Berkshire Hathaway Offers to Buy ResCap; Buybacks Continue to Plague Industry; Letters from Trenches on Appraisals

Tonight the NBA finals start, just in time, or so it seems, for the NBA
basketball season to start all over again. But here’s some aerobatic basketball
fun
for fans.

North Dakota doesn’t make the news often enough! Now the citizens are
considering eliminating property taxes.

Not only do we have to endure five more months of election news,
and then a few more about the lame duck Congress, but we are six months away
from the end of the world
. There is a lot of talk swirling around that this
year marks the end of the world as we know it and apocalypse is coming. Some
say the ancient Mayans predicted the end of the world, but that isn’t exactly
true. There is no clear prophecy in ancient Maya records because the single
stone reference of any sort that might refer to it is damaged and the last part
of the inscription cannot be understood (Monument 6 from the ruined site of
Tortuguero makes reference to the date, but the rest is just not clear). That
is one area of trouble, but it is compounded when you consider other Mayan
prophesies that exist in other documents are not only difficult to interpret,
but they do not specify 2012 either. Nonetheless, believers will not be swayed,
so why try?

I am continuing to hear news that buybacks over trivial, and not
so trivial issues, continues to plague the industry. The biggest buyback news
of late was Freddie Mac’s request of Bank of America. One of the
interesting components of that was that a vast majority of the loans that are
being repurchased are current. This leads one to believe that these repurchases
are taking place due to the quality check (QC) process that takes place on
newly originated GSE loans. And this is indeed a concern to originators
everywhere. The GSEs tend to sample a small percentage of loans originated by a
lender to ensure that they are underwritten as per their guidelines – usually
within six months. But with these loans, some of the loans being repurchases
were originated in 2009/10. This suggests that it took over 2.5 years for Bank
of America and Freddie Mac to identify and settle this issue. There is a more
in-depth write-up about the situation at www.stratmorgroup.com,
near the top right.

With the Fed voting last week to move ahead with our banks adhering, over
the next several years, to the Basel III guidelines, one can expect to see
changes. One of those changes is the shift of servicing from some depositories
to non-depositories – we saw some of that last week with the sale of several
billion of servicing by BofA to Nationstar. In a distantly related story, the
Financial Times reports that Berkshire Hathaway has offered to buy the
mortgage servicing business and loan portfolio of Residential Capital/GMAC/Ally
.
ResCap owes significant debts to Berkshire. “As part of its bankruptcy, ResCap
said it intended to accept “stalking horse” bids of up to $1.6bn from Ally for
its loan portfolio and $2.4bn from Nationstar, a home lender majority owned by
private equity investor Fortress for its servicing business. In papers filed on
Monday, Berkshire offered to beat Ally’s bid for the loan portfolio by $50m and
to match Nationstar’s bid for the servicing business with a lower break-up fee
and expense reimbursement.”

“The depressed housing market has also been an important drag on the
recovery. Despite historically low mortgage rates and high levels of
affordability, many prospective homebuyers cannot obtain mortgages, as lending
standards have tightened and the creditworthiness of many potential borrowers
has been impaired. At the same time, a large stock of vacant houses continues
to limit incentives for the construction of new homes, and a substantial
backlog of foreclosures will likely add further to the supply of vacant homes.
However, a few encouraging signs in housing have appeared recently, including
some pickup in sales and construction, improvements in homebuilder sentiment,
and the apparent stabilization of home prices in some areas.” Thank you
Chairman Bernanke. Is this news to anyone in real estate or real estate
finance?

Or how about the Fed’s report showing that American’s wealth declined between
2007 and 2010
– in large part due to housing? I’ll apologize for being a little
cynical here, but is the Fed next going to tell us that changes in shooting and
stabbings leads to changes in the rate of violent crimes? How about that
increased travel leads to more gasoline usage? Ok, back to business.

Friday the commentary had some input on the current state of appraisals.
Joel B. from Arizona suggests, “Thanks for the notes on appraisers. I
don’t want to come across as a fan of all the current and recent regulation,
because I’m absolutely not, but specifically for loan originators the question
of how to train an apprentice seems easy enough. First, you make them
obtain a license – an obvious first step if they’ll be doing an origination
work; then you title them as an assistant and design a comp plan specific to
the position that doesn’t include being paid on the terms of the loan. Now, as
long as you disclose their NMLS ID, they are free to be trained or handle
origination type activities. Perhaps something similar can be done for
appraisers.”

Dennis S. from California writes, “You mentioned the reliance of
appraisers on the MLS.  A major issue I have constantly brought forth to
our local real estate community is the accuracy of the descriptions in the
MLS
.  We have a home across the street from us that was sold as a
short sale.  Throughout the occupancy by the owners they did no work to
the property, from landscape to routine maintenance.  The property sat on
the market for several months before an offer was written, accepted and then
finally approved by the lender.  Escrow closed over a month ago and the
entire month, seven days a week, contractors have been working on the house to
update it, repair it, paint it, etc.  The house sold under market (naturally
I say that since it is in my neighborhood!) but the listing agent put no
remarks in the listing about the condition other than, “great home in great
location, move right in.” This home is now a comp at a low value with no
mention in the MLS that whoever buys it will need to spend considerable money
to get the home to reasonable condition.  Appraisers will use the comp
price and make no adjustments for condition and state it as “average.” 
This pulls down the market.  When I bring this issue up to realtors they
say, “I know but what can I do?”  Realtors are afraid to police
themselves but they must
. They must take pictures when showing properties
and let the listing agent know if they do not modify the MLS statements they
will send the pictures into the MLS oversight board and lodge a violation
complaint. Agents puff their listings to get showings, but a good agent will
show a property based upon its price and location and once inside will know
what their client may be buying.  Being honest upfront about the condition
will better serve the market, and the sellers who will have potential buyers
looking at their listings who know it is valued for work to be done after
close. Unfortunately the vast majority of agents are unable to connect these
dots and/or lack the courage to police their fellow agents.  But they are
more than willing to complain when their listing has a low appraisal.”

Amy T. observes, “The appraisal issues are huge and the commentary was
enlightening.  We pull a credit refresh to insure that our data on our
borrower is up to date and correct but we rely on valuation data that is old
and getting older while the loan is in process with no chance of any type of
market update. We are in one of those markets with multiple offers and over asking
price transactions where a high percentage of appraisals come in below the
agreed upon price, this situation is extremely frustrating for buyers who have
been waiting for the market to improve before stepping in and are then thwarted
by low valuations…. Although I also appreciate that rapid appreciation is not
healthy for our real estate economy we need to find a balanced middle ground
where the industry approach reflects the reality of the appreciating market,
how are we going to get the market to really move forward if people cannot buy
houses. My chief complaint about the new appraisal environment is that we
the lender are not permitted to order a second appraisal for a unhappy client
BUT the client can go to another lender and get another appraisal and that
happens a lot
.  Appraisals are not a science and no two on the same
subject will be the same.  In the past when I could order a second
appraisal to satisfy a client the cost to the borrower would be discounted, not
full price for two appraisals.  So today, like so many of the regulations,
the consumer actually pays the price not only the cost of a second appraisal
with another company but having to do a whole new mortgage application in order
to obtain a second opinion on the value of the property.  Who wins?”

Looking at the markets, yesterday, in the early going, everyone seemed
excited about the news from Spain on securing some EU banking aid. The impact
of improvement in Europe, which nudged rates slightly higher as well as stocks,
lasted until about the mid-morning coffee breaks, and then headed the other way.
By the end of a “news less” day here in the United States, the 10-yr closed at a
yield of 1.60% and agency MBS prices were better by .125-.250, resulting in
some intra-day price improvements. (Spain’s
10-yr, for perceived risk comparison, is at about 6.6%.)

Today for U.S. news we had Import Prices for May (expected, and actually,
-1.0% against a prior reading of down 1/2 percent) and Export Prices were -.4%.
This afternoon at 1PM EST the Treasury will be auctioning off $32 billion of 3-yr
notes – look for a yield of about .37%. In the early going we find rates a
shade higher than Monday afternoon, with the 10-yr at 1.63% and MBS prices
-.125.

The 5 toughest questions for men. (Part 3 of 5; guaranteed to get me into hot
water, but I will gladly print the opposing view if someone sends it to me.)
1. What are you thinking about?
2. Do you love me?
3. Do I look overweight?
4. Do you think she is prettier than me?
5. What would you do if I died?
What makes these questions so difficult is that each one is guaranteed to
explode into a major argument if the man answers incorrectly (i.e. tells the
truth). Therefore, as a public service, each question is analyzed below, along
with possible responses.
Question # 3: Do I look overweight?
The correct answer is an emphatic: “Of course not!”
Among the incorrect answers are:
a. Compared to what?
b. I wouldn’t call you fat, but you’re not exactly thin.
c. A little extra weight looks good on you.
d. I’ve seen larger.
e. Could you repeat the question? I was just thinking about how I would spend
the insurance money if you died.

 

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Design Notebook: At the International Furniture Fair, Social Commentary and Luxury

This year’s International Furniture Fair was marked by the contradictory pursuits of social consciousness and unrestrained luxury.



CFPB Clarifies LO Compensation Rules Related to 401(k) and Profit-Sharing Plans

Acting in response to questions from mortgage originators and companies, the Consumer Finance Protection Bureau (CFPB) has issued a clarification on it rules governing loan originator compensation. The clarification specifically addresses employer contributions to qualified profit sharing, 401(k) Plans and employee stock ownership plans (collectively “Qualified Plans.”)

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act the CFPB was given rulemaking authority for Regulation Z and issued interim final rules recodifying provisions of that Regulation in December 2011. With a few of what CFPB calls “narrow” exceptions, the rules governing compensation provide that no loan originator may receive and no person may pay a loan originator compensation that is based on any terms or conditions of a mortgage transaction.

The Commentary released by the Bureau clarifies that compensation includes salaries, commissions, and annual or periodic bonuses and that none of these can be tied to the interest rate, loan to value ratio, or prepayment penalty provided for in a loan nor can compensation be based on a factor such as a credit score which could be used as a proxy for a term or condition such as the interest rate.

The intent of these rules is obviously to end any incentives to encourage loan originator to push more expensive products on customers when they are potentially not in the customers’ best interest in order to qualify for a higher commission on that product or to boost the base on which salary and bonuses are calculated.

CFPB staff has been asked whether a financial institution can, consistent with the Compensation Rules contribute to Qualified Plans for employees, including loan originators, if employer contributions to such plans are derived from profits generated by mortgage loan originations.  

The Bureau says that neither the Compensation Rules nor the Commentary expressively address whether the above rules apply to contributions made to qualified plans.  CFPB must adopt final compensation rules by January 21, 2013 or the existing provisions become permanent on that date so the Bureau does anticipate issuing a proposed rule for public comment in the near future.  Until those final rules are determined, CFPB’s view is that the Compensation Rules permit employers to contribute to Qualified Plans out of a profit pool derived from loan originations.  

Questions have also arisen about how the Compensation Rules should be applied to profit-sharing arrangements that are not in the nature of Qualified Plans.  These questions the Bureau said have tended to be plan specific and not appropriate for the type of general guidance the Bureau is putting out today.  These plans will be dealt with in greater detail when the final rules are proposed.

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Guest Contribution: Why We Bought a Home

Nikki Usher
Our new home in suburban Washington, D.C. was love at first sight.

The all-important spring selling season is under way, and there’s optimism that the results will be better this year. Of course, that depends on convincing buyers to take the plunge. One buyer explains her decision. – Developments

By Nikki Usher

My wife and I have moved six times in seven years. Three of those times have been cross country. We’ve lived in New York, Los Angeles and Washington D.C., and have gotten used to paying the same rent for varying sizes and spaces depending on the city.

But just before Martin Luther King Day, on a morning run, we realized this: We were in D.C. for good. And if we kept paying rent, we’d never save for a house.

In every city we’ve lived in over the past seven years, home ownership looked like a feat only accomplished by, well, at least the 5%. But we figured we’d try this time. We were sick of apartment living: each rent check was going into our building for amenities we never used.

There was a catch, though: We couldn’t reach the 20% down payment many lenders require these days.

Then we got an idea. It turns out my tennis friend also happened to be a real-estate agent. Over drinks, we started dreaming a little bit, and talked about the type of house we’d want. Then he referred us to his “mortgage guy.”

After looking at our finances, we realized we were the perfect candidates for a loan backed by the Federal Housing Administration. This meant a 3.5% down payment instead of 20%. Today’s low mortgage rates also helped everything pencil out.

So we started looking in our price range, which was between $400,000 to $600,000. We wanted good public schools, access to the outdoors, a good commute into D.C. and room for kayaks (seriously). Our dream house would be somewhere in Bethesda, Md., the home of the greatest school district in the world, or so it seemed to us.

The first few homes we looked at in our price range were totally disappointing. One fixer-upper had dog poop on the screen door. Another had two bathrooms, but they were attached to each other (literally, you could be on the toilet adjacent to your spouse and have conversations through the shower). We looked at town homes in North Bethesda close to the Metro, but they reminded us of suburban sprawl. Where would we jog?

We were lucky enough to find a three-bedroom town house in a lovely little community of 1,600 residents called Cabin John, Md. To our delight, middle- and high school-aged children in the town attend Bethesda public schools.

The 1,800-square-foot home is nestled a few blocks from the Potomac River and the C&O towpath, has three full floors, and yes, a garage space for kayaks. It was love at first sight.

We hadn’t intended to buy a town house. And the commute and lack of a nearby Metro stop aren’t perfect. But the woods in the back of our house, the ability to make a down payment without feeling totally out of cash, and the ability to write a mortgage check for the same amount as our rent check makes us so happy.

Nikki Usher is an assistant professor at George Washington University’s School for Media and Public Affairs.

More: Are you in the market this spring? Tell us your story at developmentsblog@wsj.com

New Shot Clock for Zell’s Archstone Bid

Bloomberg News

Apartment company Equity Residential struck a deal with Bank of America Corp. and Barclays PLC over the weekend to extend its purchase option to buy a stake in competitor Archstone by 60 days, according to a press release Monday and people familiar with the terms of the deal.

In return, Equity Residential, controlled by Chicago real estate investor Sam Zell, has agreed to raise its minimum price from $1.44 billion to $1.485 billion for 26.5% of Archstone.

The remainder of Archstone is owned by the bankruptcy estate of failed investment bank Lehman Brothers Holdings Inc.

The move is the latest twist in a complicated sale process for Archstone, which was taken private in a $22 billion leveraged buyout by a Lehman-led team at the height of the market in 2007. That deal is widely viewed as one of the largest of the $40 billion in risky commercial real estate bets that were in large part responsible for Lehman’s bankruptcy in 2008.

For the last year, Lehman has been arguing with Barclays and Bank of America over how to best unwind the Archstone investment, which is Lehman’s largest single remaining asset. Lehman would prefer to take the company public again in an initial public offering process, while the banks have signaled that they would rather sell the company quickly in a private transaction.

Last summer, the banks held a 53% stake in Archstone, and began looking for a buyer, with Equity Residential emerging as the lead bidder late last year.

Under the terms of Archstone’s ownership agreement, the banks were required to offer Lehman the right to match any offer made to buy all or part of the company.

Last month, Lehman blocked Equity Residential’s bid to buy the first half of the banks’ 53% stake by paying $1.33 billion cash. If Lehman decides to match Equity Residential’s offer for the second piece owned by the banks, Zell’s company is entitled to an $80 million break-up fee.

In a Monday research note to investors, J.P. Morgan analyst Anthony Paolone wrote that the increased minimum price reduces the capitalization rate — or investment yield — on Equity Residential’s potential investment in Archstone from 5.3% to 5.02%, and values the company at $16.6 billion, including debt.