 Jack Guttentag
Founder, Upfront Mortgage Broker's Association
The government is betting that by lending large amounts to private investors
to purchase securities, markets will revive and security values will rise. It is
a costly and risky venture, I hope it works, but fear it won't. This article
proposes another approach to the same objectives that would cost the government
nothing. I call it "desecuritization." All it requires is the appropriate
enabling legislation.
Desecuritization means reversing the securitization process. Securitization
converts large numbers of individual loans into security issues.
Desecuritization converts the securities back into individual loans. The
objective of both is the same: to enhance value. The first works during normal
periods, while the second can work during a crisis period such as the one we are
in now.
Securitization enhanced value during normal periods because a single type of
loan could be converted into a variety of securities with different
characteristics fashioned to meet the diverse needs of investors. For example, a
pool of 30-year fixed-rate mortgages could be transformed into a security issue
subdivided into sub-issues that vary in their duration (how long before the
investor gets his/her money back), their exposure to risk of default as
indicated by credit-quality ratings, and their sensitivity to changes in market
interest rates.
Where investor demand for 30-year fixed-rate mortgages was limited, the
diverse securities fashioned from a pool of such mortgages could appeal to a
wide range of investors. With securitization, the whole was worth more than the
sum of its parts.
The breakdown of financial markets during the financial crisis, associated
with high default rates on loans in pools supporting securities, has reversed
the equation. The total value of any mortgage security issue on which the
AAA-rated pieces have been downgraded is now much smaller than the sum of the
values of the individual loans, assuming those loans could somehow be
disentangled from the security.
For example, assume 20 percent of a portfolio of 1,000 mortgage loans
defaults and each default costs 50 percent of the balance. Because the 200 loans
that default do not affect the value of the 800 that don't, the decline in the
total value of the portfolio is only 10 percent. But if the loans are in a
security issue, every piece of that security may be contaminated by the
defaults. The overall decline in value could be 30 percent or even 60 percent --
we have no way of knowing because markets have largely shut down.
In an interesting paper called "The
Law of Unintended Consequences," John Mauldin attributes this excessive
value decline to the decision by the credit rating agencies to rate asset-backed
securities in the same way they have always rated bonds. I agree with him that
the rating system needs fixing, but I doubt that any rating system can wholly
avoid value contamination within a security when default rates are very high.
In any case, the challenge right now is to find a way to unlock the hidden
value in mortgage pools supporting contaminated securities. Perhaps the new
federally supported asset purchase program will do it, but desecuritization will
be surer and cheaper.
All that is needed to make desecuritization work is a way for investors to
acquire control of 100 percent of a security issue. The investor who owns it all
can dispose of the security and own the individual loans. To make this possible,
we need a law that grants any investor who owns 'X' percent of a security issue
the right to buy the remaining 1 minus 'X' at a price equal to 'Y' percent of
the average price the investor paid for the 'X' percent already owned.
Investors will attempt to profit from such a program in either of two ways.
The basic strategy will be to acquire 100 percent of a security and realize the
difference between the value of the loans and the price paid for the security.
An alternative strategy is to acquire an amount of an issue equal to 1 minus 'X'
plus $1, which is just enough to prevent any other investor from executing the
basic strategy, forcing them to come to you.
The values for 'X' and 'Y' that will best facilitate the process depend on
the characteristics of the security issue. Hence, a first step toward
desecuritization is to develop a census of issues, showing the balance of each
sub-issue, its initial and current rating, and the current owners. This
information will not only help in formulating the enabling legislation, but will
provide critical information needed by investors looking to buy up 100 percent
of one or more issues.
The enabling law would override the maze of private contracts involved in a
securitization, and is not a step to be taken lightly. In this regard, it is
similar to the cram-down legislation that is being considered by Congress. An
important difference is that cram-down is a zero-sum game, meaning that the
gains to borrowers are exactly offset by losses to investors. Desecuritization
is a positive-sum game because the gains to successful investors will be
substantially larger than any losses suffered by other investors.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com. Copyright 2009 Jack Guttentag
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| Loan Type |
Interest Rate |
APR |
| 5/1 ARM |
3.375% |
3.532% |
| 7/1 ARM |
3.750% |
3.919% |
| 15-yr Fixed |
4.250% |
4.359% |
| 30-yr Fixed |
4.375% |
4.557% |
Rates are current as of 5-10-09, and are based upon a conforming loan amount, 740+ credit, full documentation, and
a loan-to-value of 80% or less.
Click here for a custom rate quote
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 Benny Kass
Attorney, Senior Member of Kass, Mitek & Kass, PLLC
DEAR BENNY: Isn't a contract a contract? I am about halfway through an
eight-month listing agreement. The Realtor is pressuring me to again lower the
asking price. He has shown me where similar homes for sale have recently had
their asking prices reduced. I know the market is going that way, but I cannot
afford to lower my price and don't have an urgent need to sell immediately.
Do I have any legal or ethical obligation to lower my price or can I
simply stick to my guns and expect that my contract be continued as is? I assume
that the listing contract is legally binding and cannot be changed. If I wanted
to go to another Realtor, could I get out of it or do I need to wait for the
contract to expire?
For example, when the Realtor asked me again to lower the asking price, I
asked him to lower his commission and he said the contract specifies the
commission and it cannot be changed until the contract expires. So my point,
which went unnoticed, was that the contract should be continued as is. --Craig
DEAR CRAIG: Yes, a contract is a contract and is legally binding on all
parties. But that does not mean that a contract cannot be modified, changed or
even terminated, if both parties to the contract are in agreement.
You do not have to lower your price from a legal or ethical reason. If you
had to sell, then yes, it would be a good idea -- especially in this market --
to do so. But since you are not in a hurry to sell, then I would "stick to your
guns" and to your contract. I remain optimistic that the market will rebound,
but I can't tell you when this will happen. We are starting to see some positive
signs in the real estate market; how long that will last is anyone's guess.
You made a good point to your real estate agent. If he wants you to lower
your price (which would be a modification of the listing contract), he could
also agree to reduce his commission.
Getting out of a listing contract depends on the custom in your area. In my
experience, most listing contracts can be terminated before the end of their
term, but you may have to reimburse the agent for any expenses incurred while
the agent was under contract.
DEAR BENNY: I have a rental house that is under contract with a rental
agency. About six months ago, an individual from the agency called me and stated
that the house needed a new roof. The agency had an estimate that sounded
reasonable so I gave my approval. I sent the agency the money to complete the
job. I waited for the roofer to fulfill the contract the agency had with the
roofer. After a long wait the roofer came and picked up half of the contract
money, but never started working or even delivered roofing materials.
The agency brought suit and now has a judgment against the roofer, but I
don't think the roofer has any money to satisfy the judgment. To the best of my
knowledge the agency didn't check for references, licenses or insurance. If the
agency can't get the down payment through the judgment, is the agency legally
obligated to return my down payment? If I have to take the agency to court would
I have a case against the agency? --Paul
DEAR PAUL: That's a tough question, and you really should consult a local
attorney for specific advice.
Have you done any research yourself? Was the roofer licensed in your
jurisdiction? Is there a written contract between the agency and the roofer?
What arrangement or contract do you have with the rental company? I need to know
a lot more before I can give you a response.
In general, if the agency did not do its homework, then you may have a case
against them. But litigation is always time consuming, expensive and, more
importantly, uncertain.
Depending on the amount in question, I would hesitate to file suit. But let
your lawyer give you an opinion based on all of the facts
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column.
Questions for this column can be submitted to benny@inman.com
Copyright 2009 Benny Kass
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 Dian Hymer
Realtor, Author
Decades ago, sellers priced a little high to leave room to negotiate down.
Buyers typically offered 5 percent less. Then they negotiated and settled at a
price in between. Today, there is so much variability in the housing market that
it's impossible to use a pat formula for coming up with an offer price.
Your goal is always the same: You want to buy the best house for your needs
and pay the lowest price. In many cases, you can start with a price that is less
-- maybe even considerably less -- than the asking price and negotiate from
there.
However, this strategy might not work in some California inland markets where
housing prices have dropped about 50 percent in recent years. Some low-end
housing markets plagued with foreclosures have heated up in recent months.
Multiple offers are common, and some listings sell for more than the asking
price.
Tailor your offer price to the specific house you want to buy. How much you
offer should depend on how much you can comfortably afford to pay, which may be
less than what the lender says you can afford. The price should be determined by
current local market values, how well the listing is priced for the market, and
whether or not you are in competition.
HOUSE HUNTING TIP: Buyers making offers in competition should try to make a
rational decision regarding how much they're willing to pay. Don't get caught up
in the frenzy of activity and offer more than your top price for the property.
If you overpay, you could get cold feet and back out. In this case, your deposit
might be at risk.
An appraisal contingency makes your offer contingent on the house appraising
for the price you agreed to pay in the purchase agreement. If the property
appraises for less than that price, you can withdraw from the contract and your
deposit will be returned to you. That is, if your purchase agreement clearly
stipulates this.
Other options are to try to renegotiate the price with the seller or put more
cash down to make up the difference between the loan amount the lender is
willing to lend and the purchase price.
Lenders are being just as cautious about appraisals as they are about
qualifying buyers for a mortgage. Some appraisals are coming in lower than
market value and some lenders are knocking down the appraisal 5 percent or so if
they're concerned that home prices might decline.
Buyers who offer an under-asking price can improve their chances of starting
a dialogue with the seller if they are preapproved by a lender for the financing
they'll need to close the deal. The number of transactions that fail has
increased in the current market. In most cases, this is due to buyers having
difficulty getting financing. If the sellers know you will be able to perform,
they'll be more likely to work with you to come up with a mutually acceptable
price.
Short-sale sellers will need lender approval if the accepted price is lower
than the amount of financing secured against the property. This can be a slow
and tedious process. Many lenders realize that it makes more sense for them to
work with a buyer on a short sale than it is to let the property go into
foreclosure. But, your contract should include an escape clause so that you can
withdraw without penalty if the lender is not responsive.
THE CLOSING: If you make a low offer on a bank-owned property (REO) and you
don't get a response, make another offer at a higher price, but only if you
think the property is worth it.
Dian Hymer a nationally syndicated real estate columnist and author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books. Copyright 2009 Dian Hymer
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 Paul Bianchina
Contractor, Author
Spring is always an ideal time to be checking the exterior of your home
and catching up on any maintenance items that have come to light since last
summer. As always, maintenance begins with a stroll around the house and a
careful examination of its condition. Take a tablet with you, make some
notes as you go, and then sit down and work up a list of things to take care
of -- sort the list in order of the most pressing items first -- and then
list the tools and materials you'll need for each task. By sorting and
organizing your list in this manner, you can take what may sometimes be a
long list of projects and make it a lot easier to undertake.
THE ROOF
Roof damage is an obvious area of concern. You'll want to actually go up
on the roof so that you can make a thorough and careful inspection of
several different things, so if you're not comfortable with the height or
steepness of your roof, consider hiring an experienced, licensed roofing
company to do the inspection for you.
As you walk around the roof, look for missing or loose shingles,
including ridge cap shingles. Examine the condition of the flashings around
chimneys, flue pipes, vent caps, and anyplace where the roof and walls
intersect. Look also for areas of overhanging trees that could damage the
roof in a wind storm, as well as buildups of leaves, pine needles, and other
debris. If you have roof damage in a number of areas, or if the shingles are
of an age and condition that makes patching impractical, now may be the time
to consider having the entire roof redone. Also, remember that if the
shingles have been damaged by wind or by impact from falling tree limbs or
other items, repair of the damage may be covered by your homeowner's
insurance.
SIDING
Siding can suffer damage from exposure to sun, wind and rain. As you work
your way around the house, you'll want to look for areas of siding that may
be loose, cracked or sagging. In the case of plywood siding, look for areas
of delamination -- separation of the layers of plywood -- or for an overlap
seam that may be working loose.
In addition to examining the siding, check the condition of any wood
trim, and the condition of both paint and caulking. Peeling or missing paint
will need to be spot primed and painted, and the caulking around windows,
doors, and trim may need to be cleaned out and replaced to prevent moisture
and air from creeping into open gaps.
GRADE
Heavy snow and rain can often cause the soil around your home to move --
washing away in some areas and piling up in others. This type of alteration
in the grade levels around your home can result in drainage problems and
potential damage to your home, so look for areas of water staining on the
concrete, or dirt or water stain patterns on siding -- if they're present,
plan on moving and contouring some soil to redistribute the drainage
patterns.
FENCES
Ground water can play havoc with fences and gates as well -- soft, wet
soil allows fence posts to loosen up and eventually sag or fall over. Check
fences by wiggling the posts to see if there is movement -- if there is,
plan on removing soil around the base of the posts and pouring additional
concrete to reinforce them. This is also the time to check the condition of
fence boards and the condition and operation of gates.
SPRING CLEANING
Once you've completed your examination of these and other areas of your
home's exterior and completed any necessary repairs, spring is also the
ideal time to undertake a good exterior cleaning. In addition to gutters and
roof, remove and store your storm windows and clean your windows; use a
broom or water to remove cobwebs and dirt from under eaves, as well as on
siding and exterior doors; pressure wash patios and walkways (pressure
washers can be purchased or rented); and care for exterior wood decks.
SMOKE DETECTORS
Every spring and fall, you want to check your smoke detectors. Replace
the batteries, clean the covers, and test the detector's operation before
it's too late. If you have gas-fired appliances in the house, including a
water heater, now is also a great time to consider adding a carbon monoxide
detector. CO2 detectors are inexpensive and easy to install, and are
available at most home centers and other retailers of electrical parts and
supplies.
Remodeling and repair questions? E-mail Paul at paul2887@ykwc.net.
Copyright 2009 Inman News
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