"An Enlightened Solution To The Real Estate Crisis - A Solution Without Losers" by Fred Carach

Since the housing crisis started I have been mystified that no real estate professional has stepped forward with several of the more obvious solutions to this crisis. Since I am not aware of any professional that has set forth a win-win program. I have decided to set forth mine. Everyone is a winner in my program. There are no losers.
Under our foreclosure system, everything begins when the homeowner falls 90 days behind in his mortgage payments. It is at this point that the foreclosure system kicks in. History has proved that it is very rare for any homeowner to save his home once he falls 90 days behind in his payments.
Under the system that I propose, the lender at this point instead of starting foreclosure proceedings, would send his agent to the residence with two legal documents. These two legal documents would be a Deed In Lieu of foreclosure and a Lease-Option contract. Or more specifically a negotiable five- year lease with an option to purchase. As I will explain, the negotiable feature is very important.
Let us now examine how these two rather simple legal documents would solve both the problems of the lender and the homeowner.
In today's real estate market, foreclosing on a home is akin to lenders suicide. First, it must pay for the far from cheap attorney and other foreclosure fees. When it takes possession of the home, it is common for it to discover that either the departing owner or crack heads and vandals have trashed the home. Often to the tune of $20,000-$30,000 or more.
When a property owner signs a Deed In Lieu of foreclosure, all of these crushing lender foreclosure expenses are short-circuited. This document is the voluntary transfer of the owners title in the property in return for the promise of the lender not to engage in foreclosure proceedings against the homeowner.
The question now becomes why would an owner agree to such a thing? There is of course some benefit to the owner in signing a Deed In Lieu of foreclosure document. His credit rating will not be as badly damaged and the lender cannot come after him for losses it suffers on the property. The answer however, is that the real benefit to the homeowner is the other legal document in the briefcase of the agent, a negotiable five- year lease option contract.
These are the contract terms. For an option premium of $200, the lender who now owns the home will rent it to the ex-owner, who is now the tenant for a period of five years at a rent equal to 31%-33% of the tenants verified gross monthly income. It really does not matter which number is used. History has proved that in this range the tenant will be able to handle the rent. At any time during or at the end of the five year rental lease the tenant will have the option but not the obligation to purchase the property from the lender at the original sale price. The homeowner has an additional inducement to agree to all of this.
The option has an important additional selling point. It is negotiable. What this means is that any time in the five-year option period the option holder can sell the option to any interested buyer for whatever price it can command. You will recall that the premium to purchase the the option was $200. Over the five-year option period, home values may be expected to recover to the extent that the tenant may be able to sell his option for thousands of dollars to a stronger purchaser. Or his situation may improve to the point where he can exercise the option and purchase the property back at the original sale price. Frankly, the $200 option premium amount is totally arbitrary but I think it is critical for both the homeowner and future potential buyers to know that the option has value. In the absence of some such fee human nature being what it is I feel that it might be difficult to establish in peoples minds that the option contract has true value.
As you can see, there are powerful inducements for both the lender and the homeowner to agree to the solution I have outlined. Most importantly, it is a win-win scenario. There are no losers,only winners.
The only thing I can not figure out is why a real estate professional has not been able to get a workable solution such as this out to the general public before now.

" Kiss Real Estate Goodby - A Real Estate Appraiser’s Viewpoint" by Fred Carach

Today we are told that the real estate crisis is in the 8th or 9th inning. I don’t think so.
The 3rd inning is more like it. I have a rather a unique insight on the problem. For thirty years I was a State Certified General Appraiser. That means I was licensed by the state of Florida to appraise everything from a chicken coop to office towers. I guess you could say I was there at the creation.
Those who champion a quick recovery are quick to trot out trite statements. The one I find the most amusing is the one that proudly proclaims, “that you can’t lose money in real estate”. The other one is that, “they aren’t making any more land and therefore it is a sure thing”. The quick recovery exponents foresee a V-bottom recovery. In other words after hitting bottom the market will immediately bounce strongly upward like a rubber ball that has fallen from a great height. I think an L-shaped bottom is far more probable. I think that after we hit bottom we will bounce along the bottom of the L for possibly five years. Beyond that point my crystal ball becomes very dark. What everyone appears to be missing is that in every type of investment transaction except for real estate there are only two decision makers. The buyer and the seller and if they agree the transaction takes place. In real estate however for a transaction to take place four players have to agree. And this is what everyone is missing.
It is not surprising that everyone is missing this important fact because for fifteen years the other two parties did nothing more than to rubber stamp the deals that the buyer and seller had agreed to. The other two parties to the transaction are of course the lender and that weird creature that no one knows anything about the real estate appraiser. The function of the lender is obvious. The function of the real estate appraiser is not so obvious. In theory the function of the appraiser is to estimate the market value of the property, so that the lender can recover his investment if the buyer defaults on his mortgage. And in olden days when lenders, that is the banks warehoused their mortgages this is actually how it worked. That world came to an end when mortgages were converted into securities and then sold all over the world. The lenders simply pooled these mortgages into financial instruments called MBS (mortgage backed securities) and sold them to increasingly clueless parties all over the world.
It is amazing how disinterested lenders became in honest estimates of market value once they knew they could dump these mortgages on the unsuspecting and the clueless. The appraiser now had a new function. His new function was to rubber stamp the decision of the buyer and the seller. And woe to the appraiser who did not rubber stamp the deal. I spent my last fifteen years as an appraiser having mortgage brokers point a gun to my head.
Now let’s see how things worked before the crisis. Lucky seller has found a fool who will pay $30,000 more than the property is worth. The appraiser tells the lender that the sale price is $30,000 too high. The lender couldn’t care less because he knows that his mortgage will he believes be lost in the 5,000 other mortgages that are being pooled and sold to some clueless bank in Europe. No one will ever be the wiser. He casually informs the appraiser that if he ever wants another appraisal assignment from him he will rubber stamp the deal. The deal is rubber stamped.
What is even more important however is that this new sale is now regarded as a “comp” or comparable sale by appraisers working in the neighborhood. This new higher sale now bleeds through the neighborhood and results in higher prices for all comparable properties in the neighborhood. This powerful engine for increasing real estate prices was at work throughout the great real estate boom.
Contrast that happy state of affairs for the seller to what happens today to lucky seller who has found a buyer willing to pay $30,000 more for his property than market value.
Our lender is now drowning in foreclosures. The last thing he can tolerate is to foreclose on another over priced property. He will inform the lucky seller that under no circumstances will he underwrite a mortgage for one dime more than the appraised value. Under the new world order the appraiser has also found a reason to develop a backbone he now knows that almost all appraisals are now being reviewed by an independent appraiser. There is nothing that will make an appraiser more cautious than the realization that his appraisal is being reviewed by another appraiser. Outside of the industry very few people have any idea of just how difficult it will be to raise real estate values as long as these conditions exist.
But it gets worse. It gets far worse. For real estate prices to advance it is first necessary for non homeowners to be able to purchase starter homes. For the first time in decades these young, first time purchasers are being told that they have to have a down payment. The horror of it! These pampered darlings have never saved a dime in their lives and they are now being told that they have to come up with a down payment of 10% or more. When you tell them this they look at you as if you have lost your mind. In reality what this means is that a large chunk of people who would have qualified to purchase real estate before the real estate crisis are now frozen out of the market.
Then there is the FICO score crisis. During my career the magic number was 620. Anyone who had a credit score of 620 or above could qualify for a loan. Today for the first time that score has been raised to the 660 or 680 range. There is nothing that will tell you how terrified lenders are today than this statistic. For most of the last twenty or thirty years lenders were beating the bushes looking for borrowers and constantly lowering their standards to get them. Today they are kicking them away. And this is happening at a time when the credit scores of the American people are in a death spiral from an avalanche of foreclosures and bankruptcies. Perhaps another 10%-15% of potential buyers are now frozen out of the market who would have qualified prior to the real estate crisis.
The ugliest reality of course is that the median income American family cannot afford to purchase the median priced American home. Most Americans today could not afford to purchase the home that they live in. At the peak of the boom the median priced home sold for about $230,000. The median American family can afford to pay up to $175,000 for a home using tried and true mortgage parameters. Since booms and busts almost always overshoot I suspect that the slow, relentless, decline in housing prices that we are experiencing will not end until the median priced home is selling for somewhat below $175,000. As this is being written the median price American home has fallen to about $195,000 not too far from the $175,000 requirement. I think we could reach $175,000 sometime in 2009.
That brings us to the last point. What was the device that enabled buyers to bull the price of homes to an unsustainable median price of $230,000? It was of course the phony-baloney mortgage. More popularly known as the ARM or the adjustable rate mortgage, which existed in several varieties but in all its varieties its sole function was to enable home buyers to buy homes that they were otherwise unable to afford and thus bull up real estate values. These ARMS are now an endangered species as lenders have discovered to their considerable horror that lending money to home buyers who cannot possibly afford to pay off the mortgage is a suicidal business practice.


When you analyze the unique set of circumstances that enabled the real estate bubble to occur it is hard to see how we can have sustained price increases as long as terrified lenders and real estate appraisers refuse to cooperate and return to their old and now discredited practices. Sellers can rant and rave all they want to. They are not going to get their price, at least not in the next five years. Let me repeat myself, sustained price increases in real estate are very, very difficult to achieve without the willful cooperation of the appraiser and the lender. As I have stated what makes real estate unique among all investment categories is that what buyers and sellers want is irrelevant without the concurrence of the lender and the appraiser.


Fred Carach is the author of the recent book “Forty Years A Speculator." His blog is located at fortyyearsaspeculator.blogspot.com.