Sunday, January 31, 2010

Foreclosure data: Prices are close to the bottom

Foreclosure data: Prices are close to the bottom

by J. Craig Anderson The Arizona Republic - Jan. 28, 2010 12:00 AM

For the first time since the foreclosure crisis began, the price of a Phoenix-area foreclosed home is roughly the same as it was a year ago.

Arizona State University professor Karl Guntermann, who publishes the monthly ASU Repeat Sales Index housing report, said preliminary data for December show the median price for a foreclosed home was down just 2 percent from December 2008.

"If the preliminary numbers hold up, the foreclosure segment of the housing market will have reached bottom," Guntermann said. "A leveling out of the foreclosure RSI (Repeat Sales Index) would reflect both the substantial decline in prices that has occurred over the past two years and increased demand from first-time buyers and investors for those homes."

Guntermann said he was "a little surprised" that the index showed foreclosures so close to bottoming out.

In October, foreclosed homes still were selling at about 15 percent less than they had a year earlier, and by November that change had decreased to 8 percent, Guntermann said.

Then, in December, the annual drop shrank to a mere 2 percent, based on early numbers.

The December median sale price for the homes that Guntermann tracks was $127,000, up from November's median price of $120,000.

The index for non-foreclosed homes showed a very different trend in December, indicating that the Valley housing market

continues to follow two distinct paths: one for bank-owned home sales and the other for more traditional sales.

The median sale price for non-foreclosures continued on a steady decline that barely has budged in more than a year.

"By October 2008, non-foreclosures were declining at an annual rate of 20 percent, and they still are," Guntermann said.

December's median price for traditional sales was $158,000, compared with $166,000 in November.

The index does not correlate exactly with year-over-year price changes, he said, because there is a sort of reverse momentum built into the calculation that lowers the index slightly if it's on the rise, and raises it slightly if it's on the decline.

It has been dropping for a record 32 months since home prices peaked in mid-2006.

Still, Guntermann said that is likely to change within the next few months.

The overall index, including foreclosed-home and traditional sales, was down 12 percent from a year earlier.

That's a sizeable improvement over November, when it was down 17 percent.

The overall median price in December was $133,000, down from $135,000 in November, early data show.

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'Walking away' not immoral, prof says

'Walking away' not immoral, prof says

by J. Craig Anderson The Arizona Republic - Jan. 31, 2010 12:00 AM

Arizona law professor Brent White says the only thing standing between many "underwater" homeowners and a better financial future is a misguided sense that walking away from a loan commitment is morally wrong.

White, an associate professor at University of Arizona's James E. Rogers College of Law, has spent the past few months presenting his argument to other lawyers, real-estate professionals and the national media.

It started with a 50-page discussion paper he published in October, in which White argues that underwater homeowners, those whose unpaid loan balance exceeds the value of their home, are being manipulated into picking up the tab for a real-estate crash that borrowers and lenders created equally.

"I'm all for a society where people must take personal responsibility, but that should also apply to the banks and financial institutions," he said.

Although he stops short of advocating for underwater mortgage holders to walk away from their loans, White does argue that banks might be more inclined to lower the principal balance on inflated home loans if more borrowers did just that.

White is quick to admit that the concept of "strategic default," when a borrower with the means to continue paying defaults on a loan by choice, is distasteful to many Americans.

His critics have argued that a tidal wave of strategic defaults would wreak untold havoc on an already fragile financial system and promote a lawless society in which contracts are essentially meaningless.

White said his argument is mostly academic. Despite all of the attention strategic default has received, statistics indicate that only a tiny fraction of the country's more than 5 million homeowners whose loans are upside-down have stopped making payments by choice.

Still, he said it's quite reasonable to believe that a wave of strategic defaults would spur a faster recovery in the housing market by creating stronger incentive for banks to lower the principal value of upside-down home loans, thus making it more attractive for borrowers to continue paying.

White said his primary aim is to give borrowers a rational alternative to the rhetoric of guilt and shame coming from financial leaders and politicians, which labels a practice that is perfectly acceptable in the business world as immoral and irresponsible if tried at home.

His discussion paper, titled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis," points out that lenders and other businesses are not saddled with the same moral constraints that would prevent most individuals from defaulting by choice.

"It's a double standard that says corporations can look out for their best interests, but individuals can't," White said in an interview Thursday.

A number of metro Phoenix real-estate professionals said they see merit in White's argument that lenders should meet borrowers halfway by writing down a portion of upside-down loan balances, but they were far less comfortable with the notion that strategic default is a valid solution to the housing problem.

"I don't think we should be encouraging people to walk away," said Bob Stahl of Keller Williams Realty in Scottsdale, who also writes a real-estate blog that has focused heavily on the discussion of strategic default in recent months. "I think people do need to be responsible. ... I think it is a moral issue."

Stahl said he's concerned a wide-scale walkout would damage the mutual sense of trust and confidence in contracts that makes it possible to do business.
He added that walking away from a mortgage loan can have severe consequences that borrowers need to understand before making any decisions.

Controversial though it may be, White noted that his argument is not merely a philosophical one, and that there actually is a solid legal basis for his conclusion that it's OK to walk away.

A legal concept known as "efficient breach" holds that it is ethical to breach a contract in cases where the ramifications for doing so are less harmful to the party than adhering to the contract would be.

White said he's in the process of crafting another legal argument, based on Arizona's non-deficiency statute, that says lenders don't have the legal right to report mortgage defaults to the credit bureaus, and that walking away should not have any negative effect on the borrower's credit score.

Scottsdale civil-rights attorney Donald Loeb said he thinks White is absolutely correct.

Non-deficiency statutes such as the ones in Arizona and California essentially say that lenders trying to collect on an unpaid mortgage loan have a right to foreclose on the home but cannot pursue any other legal claim against the former borrower.
For instance, the lender can't sue for the difference between the original loan value and the proceeds from a foreclosure sale of the home.

The reason it's called a "non-deficiency" statute, Loeb said, is that it establishes default and subsequent foreclosure as a valid means of fulfilling a mortgage contract, as opposed to being a breach of contract in which one party's actions are considered "deficient."

Loeb said he thinks much of the criticism aimed at homeowners who default is based on a poor understanding of what a contract is.

A contract is nothing but a legally binding agreement between parties with competing interests that sets forth mutually acceptable terms for their interaction.
Loeb said every mortgage loan agreement includes default and home repossession as a possible outcome.

"If you stop making payments, you're not breaching the contract, because default and foreclosure are valid means of fulfilling the contract," he said.

White said it's not uncommon for commercial-property owners or investors to default on loans that they no longer consider beneficial, and while it might affect their ability to obtain future loans, no one is calling them immoral.

Traditional business ethics, which weigh heavily the fiduciary responsibility to shareholders, practically require commercial-property owners to consider strategic default if a mortgage loan is costing the business more than the mortgaged property is worth, Valley commercial real-estate experts said. To do otherwise would be considered irresponsible.

Jim Achen, senior vice president of commercial real-estate services firm Transwestern, in Phoenix, said many underwater commercial-property owners are expected to walk away from mortgage debts this year, as a large number of those loans reach maturity and must be repaid or refinanced.

It is also expected that lenders in some cases will significantly reduce the balance of commercial borrowers' mortgages to keep them in those loans, he said.

That's a concession most banks have not made to homeowners.

California investors keep eye on Chandler Elevation case

California investors keep eye on Chandler Elevation case

by Luci Scott - Jan. 25, 2010 12:00 AM
The Arizona Republic

A group of investors in California is paying close attention to the saga of Elevation Chandler, especially a lawsuit by a man who claims he won the property at a trustee sale for $1 million, a fraction of what the site is worth.

Elevation Chandler is developer Jeff Cline's bankrupt 10.6-acre property near the intersection of Loops 101 and 202, containing the eyesore of a partly built, abandoned hotel.

The million-dollar bidder, Tom Peltier of Phoenix, is due in Maricopa County Superior Court today in an attempt to persuade Judge Bethany Hicks to let him take possession of the property.

Developer Cline received a $24 million loan from Point Center Financial of Aliso Viejo, Calif.

The California investors own a stake in Elevation Chandler because they invested in Point Center Financial. Now, they are suing Point Center, its president, Dan Harkey, and Harkey's wife, Diane, a California assemblywoman.

The more than 50 plaintiffs allege a number of problems, including breach of fiduciary duty, fraudulent conveyance, intentional misrepresentation and elder and dependent-adult abuse.

The lawsuit was filed in Orange County (Calif.) Superior Court.

Plaintiffs are unhappy not only with the Elevation Chandler loan but also with a number of others.

"Mr. Harkey represented to his investors that he was doing a great deal of due diligence in an effort to make sure our investments and loans were safe, and that there was acceptable and minimal risk. That is not what he did," said Lloyd Charton of Dana Point, Calif., a Point Center investor and a retired lawyer who specialized in litigation.

"In order to enrich himself, he took tens of millions of dollars in commissions and fees from failed loans," Charton said. "The loans failed because in most of them there was no reasonable expectation that they would be paid back upon maturity. . . . (Harkey) made extremely risky loans, and the only person he benefited was himself."

Charton said there was "inadequate, improper or a complete lack of due diligence."

Harkey declined to discuss the lawsuit or his investments.

"I cannot make any comments because of the ongoing litigation," he said.

One of the plaintiffs is Kurt Sipolski of Palm Desert, a retired publisher who lives on a Social Security income of $612 a month.

Sipolski said he invested most of his life savings with Harkey.

"I asked for it back two years ago, and at that time, he said he wasn't able to do it; however, shortly afterward, he bought a Lear jet and made another multimillion-dollar bad loan," Sipolski said.

"I explained I was handicapped by polio, that it was hard for me to walk, and that was my life savings," he said. "It fell on deaf ears."

Charton, a neighbor of Harkey, said after Harkey asked him to invest, he questioned him at great length. Charton invested $1.3 million.

The plaintiffs in the lawsuit include about 55 investment entities, usually family trusts.

Charton said when the Elevation Chandler loan was made, investors assumed Harkey was providing construction funds to continue to build the project. "There was no money provided for construction," Charton said.

Furthermore, the loan was made in November 2006, when the housing market and hotel industry were cooling substantially. "The loan should never have been made," Charton said.

He does not blame Point Center for mistakes made at a public auction on June 15 in Phoenix. At that auction, conducted by T.D. Service, Peltier bid $1,000,001 and was awarded Elevation Chandler, even though the bid is a fraction of what the site is worth. The next day, Peltier was told he couldn't have the property because T.D. Service had erred, making the sale invalid.

Point Center had been expecting to take back the property from Cline at the trustee sale with a $25 million credit bid.

"I'm not blaming Point Center for the mistake at the auction," Charton said.

Charton said Harkey does not recognize he has devastated the lives of many good folks.

Other investors in Point Center and plaintiffs in the lawsuit are Les and Ev Corzberg, a retired couple who live in the Bay Area and who invested tens of thousands of dollars. "It's a nightmare for so many of us," Ev Corzberg said.

The Corzbergs are eager to hear what happens at today's hearing. "We're one of the investors very concerned about Chandler and what's going to happen with the judge's ruling," Les Corzberg said. "But we're also very concerned about all our investments with Point Center Financial."

Corzberg wants his money back. "If this gentleman gets this property for $1 million, it will be one of the biggest mistakes," Corzberg said.



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Wednesday, January 27, 2010

Roubini on Markets, Economy

Hiring and income will remain weak in advanced economies, Nouriel Roubini, chairman of of Roubini Global Economics, told CNBC.


Tuesday, January 26, 2010

Fed to drop Fed Funds Rate as new policy tool?

Jan. 26 (Bloomberg) -- Federal Reserve policy makers are considering adopting a new benchmark interest rate to replace the one they’ve used for the last two decades. Bloomberg's Michael McKee reports. (Source: Bloomberg)

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