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Local market ready for bailout boost

Local market ready for bailout boost

President Barack Obama’s plan to stabilize the national foreclosure rate, increase demand for home b

President Barack Obama’s plan to stabilize the national foreclosure rate, increase demand for home buying and shore up home values could help the Capital Region real estate market, local experts said.

Obama’s program to repair the mortgage crisis includes taxpayer-funded refinancing of troubled loans and an $8,000 tax credit for new home buyers. The stated goal of the plan is to halt the free fall of home values to help re-establish consumer confidence.

James Bopp, vice president at Provantage Home Loans in Clifton Park and former president of the Mortgage Bankers Association Northeastern New York chapter, said he’s optimistic Obama’s plan could help the economy but wary of the implications of the government interfering too much with the free market system. He said the Capital Region has been fortunate to have been spared much of the negative effects of the mortgage crisis.

“We’re very fortunate in the Capital District to be as insulated as we are,” Bopp said.

Statistics released by the Greater Capital Association of Realtors, a real estate trade organization based in Colonie, show closed single-family home sales dropped 15 percent year-over-year in 2008 to 8,337, and the region’s median sale price slipped, but only 1 percent to $191,000.

Meanwhile the Capital Region’s five-county core saw 2,416 homes fall into various stages of foreclosure in 2008, a 152 percent jump over 2007 that was nearly double the national rate of increase in foreclosure activity, according to RealtyTrac.com, an Irvine, Calif., foreclosure tracking firm.

But it could be worse. Nationally, Moody’s Economy.com estimates nearly 13.8 million of the 52 million U.S. homeowners, almost 27 percent, owe more than their homes are worth after many months of declining prices. Local bank leaders say there were far fewer exotic loan products sold in the Capital Region, helping to lower the risk of foreclosure and maintain local price stability.

“Currently, we don’t have any properties under foreclosure,” said Raymond O’Conor, president and CEO of Saratoga National Bank. “We’re old-school bankers around here, and when we put our mortgage loans on the books we make sure that customers have an adequate level of income in order to be able to handle the load.”

Real Estate Market

Bopp said the tax credit for new home buyers included in Obama’s $787 billion stimulus package could combine with the chip manufacturing plant being built for AMD in Malta to stimulate a bullish real estate market in the Capital Region.

“If people want a new house or they want to fix up their house or they want to refinance their house, they should go ahead and do it, assuming they are confident in their job,” Bopp said. “From both a value standpoint, a sales price standpoint and from an interest rate environment, I think this is going to be about as good as it’s going to get. You have interest rates in the 5 [percent] to 6 percent range for just about everybody, and that’s historically very cheap and it’s still a buyer’s market, so you can negotiate a fair deal, and if you’re a first-time home buyer you’re going to pick up an $8,000 tax credit. You may never see this perfect storm of a package again for the rest of your life.”

Greater Capital Association of Realtors CEO James Ader said he agrees with Bopp’s optimism about the local market, provided Obama’s plan helps stem the tide of foreclosures.

“It’s really not going to affect sales of real estate except it will keep some properties off the market, so that helps stabilize prices. If you don’t have more homes coming onto the market, that helps homes hold their value,” Ader said.

Teri Easterly, co-owner of Fulton County-based real estate agency Coldwell Banker Arlene M. Sitterly Inc., said Obama’s plan will ultimately be successful if it helps banks loosen lending standards to more reasonable levels.

“Monies need to be distributed, more mortgages and loosening up of financing. Even the well-qualified, with 700 to 800 level credit ratings, we’re seeing it be more difficult for them right now, and it shouldn’t be,” Easterly said. “I strongly believe we are working our way out of this. I’m very positive that by mid-summer we’re going to see things turn around.”

On Thursday, Saratoga National Bank announced it is ready to lend $10 million to fund the purchase of new or existing single-family homes at rates .25 percent below their customary mortgage rates for qualified home buyers who apply by June 30 for mortgages in Saratoga County up to $417,000.

“The circumstances are as favorable [for borrowers] as we’ve seen in a long time. The last time interest rates were this low, Eisenhower was in the White House,” O’Conor said.

Refinancing Mortgages

Obama’s plan, called the Homeowner Stability Initiative, seeks to slow the national rate of foreclosure by providing refinancing money for “underwater” mortgages, those in which homes’ market values have sunk below the amount the owners still owe. The plan aims to lower monthly mortgage payments on primary residences near foreclosure to 31 percent of the borrower’s income for five years by providing lenders with $75 billion to pay half of the cost of lowering the payments. The $75 billion comes out of the $700 billion financial industry bailout passed by Congress last fall.

The plan also attempts to stimulate underwater refinancing by promising to absorb a combined $400 billion in losses from mortgage giants Fannie Mae and Freddie Mac, helping them to confidently buy underwater mortgages and change mortgages terms. The program is voluntary, and more details are expected to be released March 4.

Bopp said the danger in Obama’s plan is its provisions may be too strict to encourage lenders to participate.

“Lending is not an exact science. It’s a numbers game, and there are industry standard ratios but there should be as much flexibility, within reason, as possible. There are still loans out there today that are getting approved with 55 percent [income to debt payment] ratios,” he said.

John Wyatt, senior lending officer at First National Bank of Scotia, said the government’s willingness to buy mortgage-backed securities and the Federal Reserve’s decision to lower interest rates has enabled his bank to produce substantial gains in refinanced mortgages in recent months, but not from loans near foreclosure. He said First National Bank of Scotia always required the vast majority of its borrowers to have enough income to support monthly payments in the 31 percent of income range.

He said loan modifications like those promoted by Obama’s plan will be cheaper for borrowers than traditional loan modifications in New York state, which require attorneys’ fees, mortgage taxes and title insurance costs. He said one potential drawback to Obama’s five-year time frame for the 31 percent of income monthly payments could be its similarity to “teaser-rates” offered to sub-prime borrowers during the real estate boom.

“Mortgage modifications can benefit all parties in some circumstances,” Wyatt said. “You’ve got to try to find a way to slow down or stop some of these foreclosures, because the value of the homes of the good payers are going down as well.”

O’Conor said Saratoga National Bank will probably stick to reworking its own loans, if necessary, rather than participate in the federal plan.

“We’re anticipating situations where someone may lose their job, but when those situations happen we are so close to the ground we will generally find a way to work the situation out without having a federal program,” he said.

Josh Zinner, co-director of New Yorkers for Responsible Lending, said the voluntary aspect of the plan is its major problem.

“There are good carrots in the plan to move servicers to do more loan modifications, but there’s not enough in the way of sticks to push them to change their practices,” he said. “We’re still in a position where servicers aren’t being flexible enough to change the dynamic and enable people to stay in their homes.”

Moral Hazard?

The Obama administration has been quick to point out the Homeowner Stability Initiative will only go to help homeowners who commit to make payments to stay in their home and will not aid real estate speculators who purchased second homes as investments, or “house flippers.”

But a plan aimed at 7 to 9 million families in mortgage trouble will certainly touch borrowers and lenders who engaged in the many risky mortgage products of the real estate boom, such as no-money-down loans, stated income loans and adjustable rate mortgages. Some question why taxpayers should subsidize the failed risks of a minority of homeowners.

“I think we’re going down a very slippery slope of picking winners and losers and who gets bailed out and who doesn’t,” Bopp said. “People who lived conservatively and didn’t buy into the gimmicks, they’re almost being penalized for playing by the rules.”

O’Conor said he hopes Obama’s plan helps the economy, but one of its costs may be in marketplace fairness.

“To what extent do we want to take all of the risk out of this business? If our institution were to take inordinate risks, then we should suffer the consequences of doing so, and my expectation is all of our competitors should live with the same level of risk,” he said. “Some of the borrowers started out with rates lower than the proposed rates in this program. It’s not going to be enough to rescue everyone.”

Obama has said he supports legislation now in Congress to allow bankruptcy judges to rewrite the terms of mortgages. Bopp said that level of market intervention will backfire on the administration.

“You’ll find if they tie the hands of the mortgage business too much with regulations and rules and bail-outs, the natural ebb and flow of things will lead banks to find other places to deploy their money. Residential real estate lending isn’t the only thing a national bank or community bank does,” he said.

Zinner said his group supports legislation to empower bankruptcy judges to change the terms of mortgages as an incentive to force banks to modify them. He said current iterations of the law wouldn’t affect new loans going forward, limiting disincentives to lend.

Mortgage aid

$75 billion Homeowner Stability Initiative key provisions:

*  Provides money to match private lenders’ costs to lower monthly payments on troubled mortgages to 31 percent of the borrower’s income for five years, after which the rate can gradually increase back to the conforming loan rate in place at the time of the modification.

*  Pay for Success Incentives to Servicers: Lenders will get up-front fees of $1,000 for eligible loan modifications and “pay for success” fees awarded monthly so long as the borrower stays current on the loan, up to $1,000 each year for three years.

*  Borrowers with modified loans who remain current on mortgages will receive a monthly balance reduction payment toward the principal of their mortgage. If the borrower stays current on the loan, the borrower can get up to $1,000 each year for five years.

*  Incentive payments of $500 paid to servicers, and $1,500 to mortgage holders, if they modify at-risk loans before the borrower falls behind.

*  A $10 billion insurance fund created by the Treasury Department to discourage lenders from foreclosing on mortgages that could be viable out of fear that home prices will fall further.

Source: Obama Administration Executive Summary.

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