to achieve the LEED certification while existing buildings could face up to 10% for retrofitting.  But it is really all about return on the investment.   On that point the USGBC points out that the average ROI is 20% over the building's lifetime.

Makes sense to me.  Actually,it makes green sense.

Implications: "Modular" used to be a dirty word in the building industry, bringing up images of hucksters touting crackerjack-box homes plopped down on a street corner or a vacant lot.  Not any more and modular does not mean "mobile" as in double-wide trailer.  What is more,modular homes typically cost 10 to 15 percent less than comparable stick-built homes.

Analysis: After a recent driving trip through coastal Mississippi and Louisiana,it became abundantly clear that the citizens ravaged by Hurricane Katrina need answers that make affordable sense in terms of addressing their long term housing demands.  Modular homes may very well be a part of that answer.  Back to the myths.

Myth One: Modular is a type of home or class of housing. Modular construction is simply a building process. Modular factories are controlled-environment stick-building operations. They use the same materials, plans, and for the most part, the same practices that on-site operations use.

Myth Two: Modular construction only works for single-family homes.  Modular manufacturers are making townhomes, apartment structures, commercial buildings, as well as all kinds of customized single-family homes.  Steel construction modules are currently used to construct multiple story commercial buildings.

Myth Three: Modular construction is only applicable for small builders in rural markets. The entire industry is seeing a lot of partners who are intrigued with benefits of modular construction in the higher-growth building markets in urban areas.

Myth Four:  Weak demand for the product.  Not so. Existing modular manufacturers are expanding and new manufacturers are coming into the field. . Modular is strong and growing in the Rockies, the Midwest and the Mid Atlantic, and there is a huge interest in the West Coast, Florida, and Gulf Coast markets.

Large-scale production builders are not generally interested in modular construction because they often have the economies of scale to leverage even greater discounts on materials and subcontractor fees than a modular manufacturer can. Modular now appeals more to medium-size builders.   They can expect to build a modular house for about five to 16 percent less than the same conventional stick-built house. Due to the need to get the module under highway bridges for delivery, very large open spaces and high ceilings are the most likely limitations in modular designs. Experts estimate that 80 to 90 percent of today's residential home designs can be modularized.   The modular industry, which boasts strong structures that can easily meet high-wind zone code requirements, is gearing up for the replacement of hundreds of thousands of houses in the Gulf Coast. While modular homes may be a viable solution on the Gulf Coast for quick, affordable housing to replace the large number of homes lost to Hurricane Katrina, they also have a place elsewhere in the United States due to their affordability and speed of construction.

Implications: Will the abandonment of mortgage defaulted properties create opportunites for tax debt investors? What innovations may be on the horizon to address the anticipated loss of property tax revenue to the nation's cities & counties?  Will tax certificate sales become the method of choice for recovering tax revenue on mortgage foreclosed parcels? Will local governments take the tremendous negatives associated with the foreclosure mess and turn it around by making institutional investors a part of the recovery process?

Analysis: The neighborhood upheaval described in the CNNMoney.com story is being replicated across the nation. Foreclosed homes, empty structures, vandalism, and the loss of tax revenue can quickly make a city appear third world which creates an entirely new set of problems such as teacher flight to better funded suburban schools, the loss of potential urban investors, and the inescapable stigma of a community in decay. As Cuyahoga County Treasurer, Jim Rokakis, correctly points out, foreclosure properties push surrounding property values downward which, in turn, produces a smaller property tax yield for the City of Cleveland and surrounding levying agencies dependent upon the real estate tax for the provision of important services.  The declining property values place demand upon Rokakis and his colleagues across Ohio to reassess tax producing parcels at lower assessed values.  The State of Florida faces the same problem.

Unpaid property taxes in Miami-Dade and Broward counties reached new highs this year, as thousands of homeowners tumbled into foreclosure, shrugged off bills on investment properties they couldn't unload, or found it impossible to make lump sum tax payments that their hybrid ARM mortgages didn't require them to put in escrow. Unpaid taxes mushroomed to $365 million.  So where is the hope? It rests with governments not afraid to streamline the tax recovery process by partnering with well leveraged investors who are willing to purchase the tax delinquencies facing a city or county.  Forget the cumbersome auction process and follow the lead of Ohio which allows, by statute, the state's largest counties to sell all delinquent tax liens to one pre-qualified investor. Simple, transparent, and very cost effective for the taxpayers. 

The time is now for organizations like NACo (National Association of Counties) and the NLC (National League of Cities) to push their members to seek legislation at their respective state capitols that would allow the sale of tax debt as a bulk purchase with all of the property owner protections necessary.  The private sector will participate with some leadership by local and state governments.

Implications: The idea of having politicians involved in the solution of any problem of economics is,admittedly,frightening.  However,congrats and kudos are in order for those members of the Florida Legislature which crafted the concept of real estate tax "portability" and,further,put forth the idea in a voter referendum to be held this coming January 29,2008.  

Analysis:  The move was backed by newly elected Governor Charlie Crist and was promoted as a real estate tax buffer for current homeowners in the state who have been struggling with higher ad valorem tax bills and through the roof insurance rates.  But the measure,if passed by voters,could do much more.  Realtors across  Florida are heralding the kick start such an enactment could offer to their clients whose residential properties (both traditional & condominium) have been languishing on the market for months with no end in sight!  So,what is tax portability and how does it apply to residential home sales?

The current Homestead Exemption for Florida primary residences is  valued at $25,000.  This means that any homeowner- resident of Florida is entitled to have twenty five thousand dollars exempted from the appraised value of the dwelling for real estate tax purposes.  Homes valued at or below the $25,000 are exempted totally from property taxes.  By a court ruling in 1969,this feature of tax exemption was extended to individual condominium units as well. 

Since 1994,the homeowners of Florida have,by way of a  constitutional amendment entitled Save Our Homes or SOH,had their annual property valuations capped at 3% or the change in the CPI (Consumer Price Index) whichever is less.  The downside of this homeowner protection rests with its lack of continuance should a homeowner decide to move up.  Once the residence is sold the new buyer and the former owner will be taxed at the full and current value of their new homestead purchases.  This situation often results in wide disparities in tax valuations for similar homes on the same street. 

The January 2008 referendum will cure that disparity by including tax portability.   It will work like this:

Implications: Florida and Southeast  Alabama condominium sales are flatlined with bulging inventories that are losing value each day they sit idle. Investors are losing money,patience, and hope as this sector struggles for air. Builders are scrapping plans for new developments until the current inventories are reduced. Big question is--Who is going to buy under the current market conditions? Answer--Well financed private investors who are still awaiting the condo misery index to ratchet upward.

Analysis: Two years of slow sales have killed many new condo development plans and placed many others on hold. The inventory glut has kept bankers away and Realtors searching for buyers. Developers across the southeastern U.S. have sought and received permission to push back their start dates because of the stale sales market. So,where is this housing sector headed? At the very,least,I expect the current situation to offer an investor's market for the next 12-15 months. Unit condo prices will be unlike any we have witnessed in the past 30 years. Many developments will simply "bundle" their empty units in packages of 10-20 or more for bulk purchasers. Once the private investors have had their pick of the condominium units left standing and the inventory is sufficiently reduced,it will be time to assess how best to sell future developments.

Fractional share ownership is a proven method that can aid buyers concerned about the rising costs of living at or near waterfront units such as those surrounding the Florida peninsula and Alabama's Gulf of Mexico shoreline. Owners share the burden of homeowner association dues,property taxes,insurance and association imposed special assessments. Typically,fractional ownership is sold in 1/6 and 1/25 shares.

The bottom line is that the current economy is not producing enough qualified users and revitalization can only occur when the affordability of a condominum apartment or unit is brought into the economic sphere of more people. Fractional sales will be the catalyst that energizes this market sector!

Implications: More and more would be luxury home purchasers are finding their dream cribs just that---dreams.  Two income families with stellar credit scores have discovered that homes exceeding the jumbo loan limit of $417,000 (The cap on what Freddie Mac and Fannie Mae will underwrite.) are often out of reach due to the substantive down payment required to fill in the gap between the jumbo loan amount and the sales price.  In the last several weeks,the national mortgage crisis has metastasized into the high end luxury and custom home market. 

Analysis: Because of the Fannie and Freddie cap at just over $400K,banks and mortgage companies who are trying to close the deal find that they must tap other sources for luxury home funding such as mortgage backed securities.  MBS funding,however,is temporarily drying up as investors run from this asset class. While jumbo loans have always come with higher interest rates than conventional loans,the spread has increased due to the recent constrictions on these products.  For example,as of September 15, 2007,the average rate on a 30 year fixed-rate jumbo loan was 7.36%,versus 6.64 % on a conforming loan according the Department of Housing and Urban Development.  Unless the propsective purchasers are among the mega-rich,the sale of luxury homes will  continue to be contingent upon financing and until the institutional investors are attracted back to the market or Congress votes to raise the conforming loan limits on jumbo mortgages,the situtation will remain stagnant.  The push for legislative action to raise the loan purchase limits for the two GSE giants has pitted former allies against each other.  Realtors want the increase as a tool to reenergize home sales while the Mortgage Bankers Association has decided against endorsing such a move.  One thing is for sure.  If Congress does not act and act soon,the conforming loan limit for jumbo mortgages could actually decline by next year! Why?  Because the ceiling is indexed to home price inflation across the country and,as we all know,in many sections of the nation home prices are in a steady decline. 

Implications: Defaulted mortgages that transform into REO will hemorrhage the budget of any lender or servicer who cannot liquidate the parcels with dispatch.  Short sales represent one more tool available to property managers,real estate professionals,and homeowners faced with must sell properties in an all but dead market.

Analysis: Short sales are legitimate alternative transactions that should be considered as increased foreclosures add to the heap of REO inventories. It is, however, crucial that all parties involved understand the details of the entire process. This includes the lender-servicer, borrower, Realtor, title company, and, of course, the prospective purchaser. Lenders, especially, must understand that the price point on a short sale is the real market value of the property at the time it is offered. It is not the figure that would move the home at a foreclosure sale.

Short sales take time to put together. Appraisals, BPOs, ad valorem tax lien checks, and site inspections are all requirements in the verification chain. Problems do occur in these transactions when buyers submit unrealistic offers well below the market value of the parcel or second mortgage holders are uncooperative. Open communication is key to everyone involved with the short sale and will do much to leave all at the closing table feeling treated fairly.

Implications: On November 19,2005,the county treasurer for Montgomery County,Ohio auctioned nearly two thousand tax liens to one investor for $9.1 million dollars at a bid rate of 18%.  The following year on November 18,2006 another $6.8 million in tax liens was issued at  a 14% rate of return. This Fall the process will be repeated in counties across the Buckeye State with populations in excess of 200,000 inhabitants. Opportunities such as these for large dollar placements are cropping up across the United States as local governments examine the most efficient means available for collecting upon their delinquent property taxes---bulk tax lien sales. 

Analysis: Franklin County (Columbus) is also gearing up by offering a packaged set of tax liens to the tune of $3-6 million dollars.  This bulk sale methodology is replacing the antiquated and costly auction procedure utilized for decades by local government tax authorities who operated under state statutes that were drafted in the late 19th century.   Auctions typically mandate that every parcel with delinquent taxes be identified aloud before a crowded chamber filled with anxious competitors.  The process can drag on for days and even weeks in the case of large metropolitan centers.  The decision by local governments in conjunction with progressive thinking state legislators to sell all liens as a bundled unit makes good economic sense.

It also presents a unique opportunity for portfolio managers looking for healthy returns on substantial placements.

Implications: So called "unscrupulous" lending practices,ignorant borrowers,and unrealistic market appraisals have all been identified as sources responsible for the increased residential foreclosure figures.  Speculation has also contributed to the saturated market and stiffer lending guidelines. 

Analysis: Defaults on second mortgages,especially in the warm weather and Sun Belt states of Florida,California,Arizona and Nevada have raised the foreclosure numbers significantly for their respective geographic areas and the nation as a whole.  While many of these parcels in default are categorized as residential,they are,in fact,vacation homes with no owner on-site.  As of  June 30 of this year,the Mortgage Bankers Association reported some 32% of prime mortgage defaults in Nevada were on non-owner occupied properties while an additional 24% affected subprime mortgages.  Similar numbers were posted for Florida , Arizona and California.  The rapid price appreciation in the years 2000-2004 lured investors and homebuilders to the well and drink they did.

Some who gambled simply held their cards too long.  Now that home values are tanking,many real estate investors have walked away from their investments and "tossed the keys" back to the bank.  I am sure the lenders will not forget!