William Metzker

I own a 2007 Toyota Camry Hybrid. Quite honestly, I've been waiting since Day One for it to assert its inner Shogun. Accelerating is the least of its problems. Of all the qualities my Camry Hybrid has, speed and agility aren't among them.

I bought this particular car because I knew it would get heavy duty use. Real estate agents drive a lot. It's roomy, so lots of people can pack in for a home tour. It gets great gas mileage. Most of all, though, I bought it because of Toyota's reputation for quality.

So, what happens? My car is suddenly worth poop because of defects. Hybrid models are not on the recall list, but effectively, so what? My car's value was trashed anyway because of the publicity.

What does this have to do with our houses? If you're a home buyer or seller, take note.

Lots of people I know, including me, bought new homes from 2005 on because they wanted "new." They didn't want to worry about plumbing going out, windows and roofs leaking, siding going bleahh and all the other maintenance calamities that can occur with older homes. What did they get?

First, big time construction defects. I remain convinced that for most homes in Portland Metro built since 1998 or so, construction defects are either (a) repaired, or (b) undiscovered. The choice (c), Do Not Exist, is very rare. Many experts agree with me. So much for the quality of new.

Second, trashed house values. Thousands of people bought houses they couldn't afford with mortgages that shouldn't have been offered, the result being round after round of foreclosures and notices of default. A nosediving economy exacerbates the spiral, and here we are: Owning houses of dubious quality whose mortgages exceed the value, even though we did what we were "supposed to do."

Just like my Toyota.

When my wife and I bought our rowhome in 2005, we weighed the advantages of buying with a big mortgage and putting our saved cash into securities, or buying a home with virtually no mortgage instead. We chose the latter. As it turned out, it didn't matter that much, except we do have a house free and clear. Defects repaired, btw. But it's worth less than we paid for it.

At times, I feel like the guy who lost his job and then his wife. His house burned down and his dog got hit by a car. In desperation, he looked skyward and beseeched God, saying, "Lord! Lord! What have I done to deserve all this?"

A voice boomed down from heavens. "I don't know, there's just something about you that pisses me off."

Fortunately, Dog is my co-pilot. My spaniel is as happy as she ever was.

Jumbo loans--those exceeding Fannie Mae/Freddie Mac's limit of $417,000 (higher in high-priced markets)--are facing trouble of their own. They can't be sold off in a secondary market, because there's no market to sell to.

So if you're Bank of America or any of the other (very few) lenders offering jumbo loans, you have to keep these loans in your portfolio. You can't sell them to hedge funds or to China or Ginne Mae or wherever. There's about $1 trillion of jumbo loans out there, according to an article in Inman News, a leading online real estate news source.

It's a good thing that borrowers of these loans tend to be very creditworthy. They have high incomes and pay their bills, which is why they got the loans in the first place. Because of that, the default rate is lower than for other loans.

The default RATE is lower, but the loans, when they do go into default, cause a huge hit. Just a few failures in the jumbo category could exceed, in dollar amounts, loan failures in a conventional portfolio, even though the percentage rate is higher. One failed $1 million loan is as bad as ten failed $100,000 loans.

Nowadays, many of these jumbo borrowers are experiencing difficulty. They lose their jobs, too, and it's every bit as devastating to their familes. Worse, they aren't eligible for the loan modifications or refinance packages offered to smaller borrowers. And if the Portland Metro market is any indicator, short sales to avoid foreclosure are problematic. If a $1.2 million home is being short sold for $1 million, or even $900,000, there are few buyers out there and very little financing.

And no federal tax credit and cheap and easy FHA money, I hasten to add.

And the situation may be worse still. A spokesman for Sorrento Capital in Irvine, CA, suspects many of the jumbo borrowers of the last few years, having lost their jobs, are making their payments with HELOC (Home Equity Line of Credit) proceeds.

Stay tuned on this one.

I think not good, which is the same as bad, and I wrote about it earlier on my blog at www.terradigmrealestate.com. Here it is:

"Today, Fannie Mae, the country's largest insurer of mortgages, requested another $15 billion from the government. Looks as though they had an $18 billion 3Q loss (guess they didn't need the other $3 bill-what's a billion here or there among friends?).

"Anyway.

"That brings the total Fannie has needed to $60.9 billion. I haven't checked what Freddie Mac has needed to date, but when they were first bailed out, the total to rescue them both was projected at $25 billion. It's going to hit $100 billion, easily. Does this matter?

"Hmm. The Congress today passed an extension of the $8000 tax credit for first-time buyers. But it wasn't enough. A $6500 credit for trade-up buyers was added to the dessert tray. Nevermind that 70% of the first timers who have already used the credit would have bought a home without it. And the trade up people? The people who have to move somewhere after selling their homes to first-timers? Apparently, the government felt these people wouldn't buy without taxpayer help. I guess the feds felt these people would move into FEMA tents or something.

"Most of the first-time buyers are using FHA. Ginnie Mae insures FHA (and VA) loans. Ginnie's debt load is up to $680 billion last time checked. That portfolio has an explicit government guarantee, which gets us on the hook for $780 billion and counting.

"Don't get me wrong. The government had to step in and shore up the finance market, because if they hadn't, we wouldn't have an economy right now. I think the Feds did a good job keeping the country afloat.

"I like hot fudge, too, just not a gallon of it at one sitting."

Let me know if you agree with this. It seems to me that more of us have to stand against the NAR's lobbying and make our opinions known.

I previously wrote on what's wrong with the federal first-time buyers' tax credit at Terradigm and on Activerain. Today's post is a follow-up.

Danger lurks. Twenty percent of FHA loans insured last year face problems, according to the FHA Commissioner. Ginnie Mae may be facing a federal bailout.

But if we're going to do it anyway, let's work to make some meaningful changes.

First, let's not have a one-size-fits-all. The credit should be a staggered amount from, say, $5,000 to $15,000, depending on the price of the house.

Second, the credit should be available to anyone-not just first-time buyers.

Third, it should only apply to short sale or lender-owned properties that will close escrow in sixty days or less.

Fourth, buyers should have to contribute a down payment of not less than five percent, escalating to ten percent over the life of the credit. And they must stay in the home for at least three years. The credit ought not be a vehicle for government-sponsored flipping.

Fifth, the capital gains tax rate for purchases of REO properties should be lowered to something approaching zero if the property is held for five years. States should also consider this proposal.

Sixth, to help pay for all this, a federal transfer tax of something around .0125% should be levied on all home purchases where buyers are taking advantage of the tax credit.

This may be less generous than what's there now, but it's still a pretty good deal, better than anything most people have ever received. It will help eliminate the two-tiered market (see yesterday's blog). It will mitigate taxpayer risk from backing the swelling Ginnie Mae debt. It will encourage investment, and it will absorb distressed and excess inventory.

I'd love feedback on this one!

Let's rethink a couple of things, starting with the $8,000 tax credit for first-time buyers.

Look. I know what good it's done. But no one's talking about the bad it's doing. In Portland Metro, I'm seeing the market for houses priced at, say, $280,000 and below stabilizing. The more above that figure you go, the worse it gets. (Editor's note: must adjust stats for other variables, such as housing types. Capiche?).

We are even seeing multiple offers, some at full price (and up) on homes in this price range, especially if they aren't short sale properties. But step back a minute. What if you're a middle class family who owns, say, a $400,000 house? You know, the one that was worth $475,000 a year or two ago? The one you put ten percent down on and now owe $427,500?

If you're that person, you're going to have a bitch of a time selling, and if you do, it will take a long, long time. Kick that up to a wealthy person with a $1.2 million home, and partner, you better plan on camping there a while. And what if either of these has to go to short sale? Not great news. Worse, in fact.

There's not enough mortgage money available. The appraisals may not come in. There aren't many buyers, and oh, by the way, the government isn't giving any of your few potential buyers change after they buy it. Not a lot of first-timers out there in this. This isn't San Francisco or Boulder or Manhattan.

For the last month or so, I've been wondering about the extent to which the tax credit is helping to develop a two-tiered market in Portland Metro-a stable, occasionally active, low-end market and a virtually non-existent one for everything else.

The $8k tax credit, for whatever good it does, may be creating a new bubble in the low-end market, particularly when homes are purchased with FHA money and low down payments. Ginnie Mae buys(securitizes) these loans, by the way, and taxpayers are on the hook for $680 billion last time I checked. That's up from around $250 billion just a couple of years ago.

Some might even argue that purchases in this price range are accelerated, that is, next year's possible buyer is becoming this year's have-to-own. Is the created market sucking up the future buyers?

Keep that in mind next time you read about "the market."

At best, this is a propped up market. At worst, it's another bubble. In any event, we now have two markets, it seems to me, and the tax credit needs to be re-thought. I'll offer suggestions in a future blog