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from Unstructured Finance:

It’s Like Deja Vu All Over Again in the Las Vegas real estate market

Nordstrom Fail: One sign of Las Vegas' hard times is this failed Nordstrom store and accompanying shopping center that never advanced beyond the skeletal stage.

By Jennifer Ablan

Las Vegas had become the poster child of what many had pegged as the biggest casino during the real-estate boom, all which was engineered by cheap credit and a yearning for owning a piece of the American dream.

The economic toll of the financial crisis swept through towns and communities in terms of home foreclosures, devastated neighborhoods and half-built shopping centers and office complexes.

But on my December visit to Mountains Edge and South Summerlin -- large master-planned communities, not far from the Las Vegas strip, for example – I saw several bulldozers doing work in preparing the sites to build houses, after years of sitting idle.

from MacroScope:

Lenders still overvaluing properties, Fed study finds

The Fed calls it an “apparent misunderstanding.” Whatever term you prefer, a new Cleveland Fed study makes one thing clear: lenders are still overstating home values. The study focuses on real-estate-owned or REO inventory, which covers properties that are now owned by lenders.

We analyzed sales data from Cuyahoga County, Ohio, and found signs that appraisers, lenders, and investors could be routinely overestimating the property values of foreclosed homes there. We suggest some simple identifiers that can help lenders better estimate home values in weak housing markets. And though we have focused on one county, we believe the situation could be the same in other places. The factors we identify as possible causes of overestimation in Cuyahoga County are likely to be found in many other weak housing markets around the country.

The two Fed economists who wrote the report identify an array of reasons for such overvaluations, ranging from the perfectly innocent to the potentially dodgy:

Lenders may be overvaluing properties because their valuation methods—which they use because they work well in most markets—don’t happen to work well in weak ones. The evidence supports this explanation, since it is not only lenders that overestimate the value of properties acquired in the sheriff’s sale, but all parties, including federal agencies and investors. Proper valuation methods would substantially discount the appraised value of homes in weak markets, bringing the estimates of value more in line with what the property will sell for on the open market. It is important to remember that lenders usually cannot legally enter the home and inspect the interior prior to foreclosure, which would prevent them from detecting hidden defects. But even when they are allowed to inspect the interior, it may not be feasible to inspect each property prior to foreclosure, given the number of foreclosures initiated every year.

Finally, there may be incentives that encourage lenders to overvalue foreclosed properties. Doing so would allow them to shift accounting losses from their loan portfolio to their REO portfolio. Solvency tests and supervisors of financial institutions place less emphasis on REO portfolios than on loan portfolios. This is a function of banks having relatively small REO portfolios in normal times, but always having an active loan portfolio that can be analyzed.

from Financial Regulatory Forum:

U.S. Justice Department unit to ramp up hiring as mortgage probes advance

By Emmanuel Olaoye

NEW YORK, March 6 (Thomson Reuters Accelus) - The U.S. Justice Department plans to step up its hiring of staff to investigate abuses in the packaging of residential mortgage backed securities and to work with regulators to uncover serious fraud, a senior department official told Thomson Reuters in the wake of criticisms that Obama administration efforts were insufficient.

Last week, the former chairman of the Financial Crisis Inquiry Commission claimed that the government was not doing enough to uncover serious fraud. In a New York Times opinion piece, Phil Angelides said the 55 attorneys, agents and analysts assigned to the administration's new mortgage packaging Working Group were not enough to uncover serious fraud. Angelides also criticized the absence of federal regulators in the Working Group. The official, who spoke on condition of anonymity citing the investigations underway, said the Justice Department was "ramping up our staffing significantly" as investigations advance and documents come in.

"At the original press conference we said this was our initial commitment. We envision substantially more personnel being devoted to [the Working Group] than just those 55. We're going to go beyond that," the official said. "It doesn’t make any sense to ramp up before you start getting materials in. We're doing that now. Like I said we envision having substantially more staff than that initial number," the official said.

He did not specify hiring targets, but the department has requested a $55 milllion increase for the fiscal year beginning in October to finance the working group. The department will focus its hiring on analysts and accountants with expertise in investigating complex financial transactions.

President Barack Obama announced the creation of the Working Group in his State of the Union speech in January. The unit was established to look into the packaging of toxic mortgages into mortgage-backed securities in the buildup to the financial crisis. Observers have criticized the government’s failure to bring criminal prosecutions against sponsors of fraudulent mortgage backed securities. They have criticized the record of officials who head the Working Group in prosecuting mortgage originators in recent years.

Also, the spotlight on the sponsors of mortgage-backed securities has raised questions about the level of coordination among the Justice Department and regulators in bringing prosecutions.

from Tales from the Trail:

Washington Extra – Just “okay”

It was a long slog to the government's mortgage abuse settlement with top banks, one in which officials slept in their offices and worked round the clock. And yet, a consumer advocate looking out for those who lost homes to foreclosure can only muster an "it's okay."

You don't need an expert to tell you how little of a dent the $25 billion deal makes in a mortgage morass that President Obama reminded us is one of the biggest drags on the economy. It took 16 months to get to a settlement that helps roughly 1 million borrowers, while 11 million Americans owe more money that what their homes are worth. People who lost their homes to foreclosures will get payments of $2,000. Home prices, meanwhile, are still 33 percent lower than 2006.

It's a lot of work for a little relief. But if there is one constituent that walks away satisfied it has to be the state of California. Attorney General Kamala Harris held out for a better deal right to the end. What she won was 45 percent of the settlement spoils, and she only came to the table with a third of the nation's foreclosures in her portfolio. It pays to play hard to get.

Here are our top stories from Washington…

U.S. banks agree to $25 billion in homeowner help

from MacroScope:

Making sense of bounce in U.S. housing starts

Surprise! There’s some life in housing after all. U.S. construction starts and building permits jumped to a 1-1/2 year high in November as demand for rental apartments rose, suggesting a downtrodden housing market may be entering a tentative recovery. But will this be another in a long string of bottom-bounces? Or is it the start of a trend? 

Starts surged 9.3 percent to a seasonally adjusted annual rate of 685,000 units last month, the highest level since April last year and well above the Reuters consensus forecast of 635,000. Stephen Stanley at Pierpoint Securities was reticently enthusiastic:

Could it be? Is the housing sector finally beginning to stir? It is a little premature to declare victory, but the data are starting to point to some stirrings in residential construction activity. To be sure, we should not be entirely surprised. New home inventories are far and away lower than they have been in decades.

Still, Stanley was all too aware of the sector’s worst kept secret -- a stalled foreclosure process has the potential to delay a broad-based recovery for a while to come.

Of course, there is that nasty little overhang of existing homes associated with the ongoing foreclosure wave. While home buyers are slowly chewing through this problem, much more remains to be dealt with. Nonetheless, as time goes on, foreclosed homes are becoming an increasingly less appealing substitute for a new home. Some folks simply want to live in a new house, and for them, a foreclosed home won’t do. As a result, I am not surprised that housing starts, new home sales, homebuilders’ sentiment, etc. are starting to move somewhat higher even though the foreclosure problem is not yet completely resolved.

Another caveat on the rosier-looking figures, from JP Morgan analyst Daniel Silver -- the key sources of improvement in the report came from multi-family starts, which he says tend to be more erratic. Some more details from Silver’s research note to clients:

These increases were largely driven by sizable gains related to multifamily starts and permits, but single-family starts and permits increased as well during the month. Although single-family starts and permits remain depressed by historic standards, there has been some modest improvement in the data over the past few months. […] Other data on mortgage purchase applications and homebuilders’ sentiment (reported separately) signal that we could see some more improvement to come; however, the November gap between permits and starts in permit-issuing areas points to a slowdown in single-family starts in the very near term. Multifamily starts and permits have trended higher throughout most of the recovery, though the monthly readings are often volatile.

from Unstructured Finance:

At the intersection of Wall and Main

By Jennifer Ablan and Matthew Goldstein

Whether you agree with it or not, the Occupy Wall Street protests that began two months ago in New York have ignited a debate over income inequality and the political clout of the nation’s banks.

Before the protesters began camping out in Zuccotti Park in lower Manhattan, much of the conversation had  focused on the federal government’s debt and not the equally big debt run-up by U.S. consumers in the years before the financial crisis. Now it seems you can’t go a day without reading a story about the vast gulf between rich and poor and the shrinking middle class, or how the housing crisis won’t get fixed until something is done to alleviate the burden for millions of homeowners who are underwater on their mortgages.

Last month a group of graduate journalism students from Columbia University spent some time at the Occupy Wall Street encampment in Zuccotti where they did in-depth interviews with over 200 protesters. (This was before New York City moved to forbid people from sleeping out in the concrete plaza). And the students findings were surprising in that the OWS protesters weren’t just a bunch of unemployed hippies, who all vote Democratic. Rather, they found that the majority of protesters didn’t identify with either political party, 56 percent didn’t have private health insurance and just under 40 percent gave President Obame a grade of C for managing the economy.

We talked to two of the students, Lili Holzer-Glier and Mollie Bloudoff-Indelicato, and this video discusses some of their research.

The findings of the Columbia students are something that many who work on Wall Street might want to pay more attention to. In our story “The Wall Street Disconnect,” we found that many of the 1 percent of the finance world just don’t get why so many people in the U.S. and around the world are upset with their profession.

The disconnect between Wall Street and Main Street is a bit startling, given that three years after the worst of the financial crisis unemployment remains at 9 percent, 15 percent of the country is on food stamps and at least 20 million people live in extreme poverty in this country. And in many states, entire neighborhoods are ravaged by foreclosures.

from Reuters Money:

Housing bust squeezes renters

The housing bust horror flick is now giving way to a very unwelcome sequel: a big squeeze on the cost of renting.

The number of renters paying more than half of their income towards rent has hit record levels, according to a new study by the Joint Center for Housing Studies (JCHS) of Harvard University.

Rental affordability is a critical issue for seniors, who live on fixed incomes and already are coping with low yields on their savings, fast-rising healthcare expenses and stagnant Social Security benefits. Yet the struggle with affordability is found most often among low-income Americans; JCHS found that 75 percent of renters in the lowest quartile of income are spending more than half of their income on housing. JCHS also found that lower-middle class renters also are having trouble finding affordable rental housing.

For example, 33 percent of renters with annual income of $14,500 to $30,000 are facing “severe burdens” in finding affordable rent. And the problem is growing most rapidly among demographic groups traditionally less likely to have affordability problems, including younger households, married couples with children and renters with some college education.

“These are astounding numbers,” says Eric Belsky, managing director of JCHS. “If you are spending half of your income on housing, you have very little to spend on everything else.”

The problem stems from a mismatch of supply and demand of affordable rental housing in the wake of the housing crash. The recession pushed up vacancy rates, and depressed rents, property values and new multi-family unit construction. Meanwhile, the foreclosure crisis has sparked a substantial increase in the number of former owners who now need to rent -- just at a moment when development of new affordable housing units has stalled:

The supply gap for very low-income renters (with incomes up to 50 percent of area medians) also increased. In 2003, 16.3 million of these households competed for 12.0 million affordable, available, and adequate units. In 2009, these renters numbered 18.0 million while the supply of units dipped to 11.6 million, widening the gap from 4.3 million to 6.4 million units.

from Reuters Money:

Spouses of reverse mortgage borrowers get foreclosure relief

The U.S. Department of Housing and Urban Development (HUD) has reversed itself on a rule that was forcing some spouses of reverse mortgage borrowers into foreclosure.

For years, HUD has described reverse mortgages insured by the government as non-recourse loans.

Those loans, known as a Home Equity Conversion Mortgage (HECM), are designed so that borrowers could never owe more than the value of their homes, even though the loan balances rise over time. The intent was to assure elderly borrowers that HECMs were safe.

But a lawsuit filed last month by the AARP Foundation seeks foreclosure relief for spouses of deceased reverse mortgage borrowers. It charges that HUD illegally implemented two important rule changes in 2008. The first stated that the non-recourse provision would apply only when properties are sold. That means that if the spouse dies, the surviving non-signing spouse would have to repay the full outstanding HECM balance, even if the home’s value had dropped.

Second, HUD changed a rule stating that a borrower could sell a secured property for 95 percent to 100 percent of its appraised value. The new rule stated that only “arm’s length transactions” would be allowed under that range of prices. That effectively meant that a non-signing surviving spouse could retire a HECM only by repaying the full loan balance, but that a third-party buyer could purchase the property for as little as 95 percent of appraised market value.

The AARP lawsuit alleges that, as a result of the rule, many spouses or heirs who want to purchase the property have been unable to do so because they cannot obtain financing that exceeds the current value of the property. The federal lawsuit argues that the rule violates other HUD rules and existing contracts between reverse mortgage borrowers and lenders, and that it negates a key purpose for which borrowers had been paying insurance premiums.

from Reuters Investigates:

Jamie Dimon: Good banker? Bad banker?

The U.S. mortgage business is a “mess” in need of overhaul, JPMorgan Chief Executive Jamie Dimon reckons.

(See our special report on Dimon today: "Jamie Dimon wants some R-E-S-P-E-C-T")

Of course, his own bank is the third-largest U.S. mortgage lender. And JPMorgan is sitting on billions in not just prime mortgages, but risky home-equity loans too.

But Dimon has made a career out of being the one Wall Street banker who likes to stand up, stick up for his views and tell it as he sees it. He can talk in a way that resonates with the mood of the country. He can cross the divide between Wall Street and Washington D.C. And while his peers might talk about doing God’s work, Dimon will admit making mistakes.

The thing is, when you scratch the surface at JPMorgan, the bank doesn’t seem so different from its peers, with large consumer loan exposure and sometimes questionable business decisions. So what do you think? Does Dimon deserve your R-E-S-P-E-C-T?

Find the special report by Elinor Comlay and Matthew Goldstein in multimedia PDF format here.

from Reuters Investigates:

The robosigning story goes on

Shares Lender Processing Services Inc fell as much as 9.8 percent at one point on Monday after Scot Paltrow's special report said the company, which helps banks manage mortgage foreclosure documentation, faces more serious legal troubles than it previously disclosed. The stock closed 5.77 percent down for the day.

Read the full report, "Legal woes mount for a foreclosure kingpin," in multimedia PDF format here.

This graphic shows how the company's share price surged in 2009 as the company profited on the foreclosure boom.