Bill Ackman has sold his huge apartment at the Majestic, which means he also needs to sell the baby 1BR one floor down that he bought in 2007 for $450,000. (How baby? It’s 322 square feet; that’s smaller than the 406-square-foot living room in the apartment he just sold.)

Given the degree to which real estate values have plunged in the past two years, you might be surprised to learn that Ackman is asking $950,000 for the apartment — $2,950 per square foot, and well over double what he paid for the place. And the apartment faces west: it doesn’t even have a view of the park! (Ackman does claim to have spent more than $250,000 on renovations, but even accounting for that, he’s still set to make a substantial profit if he gets anything like the asking price.)

If, as seems likely, no one offers $950,000 before December 8, the apartment will be auctioned off by Ackman himself, who promises to “provide some excellent wines for participants”. Residents of the building should probably turn up for the win alone — and for the spectator sport of watching the bidding, of course. No word on whether Ackman’s setting a reserve, but I’m sure he’s familiar enough with the story of auction-rate securities to have a Plan C in hand if there aren’t any bids at all.

Buried in Peter Goodman’s 2,300-word tale of Christopher Hall’s foreclosure woes is a gem of a program in Philadelphia:

Under the rules adopted by Philadelphia’s primary civil court, no owner-occupied house may be foreclosed on and sold by the sheriff’s office before a “conciliation conference,” a face-to-face meeting between the homeowner and the lender aimed at striking a workable compromise. Every homeowner facing a default filing is furnished with counseling, and sometimes legal representation…

Since the administration’s program was begun in March, it has been plagued by complaints of bureaucratic confusion and the indifference of mortgage companies. Many homeowners who have applied for loan modifications complain that their documents have been lost repeatedly or that they have been rejected without explanation.

The Philadelphia program forces an outcome by bringing together all the principals in one room. If the mortgage company proves intractable, the homeowner has the right to request mediation in front of a volunteer lawyer serving as a provisional judge, who relays recommendations to the program’s supervising judge. If the judge finds that the mortgage company is not acting in good faith, she can hold the house in limbo by denying permission for a sheriff’s sale.

This is a great idea: one of the biggest problems facing homeowners trying to come to some kind of a deal with their mortgage lender is that correspondence has a tendency to disappear into a black hole; that they find themselves dealing with an ever-rotating cast of customer service representatives who have a tendency to contradict each other and even themselves; and that constructive conversation, as opposed to a bureaucratic nightmare, is all but impossible.

The fact is that the banks simply don’t have enough trained and qualified personnel to be able to act in a sensible and intelligent manner with regard to each of the loan modification requests which are flooding in on a daily basis. But that’s the banks’ problem, and this Philadelphia scheme forces them to face up to it.

Daniel Indiviglio, I fear, doesn’t understand this at all, and seems to be living in an alternate universe where all bank decisions are entirely rational:

The bank is, ultimately, going to want to do whatever is in its best interest…

A face-to-face meeting won’t change that fact. And if foreclosure is a better alternative for the bank, then meeting in person won’t change that either. It’s a waste of time.

This might well be true: if foreclosure is in the bank’s best interest, then the in-person meeting won’t change that. But there is a very large number of foreclosures which aren’t in the bank’s best interest, and in-person meetings can change those outcomes for the better.

What’s more, even if any individual foreclosure might be in the bank’s best interest, it can also be in the bank’s best interest more generally to slow the whole process down:

In West Philadelphia, Councilman Curtis Jones Jr., one of the sponsors of the resolution, watched his childhood neighborhood consumed by foreclosure, as the homes of working families — their porches once lined with flower pots — were boarded up with plywood.

“It becomes a blight on your entire community,” Mr. Jones said. “It creates an environment that fosters everything bad, from prostitution to drug dealing to wildlife, like raccoons taking over whole houses. One house becomes 10, and 10 becomes the whole block.”

If banks face a situation where a wave of foreclosures can devastate property values, it’s in everybody’s interest to keep even defaulted homeowners in their homes for the time being, if only to preserve the value of the collateral. Schemes such as the one in Philadelphia can help break the vicious cycle of foreclosures leading to falling home prices leading to more foreclosures, and that’s good for all. I’d love to see the Philadelphia scheme rolled out in other cities struggling with this problem.

Something has happened on the right-to-rent front! It comes from Fannie Mae and it’s called deed-for-lease, and I’m basically in full agreement with Dean Baker on this one: it’s a step in the right direction, but it’s still a far cry from what should be happening. Not only should the lease be for more than 12 months, but the program should be rolled out to all mortgages, not just those owned by Fannie Mae.

In the meantime, it’ll be fascinating to see just how popular this program is. Lots of bright ideas get rolled out and fail to gain traction; Fannie Mae should keep a close eye on this one, and make it more attractive if people aren’t making use of it. And Freddie Mac should in any case try to one-up them, perhaps with a three-year lease. Let’s keep the momentum going!

(Via Indiviglio)

If Forbes writes something on rent-to-buy schemes in March and then the WSJ puts up a blog entry in November along similar lines, even the stretchiest blogger might have difficulty discerning a trend. But that doesn’t mean it isn’t a good idea. In fact, it would be great if we saw much more of it in this country.

Rent-to-buy means lots of different things to different people. Often, it’s a simple lease with an embedded option to buy the property at a set price on a set date — an attempt to give the buyer a bit of time to scare up a downpayment, and to give the seller an income stream. Typically the option is purchased for cash (1% of the purchase price seems to be standard) at the same time that the lease is signed; generally if the option is exercised, the price of the option is deducted from the purchase price.

Alternatively, rent-to-buy schemes can increase the rental price and apply rent payments to the purchase price: here the price of the option is likely to be embedded in higher rent payments rather than being an explicit up-front payment.

Both schemes, however, essentially just kick the can down the road: at some point one or three years hence, the purchaser still ends up getting a conventional mortgage and buying the property in question. If property prices fall significantly over the length of the lease, then you don’t exercise the option, or you go back to the seller and renegotiate. But if property prices fall after you buy the house, you can still end up owing much more money than the house is worth.

Then there’s a scheme I’ve heard of in Germany. Essentially it takes banks and mortgages out of the picture altogether, and sets up a long-term contract between the buyer and the seller. The buyer pays rent monthly, the house is essentially placed in escrow, and the buyer ends up owning the house after a set number of years paying rent. I like this scheme because it involves buying a house without any debt — and the buyer can even move house and sublease the property, so long as she continues to make rent payments to the seller.

The downside for the seller, of course, is the lack of a big lump-sum payment. But lump-sum payments are overrated, especially if you’re not buying a house yourself. Anybody downsizing from a two-home lifestyle, or intending to rent themselves in future, might find this kind of scheme very attractive, since it provides a steady income and they don’t need to worry about how they’re going to invest the proceeds of the sale.

Buying a house slowly, over time, is a great way of building equity without taking on debt — and it’s also a great way of making sure that you’re spending what you think it’s worth to live in a house, rather than speculating dangerously on future property prices. It’s also a great way of giving renters the same kind of emotional equity in their home — and the ability to make changes and improvements — that are generally the domain only of homeowners. Right now, when a lot of motivated sellers are looking to any possible way to move their properties, might be a very good time for these ideas to gain traction.

Bloomberg’s Michael Moore has lots of detail today on the treatment of mortgage servicing rights in banks’ earnings reports. No, wait, it’s actually interesting! Especially when you look at the numbers involved.

Wells Fargo is the poster child here: it wrote down its mortgage servicing rights by a whopping $2.1 billion last quarter, but it actually made a profit of $1.5 billion on them, since the value of its hedges on those rights soared by $3.6 billion. At the end of the quarter, it valued its rights at $14.5 billion.

Moore tries to explain what’s going on here, but something smells fishy:

The value of the rights depends largely on the expected life of the mortgage, which ends when a borrower pays off the loan, refinances or defaults. When rates drop and more borrowers refinance, MSR values decline. Banks typically hedge the movements using interest-rate swaps and other derivatives…

Because there’s no active trading in the contracts, there are no reliable prices to gauge whether banks are valuing the rights accurately, analysts said.

Here’s the first thing which puzzles me: in the third quarter, mortgage rates fell by 0.26 percentage points. How could such a relatively modest decline in rates result in a plunge of $2.1 billion — more than 12.5% — in the value of a $16.6 billion portfolio? And what kind of hedges result in a $3.6 billion profit when rates decline by 26bp?

Over at JP Morgan, the numbers are a little more modest, although Jamie Dimon’s shop, too, contrived to make a profit on its hedges: the portfolio declined in value by $1.1 billion, or 7.5%, while the bank’s hedges went up in value by $1.5 billion.

I’m especially puzzled by the big writedowns because anecdotally there doesn’t seem to be a huge amount of mortgage refinancing going on, and I don’t think that expected default rates rose in the third quarter either. (If anything, judging by the prices of mortgage bonds, they fell.)

There also seems to be a strong correlation between the size of the writedown that a bank took, on the one hand, and the degree to which its hedges made money, on the other. Is there any good reason why this should be the case? Or are banks just taking writedowns as and when they manage to pay for them out of hedging profits?

Shahien Nasiripour does some more digging into the HAMP mortgage-modification figures today, following on from last week’s analysis. This time he’s looking at the percentage of trial loan mods which have been converted to permanent status, and the numbers are startling, to say the least:

Total number of trial modifications at the end of May: 50,130

Number of those being serviced by Ocwen: 1,058

Total number of permanent modifications as of September 1: 1,711

Number of those being serviced by Ocwen: 763

To put it another way, of the Ocwen has managed to convert more than 72% of its end-May trial loan mods to permanent status. The equivalent number for everybody else? 1.9%.

Ocwen’s looking good on other fronts, too, such as its redefault rate, which is much lower than the rest of the industry.

Is there any way to import Ocwen’s best practices to other servicers? Shahien quotes Valparaiso University’s Alan White as saying that Treasury “should start firing the under-performing servicers and bidding their work out to the successful companies”; what’s more, White is a law professor, which means that might even be legal.

More helpfully, Shahien explains one big difference between Ocwen and everybody else: Ocwen insists on having proof of income before it starts any trial modification. (And this doesn’t seem to have slowed it down at all; quite the contrary.) Other servicers might do well to follow suit.

Time looks at the problem of jingle mail, and explains how “because it underwrites low-cost housing for high-risk groups, the FHA’s problems are particularly acute”:

Homeowners of a new and unattractive breed are plaguing the Federal Housing Administration these days. Known as “the walkaways,” they are people who find themselves unable to meet their mortgage payments—and to solve the problem simply move out their belongings at night, drop their house key in the mailbox and disappear… In seven South Florida counties, walkaways have abandoned 3,000 FHA-guaranteed homes in the past twelve months.

The hat-tip goes to Mark Gimein, who dug this story up: it’s 47 years old, and it proves two things: (a) there’s nothing new about jingle mail; and (b) it’s entirely a function of jurisprudence and economics, rather than the Moral Character of the Nation.

Mark’s trod this ground before, but it bears revisiting: there are often very good reasons to walk away from your house. It’s never a first-best option: with interest rates low and banks under a lot of pressure to modify loans, it’s often possible to negotiate a deal whereby you get to stay in your house at a reasonable cost. But if your bank won’t be nice to you, then there’s no particular reason that you should be nice to them.

Shahien Nasiripour has an interesting datapoint, when it comes to the government’s HAMP loan-modification program:

Though the number of offers extended to eligible homeowners continues to rise, the number of offers accepted actually dropped, according to an analysis of Treasury Department data. In August, about 81 percent of homeowners accepted their modification offers; last month, just 54 percent of homeowners did so.

It’s not quite as simple as that, since it does take some time to go from the offer to acceptance. Specifically, once a homeowner receives an offer, they have a minimum of 30 days — and as much as 60 days, if the servicer permits, “to complete, sign, and return both Trial Period Plans, hardship affidavit, income documentation, first payment due under the Trial Period terms and any applicable executed disclosures”. Then, when they get the modification package, they have another 14 days to complete, sign, and return it.

All the same, if you look at the rate of change of loan modifications compared to the rate of change of offers extended, something weird shows up:

While the number of offers continues to grow, the number of new modifications is now falling, quite sharply. That can’t be a good sign.

Whitney Tilson passes on this chart, showing delinquencies at the FHA. He notes that the FHA is a crucial source of support for the housing market right now, providing a whopping 23% of all mortgages. If you have a subprime credit rating of 600, you only need to put 3.5% down to get an FHA loan; even if you have a positively wrecked credit rating of 500, you can still get a mortgage with only a 10% downpayment. And the people brokering a lot of these loans are often the selfsame shady characters who represented the worst face of the subprime bubble.

How high will the 2008-vintage delinquency rates eventually go? That’s the crucial question, since those mortgages represent more than 20% of the entire FHA portfolio. They’re already high, at 19.4%, but they could go much higher, given that the 2007-vintage loans are over 30%.

We’ve seen this movie before; we know how it ends. There’s going to be an FHA bailout, and it’s going to be big. The only question at this point is just how big it’s going to be.

Mike Konczal says that all mortgages should be prepayable without penalty. He’s right — but in fact he doesn’t go far enough. As Tyler Cowen notes, it would be even better if mortgages could be prepaid at a discount when mortgage rates rise — or property prices fall.

The result would be a sharp rise in mortgage prepayments: you’d repay when mortgage rates rise, by repurchasing your mortgage at a discount, and you’d repay when mortgage rates fall, by refinancing. Mortgage rates in general might have to go up somewhat in order to make up for all this new prepayment risk, but to offset that there would be significantly less default risk. And right now, when mortgage rates are low, is a good time to implement something like this: the damage you cause to a bank when you prepay a low-rate mortgage is very limited.

It’s true that prepaying at a discount doesn’t work as easily in the heterogeneous US as it does in the more homogenous Denmark, but there are ways around that; at the very least, homeowners should be given the opportunity to offset their mortgage liabilities in the broader capital markets. There’s got to be some way of doing that, and I’m not talking about zero-sum games like Bob Shiller’s housing futures.