A Presentation On the State of the Real Estate Crisis 1/30/2009

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1 A Presentation On the State of the Real Estate Crisis 1/30/2009 Presented by Mike Anderson, CRMS President, Essential Mortgage, a Latter & Blum Realtors Company Immediate past president/legislative Chair Louisiana Mortgage Lenders Association. RML Advisory Board member Office of Financial Institutions State of Louisiana. Member Louisiana Advisory Task Force for Housing and Community Development 1

2 Existing Problem (March 2008 presentation) Credit Crunch starting August 2007 Liquidity in secondary markets Over 300 wholesalers and lenders bankrupt Rapidly increasing foreclosures Decreasing home values Higher relative rates for conforming & jumbo loans 2

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5 Existing Obstacles/Purchases Bond loans at very high rates The GSE s are not purchasing bond loans NO REAL first time homebuyer programs No 100% loans available to even WELL qualified buyers Higher fees imposed by the GSE s Investor loans are priced OUT of REACH with extremely high fees imposed by the GSE s and ridiculous underwriting guidelines (can t own more than 4 properties) No jumbo loans available with favorable terms (no 30 yr fixed rate product) only 3/1, 5/1 and 7/1 ARMS which are risky loans for consumers The Real estate market is at a stand still, no first time buyers are purchasing homes 5

6 Current Available Loan programs FHA with 3.5% DOWN PAYMENT (1/1/09) Conventional loans with as little as 3% down payment with extremely high credit score requirements and higher fees and rates prohibiting many first time buyers from purchasing a home USDA/RD 100% loans in a very limited area 6

7 Who is at Risk? (March 2008 presentation) First Time Home Buyers State Bond Loans Home buyers with credit scores below 700, (National average is 677) Sellers, Buyers, Realtors, Builders, Appraisers, Title Companies, Home Inspection services, Loan Officers, Loan processors and all loan support personnel Homeowners who are facing Adjustable Rate Mortgage resets will find it harder (or impossible) to get a mortgage and will be hit with higher rates and fees. This will blunt any consumer benefit to the recently enacted stimulus package. Small business entities whose businesses are dependent upon home sales. Housing values will plummet further and foreclosures will increase because of the decrease in the eligible pool of Buyers for homes.` State & local governments faced with empty homes, non payment of property taxes, crime, vagrant & blighted properties 7

8 Why it is going to get worse (March 2008 presentation) GSE increased down payments (Freddie Mac) GSE increased undisclosed adverse credit delivery fees Increased mortgage guarantee insurance rates (PMI) Tightening standards for credit scores Inaction on FHA reform THE INTENDED BENEFITS OF THE STIMULUS PACKAGE ARE BEING USURPED THROUGH INCREASED COSTS AND RESTRICTIVE UNDERWRITING STANDARDS. 8

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11 Impact on Home Sales? (March 2008 presentation) We are the largest real estate company in the Gulf South and the 36 th largest real estate company in the United States. Over 56% of all our home sales were financed with less than 20% down payments! 52% of all those Home Buyers had credit scores under 700! Losing that many Home Buyers out of the market will cause home prices to plummet and foreclosure rates to go even higher. Increased GSE fees leads to increased payments reduced qualified buyers leads to reduced home prices Disproportionately, low income and minority Home Buyers will be the most negatively impacted. 11

12 Current Solutions The Bailout of Wall Street & Major Banks, This is not working $7,500 first time home buyer LOAN, not a tax credit. This is not working 12

13 Before & After Using the national average credit score of 677 $200,000 95% LTV* (owner occupied) Typical closing cost before Typical closing cost NOW $5, $9, $200,000 95% LTV* CONDO (owner occupied) $5, $10, $200,000 85% LTV* (owner occupied) $5, $10, $200,000 85% LTV* cash out refi owner occupied $5, $15, $200,000 80% LTV* investor purchase $8, $16, LTV = Loan to Value, 95% LTV is 5% down payment 13

14 Adverse Credit Delivery Fees Charged by the GSE s 14

15 Adverse Credit Delivery Fees charged by the GSE s 15

16 Defaults by loan type 16

17 Solutions Expand the current USDA/RD loan program to ALL areas of the country for a 24 month period. Expand the income limits. Keep the program for first time home buyers Suspend the adverse credit fees imposed by the GSE s for a 24 month period. USE THE MCDONALDS APPROACH Suspend the adverse fees for investor loans imposed by the GSE s for a 24 month period Revert back to 10 total investor loans for investors on GSE products Suspend the increased down payment requirement by FHA for a 24 month period for first time home buyers. Revert back to the 3% min investment Create a TAX incentive for investors to invest in revenue bonds for bond loans with 4% assistance for first time home buyers (have the GSE s purchase bond loans with 4% assistance) Suspend the capital gains tax for investors who buy distressed and foreclosed properties for 12 to 24 months Bring back 100% loans for FIRST TIME home buyers who are qualified WE MUST HAVE AFFORDABLE FIRST TIME HOME BUYER PROGRAMS 17

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24 Reckless & Irresponsible Underwriting by Fannie Mae & Freddie Mac FACT 100% loans were approved through the automated underwriting engines of both Fannie & Freddie with debt to income ratios as high as 65% based on GROSS monthly income before taxes. Credit scores in the mid 500 range were also in the equation. These loans were then granted final loan approval by the mortgage lenders underwriters, NOT BROKERS and then sold in the secondary market. 24

25 Reasonable and Responsible Underwriting Use the USDA/RD & VA method using a maximum 41% debt to income ratio on high LTV (95%>) loans On High LTV (95%>) loans establish a minimum credit score of 620 with exceptions for documented circumstances beyond the borrowers control On loans with more than 5% down establish a minimum credit score of 580 Higher debt to income ratios for borrowers with credit scores of 650> with a maximum of 55% with adequate cash reserves etc. 25

26 We Must Act NOW The bottom line is the real estate crisis was caused by LOAN TYPE and reckless irresponsible underwriting criteria set by the GSE s and Wall Street, NOT the Mortgage Broker (MARI study, 2008) Going back to the basics of actually qualifying and not exceeding reasonable debt to income ratios, as proven by the USDA/RD loan will bring an end to rampant foreclosures and a stabilization in the housing market. 26

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