Regulations Aiming to Turn Around a Sluggish US Housing Market

In interesting news, the US House of Representatives has voted overwhelmingly to reduce some requirements and ease burdens on home loans for certain types of homes. At the height of the financial crisis, homeowners across the country were forced to foreclose home loans due to their inability to pay mortgages and home loans. In the aftermath of the crisis, strict laws were enacted to reign banks and other financial institutions from making home loans easily available to everyone.

The flashpoint of the economic recession of 2008 was home mortgages. Just before the crisis, investors were lured by banks into investing in high-interest mortgages that were risky; this became apparent when the rates of interested went north and the bubble surrounding the real estate industry burst in 2007-08. As default payments by millions of mortgage home owners hit the roof, the value of investments held by banks and institutions went south and hit rock bottom.

The recent legislation is seem as a move to ensure that the consumer public can afford to repay loans; lawmakers insist that it will provide great relief by bringing regulations within reach of the average American with low to moderate incomes who are intending to buy homes. However skeptics still maintain that this will have a very drastic impact on prospective home buyers looking to obtain credit to buy first-time homes. A member of the committee on Housing Financial Services comments that the legislation will end up rolling back consumer protection completely and expose them to predatory practices indulged by some in the financial market which led to the crisis in the first place.

A substantial percentage of first-time home buyers in the US who pick up mobile homes are among the most economically weak and low-income earners. The overrriding fear is that this segment will be subject to tactics used by banks to lend large sums at higher interest rates, luring them to invest in more expensive mortgages by working around regulations even when they qualify automatically for low-cost alternatives.

In the traditional real estate market, home owners are already exposed to risks that are significant and can have serious impact on their earnings and savings; factors like inability to refinance, higher interest rates and depreciation are the prime risks. For example, depreciation is a factor that sets in almost as soon as a home is purchased.

During the financial crisis, it was extremely difficult to get ‘honest data’ from banking circles regarding the state of housing finance and home loans. Piecing together information from bank reports was certainly not providing an accurate picture because banks for one were delaying from showing home foreclosure filings in their monthly reports. On the other hand, home owners were simply unable to meet mortgage payments and stopped paying altogether, perhaps even using it as a strategy for foreclosure. That said, the real picture of the US housing market may still not be completely understood.

Commercial Mortgage – Borrowers Frustrated As Lenders Halt Walgreens Financing

Walgreens recently announced that they will be gradually slowing organic growth of new stores from a planned 5% down to 2.5%-3% starting next year through 2011. But Walgreens is a big chain, and even considering the slowdown there should be 30 to 50 new Walgreens outlets popping up on street corners around the country every quarter for several years to come.

The Walgreens model calls for most new stores to be built by developers, owned by investors and merely leased to Walgreens. But with the credit crunch still squeezing borrowers, the question becomes where will the capital to build all those stores come from?

Lately, plenty of Walgreens loans were originating from a fairly obscure lending platform known as “credit tenant lease” or CTL financing. CTL loans are underwritten in a very different manner as-compared to traditional commercial real estate mortgage loans. In CTL finance the properties lease, not the physical real estate itself, is considered the primary collateral backing the loan. Each deal is underwritten based on the structure of the lease and the financial strength of the tenant who signs it, rather than the underlying value of the building and the credit of the borrower.

To fund CTL loans commercial mortgage banking firms would issue private placement mortgage bonds and sell them to fixed income investors. The bond buyers providing the liquidity for CTL financing were often pension funds, endowments, trusts and insurance companies, all with insatiable appetites for dependable, secure income.

Despite the economic recession Walgreens has maintained its very healthy credit rating (A1/A+) and the chain tends to sign iron clad leases renewable every 25 years. These factors made Walgreens bonds among the most desirable securities in the private placement debt market. With Walgreens opening several hundred stores a quarter there was never a shortage of Walgreens paper to be had. Investors bought up all that was offered to them as fast as mortgage bankers could issue it.

Unfortunately, the incredible success of Walgreens CTL financing has now led to a near universal shut-down of the program. Without warning bond buyers have stopped purchasing Walgreens paper. Recent portfolio reviews by the investment policy committee’s and portfolio managers uncovered the fact that many portfolios were highly over-weighted in the sought-after paper. Many Walgreens bond buyers are highly regulated and must, by law and by policy, maintain strict standards of diversification. In simple terms, they own too much Walgreens debt and can’t take on any more without running afoul of their stated investment policies.

Beginning two months ago one CTL mortgage banker after another stopped taking mortgage applications for retail buildings that housed Walgreens pharmacies. As-of right now it is exceedingly rare to find a lender still willing to originate a Walgreens CTL deal; they know there will be no funding forthcoming.

The loss of CTL funding for developers holding Walgreens leases and commercial real estate investors with pending purchase contracts comes at a particularly inconvenient time; the whole banking system is still dealing with a severe credit squeeze.

If the credit environment were functioning correctly, the loss of one form of funding would be compensated for through an increase in other types, or the development of a temporary replacement funding vehicle. The collapse of the public commercial mortgage backed securities (CMBS) market coupled with the refusal of banks to lend, means that the loss of CTL capital flow can not be easily replaced.

Many real estate buyers and commercial developers chose Walgreens stores because they thought that the good name and excellent credit of their tenant would make it easy to secure mortgage and construction loans. They looked forward to a smooth closing and then to cashing the very dependable Walgreens rent check month after month. Now even top rated Walgreens finds itself caught up in the credit crisis, not because they are hard to finance but because they are easy to finance.

CTL financing is long-term, high leverage lending. Rates are fixed for the life of the loan and terms are co-terminus with the lease. For Walgreens loans that meant store owners could borrow nearly 100% of a property’s value and lock in 25 year loans at today’s historic low interest levels. Without CTL loans available, there is virtually no long-term fixed rate, high LTV mortgages for Walgreens buildings. There aren’t many banks still actively lending against real estate in the retail sector and none at high LTVs. Those that are loaning money typically offer fixed terms of 3, 5, 7, or less frequently, 10 years. Short term loans will initially have a lower interest rate but will force borrowers to seek a refinance just a few years into the future when rates are almost sure to be much higher than they are today.

Some CTL lenders are anticipating that their Walgreens financing programs will be on ice for 6 to 9 months. Other, more optimistic bankers are telling clients that Walgreens CTL loans will be back online in only 3 months. In any-case developers and real estate investors with pending deals are frustrated with the lack of dependable funding.

The bond buyers who funded the last few years of Walgreens growth won’t be back until their portfolios grow significantly or a large number of their current Walgreens debt is retired. Neither of those things is likely to happen quickly. Mortgage banking firms are desperately attempting to recruit new investors who have room for Walgreens paper in their funds.

Walgreens lending, it seems, is a victim of its own success. A hundred Walgreens a month were opening in population centers nationwide. An innovative lending platform called CTL made it possible. Now CTL lenders have had their fill of the A+/A1 rated Walgreens bond, and must take time to digest what they have already consumed.

The drug store chain, CVS can not boast of a credit rating as high as that of Walgreens, yet CTL money for CVS loans is readily available even while lenders turn Walgreens loans away. We are living in strange time.

Right to Buy Mortgage Finance – A Brief Introduction

A right to buy mortgage, is a mortgage format that is effective across the United Kingdom. It accords the tenants of council housing the right to procure the dwelling in which they are living.

To take benefit from the proposal one ought to be a committee boarder. A committee member is one tenable boarder is living for the last five years or hence (the minimum value has been altered from two years from 18th Jan 2005) within either the district council, or a non-charity housing organization, or a country council.

Till date, almost 1.6 million persons have implemented their right to acquire and this number advocates that, even though not broadly understood, the right of procure proposal is attaining thrust in the U K. There are several things to be considered before one opts for this scheme. One needs to have a thorough understanding of the system and the restrictions, for the sale to take place smoothly.

Firstly, the tenant must find out how the background repayments are likely to be and whether he/she would be able to meet these comfortably. All additional costs such as insurance, maintenance and repairs should be accounted for. Then the tenant needs to consider how much of a deposit he/she has available and how much he/she would need to have in place.

Then the tenant must send an application to the landlord for the right to acquire. Both the tenant and the landlord now have to adhere to rigid deadlines. It is very vital that background research is carried out on the rate of the dwelling. As time gets very precious very precious once the application is submitted.

The tenant and the landlord both must pay attention to detail. The tenant should be totally honest and meticulous will filling the form. The landlord based on the application decides whether or not the tenant is eligible and the discount level he/she should get. The right to buy mortgage is a great way of getting on the property ladder.

Lending In The House

The Mortgage Reform and Anti-Predatory Lending Act of 2007, also known as HB3915, was resoundingly passed recently in the House of Representatives.

The three main provisions of the Bill that offer consumer protection are:

1. A National Registry of All Mortgage Originators – This will give consumers the most protection because it means that all mortgage originators, including banks and lenders who break the law will not be able to move from state to state or mortgage company to mortgage company without detection.

2. Enhanced Professional Standards for all Mortgage Originators – This creates a system of criminal background checks, fingerprinting, education and pre-licensing for all mortgage originators no matter where they work. However, loan officers and federal depository institution employees need only register with the national registry system, but do not have to participate in the enhanced education and testing.

3. Preservation of Mortgage Originator Compensation and Consumer Financing of Points and Fees – The original bill called into question the legitimate payment of the Yield Spread Premium, as well as the consumer’s option to finance points and fees into the loan (or obtain a no-cost loan). Working with House Financial Services Committee Chairman Rep. Barney Frank (D-MA) and Representative Gary Miller (R-CA), NAMB was able to obtain clarifications that preserves the ability of consumers to finance origination fees, points and other closing costs into the loan rate or amount, and preserves the ability of originators to receive payment in such cases.

This is a strong victory for the NAMB and the consumers that are served by the Real Estate and Mortgage Professionals that work with them. Even with this victory, there are some drawbacks. Locate in Title III, there are some provisions that NAMB did not support. The feeling is that there will be a wide-range “negative impact on the availability and affordability of all credit.” Unfortunately, this will affect those with imperfect credit histories, including individuals looking to refinance.

The Senate is now considering FHA reform. Also, a bill on Mortgage Reform is being worked on. HUD’s new Good Faith Estimates and other reforms including new Federal Reserve Board regulations dealing with unfair and deceptive practices are forthcoming.

Overall, it is good news that Mortgage Lenders, consumers and others involved in the lending process will enjoy higher standards, which will lead to better performance and a more positive outlook and outcome for everyone.

Using Deed of Trust to Secure Real Estate Financing

A deed of trust is used with real estate transactions that require financing from banks or hard money lenders. Deeds must be recorded with the county recorder to identify the first lien holder. When the loan if satisfied the lien is removed against the property and the deed becomes void.

In the simplest terms, a deed of trust is comparable to a mortgage note. A Trustee is assigned to hold the real estate note until the loan is repaid. Trustees are typically the title company, but could be another independent party.

The trust deed is used to transfer the title to the Trustee and provide beneficiary rights to the lender. Lenders are listed on the deed as a secured creditor so they are protected if borrowers default on their loan. Real property is used as collateral to secure the mortgage note. If borrowers default on loan payments the Trustee can foreclose on the property and take possession.

Lenders issue a promissory note which is used in conjunction with deeds. This document provides details of the borrower’s financial obligation. It should include the amount of money borrowed, interest rate, payment amounts and dates, default clause, and prepayment penalty.

Due to the fact that promissory notes and trust deeds are legal contracts it is imperative to read and understand what is included. Most people find it beneficial to hire a real estate attorney to review contracts prior to signing.

At minimum, people should read documents to ensure everything is correct. Make certain the borrower’s name and property address is spelled correctly. Look over the names of the lender and Trustee. Review the amount of borrowed funds and interest rate, along with prepayment and default clauses.

It’s advisable to protect deeded property with a revocable living trust. However, certain steps must be taken. Banks typically do not provide real estate financing for property secured by a trust.

The workaround is to have a lawyer prepare a legal opinion letter which states that provisions are included to protect the lender. Opinion letters undergo a review process by bank committees and will prolong approval and closing procedures.

If the loan is ever modified then borrowers must also modify the living trust. As an example, if borrowers refinance to obtain a reduced rate of interest they would remove the real estate from the trust so lenders can record a new deed. Once the document is recorded, borrowers put the property back into the trust.

Real estate that is secured with a deed has to be appraised by a licensed and certified appraiser. Homeowner’s insurance must include provisions against loss or claim. Each of these actions will cause borrowers to incur legal and court filing fees.

Establishing a living trust is usually a good way to protect encumbered property, but there are instances where it can be a hindrance. Therefore, it’s advisable to consult with an attorney to assess the pros and cons prior to taking out a real estate loan.

Buying a house is a major investment that requires careful financial planning. Otherwise, property owners could default and lose their home to foreclosure. To lessen risks, work with professionals to develop long term plans and become educated about using deed of trust to secure financing.