Esko Kiuru - Las Vegas NV Mortgage Consultant

Housing prices have been in a free fall in most sectors of the nation for a long while, much longer than any real estate expert had predicted. When mortgage financing is hard to come by and supply far outpaces demand that's usually what will follow. The weak economy is also a major contributor to this. Lately, though, prices have begun to stabilize across the colorful map.

Southern Nevada - Las Vegas, Henderson, Green Valley, Summerlin, Southern Highlands, Pahrump, Mountains Edge and Mesquite among its communities - is a good example of that. The lower end of the marketplace is rather busy here as investors and first-time home buyers do their thing and pick up bargain properties. The statistics are somewhat slanted because of the proportionally high impact of this particular segment. The mid-range and upper end in Las Vegas are still quite soft due to lack of demand, as expected, and difficulties in securing home loan approvals.

In a housing study Goldman Sachs just published it says that home prices have been nationally steered higher by 5% on average on account of government incentives and interventions.The number can be debated until mouths foam, but the fact right now is that Washington is largely making the housing market what it is. Mortgage money is kept affordable by the Fed buying just about everything that has a mortgage bond stamp on it. Then there are all these home loan modification and rescue plans, with eye-catching acronyms, that most consumers are liable to lose track of. But regardless, they at least slow down the supply of homes being foreclosed and dropped on the already saturated marketplace. The first-time home buyer tax credit has given a nice boost to the demand side. And by the way, it looks as if a similar program will come out of Congress in a little bit to replace it.

Las Vegas metropolitan area - as are many other markets throughout - is still grappling with many challenges in the mortgage and real estate arenas. It would be in much worse shape, though, without Uncle Sam's charity and efforts. Eventually it has to stand on its own again, and it will. It's already taking some wobbly steps using crutches toward that goal, but obviously needs more time to fully recover.

Photo by RyanGWU82

The home loan and real estate markets we are currently slogging through are unprecedented in their severity. The last time something similar happened was so long ago that few are still here to remember it. As a result millions of people are unable to make their home loan payments and subsequently will have their credit damaged. Three basic events can lead to that.

In short sale the mortgage lender agrees to let the homeowner sell the property for less than the underlying loan balance. Deed in lieu means that the borrower gives the deed, or keys, to the home loan provider before it starts foreclosure action. And then there is the foreclosure itself. All three will slam the homeowner's credit generally up to seven years. By how much depends largely on how many other accounts are in distress.

These guidelines evolved gradually during "normal" housing market conditions. At times when there weren't millions of borrowers in trouble with their mortgage payments. But today things are different. The real estate scene is uniquely clobbered, bringing along with it a historic price adjustment, too. One that was actually badly needed to better reflect a sustainable value structure.

What FICO, the most widely used credit standard, does is use its computer model to predict future borrower behavior, in other words assess risk. FICO score, say, eight years ago was able to lay out a rather representative picture of a mortgage borrower. But from about 2007 onward a totally new class of a credit applicant was introduced to be rated. An unusually large segment of today's homeowners who in some shape have defaulted, or will default, on their mortgage have had a decent to excellent credit rating up until this meltdown. Keeping that in mind, their current FICO score would not be as accurate a predictor employing the standard model. Once the economy improves and most of them will obviously recover financially and become good credit risks once again, they'd still be carrying for years dings to their credit.

Las Vegas valley - with localities like Mountains Edge, Summerlin, Henderson, Southern Highlands, Anthem, North Las Vegas and Green Valley - has its share of homeowners who fall under this category. Real estate upturn here in Southern Nevada - and throughout the nation - will be undeniably delayed because many home loan applicants just can't get approved due to FICO's slow update policy. But there is hope.

The mortgage industry still has those with the spirit of entrepreneurship. Some scattered portfolio lenders are already underwriting mortgages for borrowers with recent foreclosure on their record. They keep the loans in their own books since Fannie Mae and Freddie Mac won't touch them. And it's foreseeable that more will start doing that as they realize what untapped market it is.

Mortgage-backed securities, or MBS, played a pivotal part in the recent galloping real estate market and in its eventual and memorable collapse. These bonds get rated based on risk before they are offered for sale so that potential investors - pension funds, university endowments, international investors, among others - know what they are fiddling with. Moody's is one of the top three in U.S. to do that, the others being Fitch Ratings and Standard & Poor's.

When Moody's was spun off from Dun & Bradstreet early in the decade, the long-time corporate philosophy of honest and quality ratings was supplanted with a more pro-business one. In essence it would now pay more attention to the bottom line than accurate mortgage and other bond ratings. It needed to keep its market share, and possibly even increase it regardless of the means. That looks like a dangerous shift in corporate strategy. And it was.

Writing countless AAA ratings for mortgage bond issues - and also doing packaging of securities - earned Moody's superb fees. Later on many of the issues were rated no more than junk. The ratings were based on mathematical models that were far from accurate and often hopelessly out of date. Perhaps so by design. Anyhow, life was good. Not only for Moody's but the other players as well. Global investors trusted their advice, liked the yields and were writing checks left and right. And then the unthinkable happened. A thermonuclear event blew up the mortgage industry.

Another aspect about the mortgage bond rating regimen that skews its results is how the agencies are compensated. For decades now Wall Street itself has been paying the fees, the same investment firms that benefit from top ratings - no matter how erroneous - when marketing their products. That smells of a major conflict of interest. How objective can a rating be when it's done this way? Not very. Decades ago, before the new setup was approved it was the investors who plunked down cash for the ratings. That makes much more sense and should be considered for revival.

Government regulation - currently through Securities and Exchange Commission (SEC) - of this particular segment needs to be carefully assessed and preferably tightened. The big investors were badly scorched in this recent home loan and real estate meltdown. They formed the backbone of the secondary mortgage market here and they are needed there again. But to convince them to return requires new procedures and rules that would assure them the securities they are considering are thoroughly and competently researched and then rated accordingly. After all, the Fed, having largely replaced the no-show investors to keep the secondary mortgage market alive and liquid, can only do it for so long.

Mortgage banks have been pushed between the rock and the hard place in today's reeling real estate market. They are trying to make the right moves to keep their bleeding books from totally blowing up during this perfect storm as more and more home loans go bad. To deal with that, they generally look at three basic options; a mortgage loan modification, a short sale or then the foreclosure, the infamous word that has been in the media a lot lately.

Southern Nevada - with communities like Henderson, Boulder City, Summerlin, Mountains Edge, Southern Highlands, North Las Vegas and Green Valley - homeowners are increasingly finding themselves underwater, meaning that their mortgage balance is higher than the underlying property's value. Many have been able to convince their home loan providers to go for a short sale, whereby the bank will accept a sale that is for less than the mortgage balance. If so, once the deal is closed - it can take months by the way - the homeowner usually thinks the nightmare is finally over.

After all, at some point - normally soon after the settlement - the mortgage loan company sends the homeowner an IRS form 1099C spelling out that the debt has been canceled. The law requires that any canceled debt over $600 must be so reported to IRS and the borrower. And since this is his principal residence he's not obligated to pay income tax on the canceled debt. All this appears reassuring enough.

But the pain may not be over after all for the homeowner.

When the mortgage firm agreed to the short sale, did it also include in writing that it was fully releasing the borrower from the debt? If it did not, things can turn rather nauseating from the settlement on out. What is happening at increasing frequency now is that many home loan companies are selling their real estate debts to collection outfits that then come after the unsuspecting borrowers. All of a sudden a major problem seemingly solved turns into another bad dream.

Obviously mortgage lenders interpret the situation so that they can come after the difference if they didn't explicitly and in writing agree to a complete release. While the homeowners believe the IRS form settles the issue in their favor. Who is right? Hard to say off hand at this stage. The courts are going to have to make a conclusive ruling on short sales and the debt forgiveness.

So, Las Vegas mortgage borrowers who enter into a short sale agreement without a written release from the bank run the risk of being chased for the remaining liability. Historically it has rarely happened, but today things appear to be heading into a different direction.

Photo by tomsaint11

Affordable mortgage money and in many areas really mouth-watering prices are helping the real estate market out, but it needs much more than that in this frustrating economic environment. The famous up to $8,000 tax credit, it is due to expire at the end of November, for first-time home buyers did boost sales a degree or two. Still, the housing sector keeps on drifting along without too much purpose.

Mortgage Bankers Association, or MBA, National Association of Realtors, or NAR, and National Home Builders Association, or NAHB, are the heavy hitters on the real estate scene who now are twisting arms in Washington to get the soon-to-expire tax credit expanded. Not just extended but broadened. What they have in mind, as the main points, is to hike the credit up to $15,000, include all buyers and do away with income limits. Their lobbying efforts have so far spurred 20 or so different bills, more are probably on the way, in Congress to address the issue. That's a big surprise. Everybody and his nephew obviously wants to get credit for doing something for the doubtful and besieged voter.

The real estate market could truly use such an expansion. The demand side is still quite soft and this would give prospects some more incentive to begin chipping away at the high inventory of homes for sale out there. Housing is a key component of the whole economy and it needs to get healthier to give the much anticipated recovery a strong leg to stand on.

Besides, the government has so far - for the most part - been pouring gazillions on irresponsible Wall Street operators to keep them afloat while largely ignoring the average consumer. Despite the taxpayer charity mortgage lenders inexcusably continue to drag their feet in doing timely home loan modifications, expediting short sales and helping out otherwise. It's about time that more focus is shifted toward the consumer. With the right length of carrot he'll step forward and start lifting housing out of the gutter.