Seattle Bubble

Kirsten Grind had an interesting piece about local banks in the Puget Sound Business Journal last Friday: Bad loans rising at Washington banks

Bad loans are up dramatically at Washington state banks, surpassing the national average and reaching levels that local banking experts say are unprecedented.
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Washington banks historically have seen lower levels of problem loans than their counterparts across the country. But their heavy construction lending has hit them hard in the wake of the housing slowdown, said Brad Williamson, director of the Division of Banks at the Washington State Department of Financial Institutions, which regulates state banks.
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How bad is it? Since the height of the housing market in the middle of 2006, Washington state’s 97 banks — both publicly traded and private — have seen their problem loans jump from an average of 0.42 percent to 2.71 percent of all assets, according to the most recent data available from the Federal Deposit Insurance Corp. That compares with a national average of 1.89 percent.

As a counterweight to bad loans, regional banks are bulking up with more capital, which acts as a buffer to the problem loans. And most publicly traded banks across the Puget Sound region are considered well capitalized.
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But a well-capitalized bank can still fail, and several already have. Both Washington Mutual and IndyMac, of California, were well-capitalized by federal regulatory standards in their last quarterly reports before their historic failures this year.

The basic message seems to be that local banks are in slightly more pain than the national average in terms of bad loans, but that bad loans aren’t a particularly useful predictor of bank failures.

I was surprised to read that local banks actually have a higher percentage of bad loans than the national average. That would seem to fly somewhat in the face of the “Seattle is special” mantra of many local economists.

(Kirsten Grind, Puget Sound Business Journal, 11.14.2008)

I received the following in an email from a reader:

In August I found a brand new townhouse in a great location that is selling at about 5 or 10% below recent comps (and 15 to 25% off of what it would have gone for at peak). I still think I am going to end up underwater at some point in the next few years, but I can take the equity hit if I have to, and I don’t plan on selling (maybe not ever).

At the end of all of this, the builder can’t get title insurance. We were supposed to close last week, but the builder has been firmly rejected for title insurance twice—apparently this is happening to lots of builders. The rationale for rejecting him has been consistently that “title insurance companies have lost too much insuring builders already.”

In addition to being an example of the current aversion to risk everywhere, it is also another drag on actually getting the transactions closed. We want to buy, they want to sell, we’re one of the few with sufficient income and credit scores for the bank to want to lend to us, and the transaction is in peril because of title insurance.

Has anyone else experienced this problem? I haven’t heard anything in the major news outlets about a wave of title insurance problems killing closings.

If this is a widespread issue, it could certainly be yet another factor dragging the market down.

Here are the basics of the latest mortgage bailout initiative from Fannie Mae and Freddie Mac that was announced today by the Federal Housing Finance Agency.

To qualify, borrowers must:

• Have a loan owned or guaranteed by Fannie or Freddie.
• Owe 90% or more than the home is worth.
• Be 90 days or more behind on payments.
• Demonstrate financial hardship.
• Not have filed bankruptcy.
• Presently occupy the home.

Possible remedies under the plan include:

• Interest rate reduction.
• Loan term extended from 30 to 40 years.
• Deferred principal.

Note that principal reduction is not among the possible remedies (nor should it be, in my opinion). What this means is that this plan is really only useful for individuals that really want to keep living where they are now for an extended period of time (10+ years). If you owe $400,000 on a house that’s only worth $300,000 and you want to sell a year or two down the road, reworking your loan in this manner will be of little help.

The plan goes into effect December 15th.

I’d also like to briefly address a quote from FHFA Director James B. Lockhart that appears in the press release:

Foreclosures hurt families, their neighbors, whole communities and the overall housing market. We need to stop this downward spiral.

Note that when a family goes through foreclosure, it’s not as if they end up on the street. They simply have to go back to renting, which is often financially where they probably should have stayed in the first place. And somehow I don’t seem to recall ever hearing high-ranking housing officials saying the converse of the above statement during the inflation of this ridiculous bubble:

Skyrocketing home prices hurt families, neighborhoods, whole communities, and the overall housing market. We need to stop this upward spiral.

But now we have to do anything and everything to (attempt to) keep home prices at ridiculously high levels that prevent financially responsible families from becoming homeowners? Nonsense.

As astute market observers may recall, back in March (pre-complete-government-takeover) the conforming loan limit for Fannie Mae and Freddie Mac-backed loans was bumped from $417,000 to $567,500 for the Seattle area (King, Pierce, and Snohomish counties). At that time, the local press was touting the new limits at “a big dose of first aid” and the “shot in the arm” for the housing market, while here at Seattle Bubble we asked the question: Will Higher Government Loan Limits Boost Seattle’s Market?

Our conclusion was that the added lending restrictions attached to the “Temporary Jumbo Conforming” loans set the bar sufficiently high as to prevent the lower limits from having the (apparently intended) effect of preventing home prices from falling further. Given that the median price of homes in the Seattle area have fallen 6-8% in the intervening seven months, it would appear that this assessment was accurate. Of course, one could argue that perhaps without the higher conforming limit, prices would have dropped 10% or more in the same time, and there’s really no way to know whether that might be true.

If we assume that the Seattle area’s $567,500 temporary conforming limit did in fact somehow soften the blow, however slightly, then the latest news that this limit is being dropped to $506,000 is likely to be unwelcome. However, it should be noted that as far as I am aware, all the same restrictions are still in place including, but not limited to:

• Fixed-rate loans are limited to 90% LTV/CLTV (loan to value/combined loan to value).
• Minimum FICO for any loan is 660.
• Minimum FICO for LTVs greater than 80% is 700.
• No late mortgage payments in the preceding 12 months.
• Full doc only.

While the $567,500 temporary limit was based on a calculation of 125% of the median home price (source), the new $506,000 limit is “set equal to 115 percent of local median house prices” (source). So the new loan limit translates to a drop in government-calculated median home price from $454,000 around March to $440,000 around October.

Interestingly, although the King County SFH median price was $440,000 in May, the Snohomish County SFH median has never breached $400,000, and Pierce County topped out below $300,000. This is explained in the announcement pdf:

In calculating loan limits, FHFA used median house price estimates calculated by the Federal Housing Administration (FHA) of the Department of Housing and Urban Development (HUD). Those values have been estimated in a manner consistent with requirements of the National Housing Act, which requires that median prices for all counties in metropolitan statistical areas (MSAs) be set equal to the median price for the highest-cost county.

So will the new, lower limit put even more of a damper on Seattle area home sales? Or was the effect of the higher limit so negligible that the reduction won’t really matter?

As the housing market has slowed dramatically from the heady boom years of 2005 and 2006, the number of discount real estate brokers has been on the rise. While Redfin made a big splash in 2004, and continues to be the discount market leader, as the market tumbles other competitors continue to crop up.

As recently as September, over a year into the local market decline, discount brokerage Findwell opened its doors, offering half-priced services for home buyers and sellers. Even more extreme is 500 Realty, which was launched in August 2007 and offers to refund 75% of the buyer’s commission.

With an ever-shrinking pool of home buyers (and therefore successful sellers)—just over 3,000 SFH and condo sales closed between all of King, Snohomish, and Pierce counties last month—the squeeze is on for real estate brokers of all stripes, discount or full service. I find it quite interesting to see how the different companies are dealing with the tight market.

Redfin is constantly improving their search technology (which is amazing), and recently announced a restructuring of their commission structure and services offered. Meanwhile, newcomer Findwell is doing their best to make headlines and get their name out there, and has declared a “customer service challenge” to Redfin. And of course regular readers of the comments here are aware of the ever-persistent guerrilla marketing campaign waged by Ray Pepper and the folks at 500 Realty.

Personally, I think there’s plenty of room in the discount real estate services market for some healthy competition like this. In a way, it makes sense that a slowing market and falling prices would bring out more low-cost competition in this field. Since sellers have already seen their paper equity take a significant hit, they want to save as much money as possible. For buyers, the old days of depending entirely on your real estate agent to find you a home are long gone, so why should they still be paying 3%? (And don’t try to tell me that “the seller pays” so the buyer’s agent is free, because only one person shows up at closing with a check—the buyer.)

Will companies like Redfin, Findwell, and 500 Realty have long-term staying power? I certainly hope so. Will they have a large enough impact on the overall profession to usher in the closing chapter for fixed 3% buyer’s and seller’s commissions? Time will tell…

Full Disclosure: Both Redfin and Findwell are advertisers on Seattle Bubble.

Let’s take some time to check out the local press’ reaction to the undeniably slow NWMLS housing market statistics for October.

Here’s a blurb from the NWMLS press release that accompanied yesterday’s numbers: Housing Activity in Western Washington during October Described as "Disappointing, but Not Unexpected"

Housing activity for Northwest Multiple Listing Service members was disappointing last month, but not surprising, according to one industry executive. He and other representatives of the Northwest’s largest MLS believe the situation is improving.
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Despite market volatility and shaky consumer confidence, one industry leader emphasized it’s important to understand that advantageous market conditions currently exist for those who are motivated to buy. “The truth of the matter is the market conditions are ideal for first time buyers, move up buyers, and investors,” said J. Lennox Scott, chairman and CEO of John L. Scott Real Estate.
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“Thankfully, we now see tangible housing and lending programs being initiated, with many more on the horizon,” said [managing vice president of Coldwell Banker Bain in Bellevue Ron] Sparks. “Interest rates are softening. We appear to be moving in a positive direction again!”

That sounds suspiciously like another bottom-call. Will we see even more bottom-calling from real estate salespeople around the sound this month, or have they finally managed to come to grips with the reality of the market? From the tone of the press release, I’m inclined to expect the former.

Read on to find out…

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