Fannie Mae has this program since June 15th. It will end at the end of October. It has been extended once already a month ago. I’m guessing it will be extended again.

The 3.5% must be in the form of closing costs, which you can use for any settlement costs, and buy down the (already-low) interest rates. You do have to buy one of the foreclosed property from Fannie Mae, and it’s pretty to search through their properties online.

You can find the details of home path program here.

Freddie Mac also has a “home steps” program for extra home warranty and $1500 condo association credit. But it’s most likely less than 3.5% unless the property is extremely cheap.

I still expect the home prices to drift down further, but if you are ready to buy for non-financial reasons, by all means, you should take advantage of this offer.

This is just my personal opinion which I have been saying since 2007 housing market peak:
I am fairly certain that US housing prices will not recover its inflation-adjusted price until 2027 at the earliest. In terms of nominal prices, I am less certain but I also tend to think that housing prices will not recover its nominal prices until the same time-frame. My reasoning is fairly simply. Every financial bubble in human history will NOT repeat itself for at least 20 years. Usually it’s AFTER 20 years have passed that the same asset class can have a new chance to begin to rise in prices.

The two main negatives that have not been priced in by the current buyers are
1. Bond bubble bursting causing rise in interest/mortgage rates, AND shortening of the duration of the mortgage term. This will cause the domestic US buyers to decrease their offering prices.
2. Increasing deficits will most likely result in increase in property taxes. This will increase the holding cost of houses and therefore decrease the home ownership benefits.

The third negative that has not been priced in by the foreign cash buyers is that the current US housing price can possibly become 50%-off, once US dollar drop another 50% against the stronger Asian(Japan-excluded)/commodity currencies. These buyers will probably not flock into US after 50% off because the relative political/economical stability across regions can change in detriment to US, and that these “savvy” businessman and “corrupted” government officials won’t probably be throwing good money after bad.

Regardless, if the home ownership cost is way below the current rental cost, it obviously makes sense to buy. You could use my Rent vs Buy calculator to see if it would make sense.

There is a serious mortgage paper fraud bubbling to the surface. I was aware of this several years ago, but I was not aware of the magnitude. It is so serious that I think it can easily turn the whole world up side down (for the second time, I guess).

Some background first. The US bankers and Wallstreet or more properly called “fraudsters” first selling all the worthless “mortgage-back” securities back by phantom 100% financing loans from 2005 to 2007, cheating the entire world out of savings. They turned the world up side down with the financial crisis, and then had Paulson from Goldman Sachs being the US treasurer at that time, saving their ass with taxpayers’ money, transforming or rather downloaded all the worthless mortgage paper onto Fannie Mae, Freddie Mac, and AIG. Of course, everyone thought that was a great mission accomplished.

Now, when they try to foreclose homes, but lawyers demand to see the promissory notes, they find out, “Damn, where is that piece of crap?” Imagining all the homes that cannot be foreclosed on, due to missing documentations for the promissory notes? All the mortgage-back securities now will be truly back by NOTHING!

Here is what I will venture to guess the potential outcomes.
1. The only way to foreclose these homes will be through non-judicial foreclosures (including California, the home fraud center). Rather than getting nothing for the mortgage paper, it’s far better than getting something for it. Once the avalanche starts rolling, every bank will start scrambling to sell the homes out of the flood gate. Home prices will fall by another 20% in the coming 2/3 years. Or at the minimum, the shadow inventory of the homes on bank’s balance sheet will dramatically rise.

2. If this is not resolved through Congress passing a new law, back-patching the shoddy works by bankers, and the news start to spread around the whole world, US dollar will drop to a new dramatic low. Imagine another 3 trillions loss (out of 11 trillion) on Fannie Mae/Freddie Mac backed debts, all USA government owned? By the way, if this event unfolds, stock markets will panic first, but later will reverse to break 52 weeks high. Bonds will plummet for sure. Real estate will go into extended nuclear winter.

3. New laws get passed through Congress to save the bankers’ ass. Congress initially side with home squatters in the name of protecting voters, until all the law-abiding citizens take the street, demanding fairness. Then Congress realizes that it’s too late to stop the revolution by the majority of the law-abiding citizens, turning to lawless resolutions everywhere.

Just some crazy ideas. But certainly less insane than what has been going on in US real estate markets. And all of the rotten apples (Wallstreet bankers, home speculators, and all the mortgage “consultants”) are still in there unbelievably.

I thought that what happened in US since 2007 (and in Japan back in 1990) would have taught people some lessons. But human greed knows no bound. Either they don’t read news, or they’re too greedy. There are still booming undying bubbles in China, Taiwan, Canada, Australia.

It is apparent that most participants recognize the value of housing investment in protecting assets against inflation. It has been the preferred financial instrument, especially in Asian culture, to buy real estate because
1. It won’t go to zero, because it’s “real” estate, and you will always have it.
2. It pays out dividends in the form of rent.
3. It always “goes up” in the long term.

My colleague asked me whether I know how much real estate has gone up since 50 to 60 years ago. He told me it’s tens of thousands of percents. Well, but one must recognize the fact that since 1930, $US has depreciated 94% in buying power, according to government official statistics (and probably worse if using unofficial figures). The primary reason that real estate goes up in the long term is because of general inflation. Since a couple of decades ago, another factor that helps real estate price is that the financing costs/interest rates have been going down. However, over the long term, the average real estate prices cannot exceed inflation rate by too much and/or for too long. Why? If real estate simply returns 1% more every year than the general inflation, after 100 years, real estate price will be 270% higher than the general wages. After 200 years, real estate price will be 732% higher than the general wages. Well, the economic law of supply and demand will always balance things out. Eventually, either people cannot afford homes anymore, and younger generation stops forming families, resulting in reduction or stagnation in population, and therefore reducing demands for homes, or the home prices will simply FALL behind the general inflation rate. And I can bet you that it will happen before real estate prices are 732% higher than the general inflation rate. In fact, both Japan and Taiwan are already showing such signs of either declining population or stagnant growth. If you have so much money that you don’t need to worry about future, housing, employment, etc, and you have all the leisure time in the world, won’t you tend to have children? On the other hand, the opposite extreme scenario would probably be true also. So if the population is declining, who is going to fill up the existing housing space, not to mention that builders will always build more. Imagining a hypothetical scenario, where for every grand kid, he or she is inheriting at least 2 homes from both sides of the grandparents, and/or parents, and/or any unmarried relatives who have passed away, now won’t the housing and/or rent price go down because there are extra supplies versus demands? Of course, before long, economic law of supply and demand will kick in, and population would have increased.

What I’m trying to point out is that it is simply IMPOSSIBLE for housing prices to stay higher than inflation rates for too long. Those that bet on housing prices will increase 10% above inflation rate every year are simply delusional.

Very infrequently I come across some articles that are so well written that I feel obliged to recommend them to people. And I found it at Irvine Housing Blog. IrvineRenter, the owner of the blog has written a couple of excellent articles that should be must-read for every home buyer.

On “Valuation of Lots and Raw Land”, IrvineRenter explained in details how the valuation of an investment in raw land would work out. To sum it up, land investment works like a call option on the housing market.

On “Loan Assumption is the Appreciation of the Twenty-Teens“, IrvineRenter gave his best advice (and I concur too) that the best bet in building your home equity is probably by buying with an assumable AND fixed-rate loan. Unfortunately, as far as I know, the only assumable loans these days are FHA loans, which have higher fees in general. Why is that? A good deal to the borrowers is always a bad deal to the lenders. The scarcity of such loans automatically tells you that assumable loans are not good for lenders.

And at last, on “Fundamental Valuation of Houses – Part 1“, IrvineRenter explained in details about the math of home ownership cost. His article almost acts like a companion manual to my online java housing cost calculator. All of the factors that he has mentioned, I have included them in my online housing calculator, plus commute cost difference. But just one caveat, garbage in, garbage out. My calculator is only as good as the validity of your input assumption. If your assumption on the housing parameters such as rent/housing inflation or tax rate, are inaccurate, then the results will be inaccurate as well.

So what’s the buying strategy for the housing market? In case you missed it, it’s using assumable fixed rate loan. On a longer term, I believe that the mortgage rates will be going up. Contrary to all the unscrupulous realtors, the best time to buy real estate is when the mortgage rates are at the highest, not when they’re at the lowest. Lower mortgage rates always cause the housing valuation to expand, while higher mortgage rates will rein in the price. Assuming a forward picture of higher than normal inflation, and mortgage rates trending higher, the inflation force may arrest and balance out the decline caused by higher mortgage rates. Nominal housing prices may stagnate for a decade or even two decades, but inflation-adjusted price will continue to decline. Such picture does not bode well for many participants. The renters will see their rents going up due to general inflation. The new home buyers may still see price declining if the nominal prices have not reached bottom. Worse yet, if the equivalent ownership cost of their home is higher than prevailing rent, then they’re effectively speaking draining any potential savings that they could have built without buying a home. In such picture, the only potential remedy would be to have an assumable fixed-rate loan, so that one could recover the price benefits between future higher mortgage rates and the current lower mortgage rates.

And if you cannot find such loan, make sure you put the least amount of down payment, and borrow as much as you can for 30 years fixed. Forget about adjustable ARM. The only way to short the bond markets and US dollar simultaneously and safely without margin calls is to borrow against your real estate holding.

I have blogged about “different ways for a busted refinancing plan” back in 2006 at the height of housing market. I argued that once the housing markets fall, most of the real estate “investors” will NOT be able to refinance out of their payment troubles. It was very clear to me that a housing Ponzi scheme simply cannot last forever, and was destined to pop. Of course, according to Greenspan, Bernanke, Wallstreet, and traditional news media, nobody could have seen the financial crisis coming.

I definitely thought that things would be worse in the housing markets. Due to various factors that I didn’t forsee, including Obama’s home affordability programs, delays in foreclosure processes by banks, and a dramatic drop in the interest rate curve, things are not terrible as of now. In fact, in 2009, housing markets actually went up (at least in California), sucking in the last bunch of ever-hopeful real estate “investors”. Regardless, numbers won’t lie, and let’s see how the negative amortization or option ARM homebuyers are doing.

Below is a summary from the monthly payment history based on a hypothetical case that I’ve made up for a California home ($500K, 20% down). I think it is pretty representative. You can get the original complete Excel spreadsheet here. All the interest rate data are from X-mortgage. I’m listing both MTA and COFI indexes which are the two most common indexes for option ARM:

Date	MTA (%)	11th District COFI (%)	Monthly payment (MTA)	Balance (MTA)	Monthly payment (COFI)	Balance (COFI)
2004	1.2383	1.802	1,286.56	400,042.88	1,286.56	400,230.78
2005	2.5042	2.515	1,383.05	402,760.80	1,383.05	403,981.61
2006	4.1425	3.759	1,486.78	410,981.87	1,486.78	411,293.82
2007	5.0292	4.224	1,598.29	424,437.96	1,598.29	422,556.80
2008	3.5283	3.111	1,718.16	436,514.40	1,718.16	432,092.15
2009	1.34	1.38	2,332.69	436,960.64	2,325.33	433,770.30

From the original teaser payment of $1286.56, the payment increased 7.5% annually, and is recast to about $2200 after 5 years from 2004. I think the more aggressive homebuyers who couldn’t cover the annual payment increase of 7.5% would have dropped out already. They either
1. sold and made some profits,
2. refinanced into another option ARM before housing markets dropped in 2007 (which will cause more problems later in 2012),
3. or defaulted already.
The more “conservative” homebuyers who were able to sustain thru 4 years of annual payment increases of a total of 30%, now will be facing an additional payment shock of 28% from $1718.16 to $2200. That is a total increase of 71% from the original $1286.56.

Needless to say, an increase of 71% in 5 years will be huge for anyone. Very few family will be able to make it thru a combination of salary increase, second job, and/or having non-working spouse going back to workforce. Unfortunately, refinancing to 30-years loan at today’s 4.75% will not be an option either, since the monthly payment for 30-years is about $2200, the same as the recast option ARM loan, if not more. I originally thought that these people probably would have problems with LTV or loan-to-value ratio. But Obama’s home affordability program has “solved” the LTV problems for these most of these homeowners. The monthly payment issue is still there. One cannot make an unaffordable home in the first place to be affordable.

Looking forward next year, once the home affordability program expires in mid-2010, we will probably get more defaults and walkaways from homes. Due to Bernanke’s cutting of interest rate, and a huge buying program in both treasury and mortgage market, current interest rates are temporarily held down. If the option ARM indexes like MTA and COFI rise up to 3% for example, the monthly adjustable payment will go up by another 25% to 30%. I don’t think the housing markets will recover anytime soon due to this impending supply of homes (from defaults of the option ARM loans).

So what should you do if you are one of the option ARM homeowners? There are many sites & articles that talks about foreclosure options. In my opinion, short sale would be the best choice (if you have this choice), since you won’t be liable for the deficiency judgment, and it will hurt your credit report the least. The second best choice is loan modification, although not many can negotiate a good deal with banks. The rest of the choices such as foreclosures are not ideal, but it’s probably earlier the better under the assumption that it does not affect your job prospects based on a much worse credit report.

Here is some of good sites & articles that I’ve found on foreclosure-related options. Some of the site owners are very helpful, and may be able to provide you with needed advice or services:

• Foreclosure option networtk. Hanna was particularly helpful to me on a couple of nasty legal questions.
• Foreclosure options from MSN
• More info on various foreclosure options from foreclosure university.

From several of my friends, I’ve heard that people are bidding the homes again like crazy for the last four months. Many properties sold at the asking prices or above, receiving multiple bids. Home prices actually have gone up by up to 10% versus prices from last year. People just never learn (especially about history). Human greed and fear is always with us, and therefore there will always be bubbles.

Frankly I am totally disgusted by the “get-rick-quick” crowd and their mentality. Nobody wants to work & save diligently. Instead people are afraid of missing the next stratospheric real estate boom, afraid of missing the bottom in stock markets, and afraid of missing the next generational boom in emerging & BRIC markets. Just sit down and think a little bit. If all of these people will get rich, retiring with more than a million in net worth in inflation-adjusted dollars at the age of 55, who is going to serve the table when you go to restaurant? Who is going to be nurse taking care of elders? Who is going to be the hotel cleaning lady when you go and travel? Robots or imported cheap labor from African countries? I don’t mean to disparage the above jobs at all. For the society to function at all, everyone needs to perform their duty and job function. Everyone is indispensible (at least in a collective sense). And so, it just happens that NOT everyone is going to retire on the beach, enjoying the sunshine. That is just a fact, until robots can replace all human labor.

The recent bubble in (international) real estate has been the biggest ever in size in human history, driven by massive credit liquidity multiplication. There was a paradigm change and the credit liquidity is not going to be the same possibly for decades to come. Just remember that if real estate in Japan of just four main islands can go down in prices for 20+ years, then there are more reasons for real estate to go down in prices in bigger continents.

I’m not saying that home prices cannot go up. There are two main drivers for home prices:
1. Persistent increase in wages: I seriously doubt that it’s going to happen anytime soon. The unemployment rates are going up. There is no pressure to increase wages. Furthermore, in order to reverse outsourcing trends, either US wages go down, or US dollar goes down.
2. Long term interest rate drops more: I have doubts that the condition of low long term interest rate in US dollar can persist. Due to all the Wallstreet bailouts and fiscal deficit at Washington, at some point, the liquidity crisis will hit US bond markets again. Foreign central banks are shunning away from US bonds now. I believe long term interest rates will trend up rather than trend down. That does not bode well for home prices.

Of course, if the above two factors change to favoring home price increase, then my opinion will change. Until then, I wish those home buyers and real estate “investors” good luck. Our generation doesn’t really understand the word investing anymore. Calling speculation as investing does not reduce the risk of speculation by any tiny bit. Rather it just pampers your own greed.

Ten large banks are paying back treasury with 68 billion dollars, so that they can be freed from government meddling in paying their executives. Now that all of their accounting book is blessed with marked-to-fantasy, they don’t need the cash anymore. Can we put in a clause in the payback that “please don’t come back again even if you’re insolvent (after squeezing out more bonus for executives)?”

I’ve said many times, and I will repeat it again. Option ARMs and AltA are resetting starting from about now until the end of 2011. The wave of notice of defaults is already coming (Dr. Housing Bubble has got all the charts here). It’s not a question of if, but when (the next wave of financial crisis will hit). Mark-to-fantasy by thinking that you have not sold your stocks (mortgages on the book of these banks) after 60% losses and that they will come back to full value after 10 years will not help at all. The end game will come, when the homeowners stop paying mortgage and/or walk away from properties. When the properties go into foreclosures and get sold, banks have to mark down the losses without a choice. The fact that banks are not in a hurry to foreclose all the properties tell you that the level of losses in a foreclosure will probably destroy the banks. By choosing not to foreclose (and not mark-to-market), insolvency can persist in fantasy land.

And before they go down, CEOs are going to squeeze out more from shareholders, bondholders, and taxpayers. They’re definitely a smart bunch.

Here is just some decision flowchart on what I think you should do for your home/mortgages in many circumstances. It’s based on my personal opinion, and you should always consult professionals & legals when it applies. There aren’t many solutions for you besides out-right sale, short sale, refinancing, loan modification, foreclosures, and walkaways. But you should choose carefully on each option. Anytime you choose short sale, foreclosure, and walkways, it’s implicit that you will lose all the amount of any down payment that you have put into the home when you first bought it.

1. Case #1: if you are “underwater”, meaning that your loan amount is greater than your home market value, your decisions should be dependent on your loan type.
   1. Case #1A: if your loan was a PURCHASE loan, meaning that you have never refinanced your loan since your home purchase, in many states such as California, where there are laws protecting home buyers from loss of incomes or jobs, you should probably walk away from your home. In such cases, you should be protected by state laws, and you should not be responsible for lenders’ loss. The laws however cannot protect you if you have lied about your income and assets on your loan application. Please make sure that you consult lawyers for specific details, because I cannot be responsible for your legal troubles. Please NOTE that if you have a second loan, but the second loan was a purchase loan which you’ve probably paid PMI insurance on, you should still be okay. However, the same does NOT apply to home equity or piggy-back loan. Home equity loans are recourse loans, and it means that banks can theoretically or legally hunt you down, extract all of your current assets and future salaries, until you file bankruptcy.
   2. Case #1B: if you have more than one loan, and the second loan is home equity loan, you should probably try a short sale first, and then try doing a loan modification. The short sale is better in the sense that your credit is just partially ruined. The banks need to take their deserved losses. If you cannot do a short sale, you should try to modify your loan thru Obama’s home affordability program. With this method, I believe that your credit profile stays the same. However, you’re stuck with your own losses, banks get off the hook, and taxpayers may be stuck with your losses if later down the road, you walk away.

   For both of Case #1A or #1B, you may want to stop or slow down on paying your first loan or the purchase loan, so that you can force bank to come to the negotiation table with you. However, you will be risking a real foreclosure. Also, in case #1B, you should continue paying down your home equity loan regularly because it’s a recourse loan.

   3. Case #1C: if you have refinanced your home loans, then you’re out of luck. Legally, you’re 100% responsible for your loans. Nevertheless, you should try contacting banks for short sales, and doing loan modifications, like in Case #1B. Both will be to your advantages, if they go through.
2. Case #2: if you are at about the same the “water level”, meaning that your loan amount is about the same as your home market value, you should in general try to refinance, and/or short sale if you decide that you don’t want to keep your home.
   1. Case #2A: If the prevailing rent is still higher than your home cost: mortgage payment after tax benefits, plus any property tax, or potential interest credits, then you could try wait out the downturn (although I think the downturn will be much longer than anyone expects). You should at least try refinancing and see if you can lower your monthly cost. The Obama’s home affordability program will allow refinancing of up to 105% of your home value, if your mortgages are owned by Fannie Mae or Freddie Mac. You can check that at the home affordability page.
   2. Case #2B: If the prevailing rent is lower than your home cost, I think you should try to do a short sale, and forget about doing any refinance. Your short sale will be easier to go through bankers. And this way, it will prevent you from suffering further home losses down the road.
3. Case #3: if you still have substantial equities in your home, meaning that your loan amount is smaller than your home value, you are financially sound. I would advise to do refinancing through the normal channels, cash out any equities that you can, and hold on to your cash in 5-year US treasury for another two to three years for better opportunities. The best refinancing time is either now or possibly in Oct/Nov if stock markets take a dive at that time.

Here is the Obama’s home affordability page, in case you don’t know about it. If you follow thru the links, you can find out how to verify that your loans are owned by Fannie Mae or Freddie Mac.

And for potential new home buyers, my advice stay the same: just stay put and wait for year 2012. Your patience should be rewarded (in my opinion). That $10,000 home buying tax credit cannot come close to the amount that you may gain through further home value erosion.

Ed Ross who just had a book “Forecasting for Real estate Wealth: Strategies for Outperforming Any Housing Market”, is saying that NOW is the time to buy and jump back into the housing market. It is my personal opinion that anyone claims such given the preponderance of evidence against him or her is just irresponsible. Yeah, housing prices always go up if your investment horizon is to hold it for more than 20 years. Oh no, 20 years was not a typo.

Home as an investment vehicle is no different than any other kinds of investment, subjected to considerations of risk versus return. The best advantage is obviously that it affords you the leverage power of 5X to infinite X (if you put zero down, or even doing 125% financing) without the danger of getting a “margin call” (until you cannot make the mortgage payment). As I have explained in “Leverage: the secret of making big money”, those are the major reasons of why your home could be your best investment. But the days for 100% or >100% financing are over. And you only get to do such deals until you get busted and fail.

But the leverage power that you get from investing/buying a home works both way, magnifying your percentage of potential return or loss. To make a statement of “home prices always go up in the long term” is just totally irresponsible. The only reason that it is true is because the inflation rate is always more than zero percentage in the long term. Obviously, inflation rate is positive because societies have gone away from gold standard to a fiat money system.

Now if we look at the most recent housing bubble occurred in Japan as an example, we will find that the prices have NOT recovered to the peak of 1991. In fact, prices in 6 largest cities have dropped 64% from 1991 to 2004. And interest rates have been cut to almost 0% and loan terms extended to 90 or 100 years without being able to stimulate the housing economy. If such declines in home prices can happen in a country where the lands on islands are the most precious commodity and population density is relatively high, then there is no reason that it cannot occur here in the United States.

While I don’t think US will follow the deflationary model of Japan, but rather Argentina’s inflationary track, housing market in nominal prices before adjusting for inflation is most likely to continue to fall towards 4th quarter of 2012. Certainly, my call on the bottom can be wrong, but at least I was intelligent enough to know that we are in the post-peak of housing environment back on August 4th 2006 (in the last paragraph of “Why Stock Markets Crash”).

My date of 4th quarter of 2012 is based on the following observations. First and foremost, the second major wave of mortgage payment reset is not over until the first quarter of 2012.

While the peak of the option ARM resets is at about mid-2011. Since option ARM holders can continue to choose to pay the minimum payment on their mortgage until right before their reset, I assume that the flood of REOs (real estate owned by lenders) won’t be in the market until 6 to 9 months after the first missed payment. With the number of the homes potentially going thru foreclosures and downsizing of the banks, I won’t be surprised that the foreclosure process will take a whole year. Therefore, the housing supply situation will probably be very bad in mid-2012 (1 year from the peak resets in mid-2011) until first quarter of 2013. If you add 6 to 9 months on top to the mid-2012 for the time to sell a REO, there will NOT be any real recovery until 1st or 2nd quarter of 2013.

For the people who are looking to buy, the major bulk of the price declines should have happened by 3rd/4th quarter of 2012 or earlier. I believe that there is still a potential 15% to 20% downside from the current prices. If you’re looking forward to invest, there is just no reasons that you should put your money in a potentially sinking boat.

Interestingly, from Martin Armstrong’s economic confidence model, the credit cycle probably will bottom near July of 2011, which is consistent with the above timeframe. The above date probably will coincide with a bottom in the financial stocks (or the stock market for that matter) will certainly occur first probably with a minimum lead time of 9 to 12 months ahead of the actual housing bottom.

With an inflation rate that is probably going to be higher than normal going forward, a low Fed rate will not be helping much on the mortgage rate either. For those housing bulls who think that a low Fed rate will come to rescue, they don’t understand that an initial teaser rate at 1% (while the long term rate was still at 4.5% or above) will most likely NEVER come again. Since long term rates will most likely go higher due to heightened inflaiton, mortgage rates will be higher too. That certainly won’t help the housing prices.