Will State SIV Funds bankrupt local communities?

Many states are hiding a deep dark secret; they have been running investment funds that have bet heavily on mortgage-backed derivatives. Hiding behind financial confidentiality; many government officials loath to discuss the impending crisis. Significant portions of the money placed in these state funds comes from local governments who have been urged to allocate money in these vehicles in order to earn higher returns. Now the wheels are coming off.

The recent situation in Florida is a standard run on the “bank”. Very jittery local governments basically rushed the gate to remove money from the state fund over several days until officials shut down withdrawals on January 29th. Today the fund re-opened up to limited withdrawals of up to 13% of assets limited to $2 million. Action was described as brisk as many communities sought to recover something from the pending fiasco.

The local governments have every right to be nervous; currently many of these state funds are probably only worth only 30% of their “face-value”, as a continual cycle of downgrades hit their mortgage-backed SIV investments. Many local communities rely on these funds to pay pensions and operating expenses. A crisis in these state funds would leave many government retirees out in the cold and communities unable to meet payroll.

States such as Connecticut, Maine and Montana are experiencing similar scenarios with local governments rushing the gate for withdrawals, the quarantining of troubled fund components, and more than 20% of some funds being declared as defaulted SIV investments. The state government officials have moved to the defensive in recent days making statements that they expect the funds to “recover” and that state reserve funds can cover any contingent shortfalls.

So much for proper stewardship, most of these vehicles were sold to the state financial oversight boards as “safe” investments that would earn higher interest. Of course, Wall Street reaped exceptional fees for their involvement in these entities while hiding the actual risk involved from these government entities.

At this point, it is simply a question of how deep and painful the fallout for local governments will be rather then a question of if the downside SIV scenario will occur.


Reference:
Fund Crisis in Florida Worrisome to States
http://www.nytimes.com/2007/12/05/business/05invest.html

What to do if your rental is foreclosed on

The mortgage crisis is not restricting its pain to owners; many renters are being evicted from their homes when foreclosure occurs. Many are only given a few hours notice when a sheriff shows up at their door. The New York Times had an article over the weekend that discussed this now prevalent situation.

As Owners Feel Mortgage Pain, So Do Renters
http://www.nytimes.com/2007/11/18/us/18renters.html

The immediately critical question for many renters is "what should you do if they want to evict you during foreclosure proceedings?" Taking the right steps can buy a renter critical time to find a new place to live.

Many times a bank will be the new owner after a foreclosure. Sometimes the home is sold at auction and you will be dealing with a private individual. In the current environment a renter probably has more leverage with a bank from a regulatory and practical perspective. A bank is normally interested in cutting a deal to get you out of the home in a reasonable timeframe without having state banking regulators pestering them. A private individual who purchased a home at a foreclosure auction simply wants to move in to their new home as soon as possible and will get a much more sympathetic hearing from any third party such as a court.

What grounds do you have to avoid eviction?
First, let’s start with the assumption that you have consistently paid your rent on time, there is a written lease in existence, and the lease does not end shortly. Most leases have a requirement that either party must give the other 30 days notice prior to taking action. Some states view that properties are still encumbered with existing lease agreements if the house changes hands. If you are a renter in good standing and are given less then the notice period to evict the property then you have solid legal ground in many states to stall the eviction proceedings and threaten to take the situation to civil court. Most banks and purchasers very much want to avoid court and normally will consider providing a more reasonable timeframe to relocate then a few mere hours.

What regulators can help?
The most valuable people to call, if a bank is threatening to evict you, are the State Banking Regulators. Demand action to prevent your eviction for 90 days from the bank. In many states these regulators are very helpful in these situations; others view it as outside the scope of their oversight. Regularly call to follow-up and ask for details on their interaction with the bank. Calls to the state AG’s office or BBB are not likely to have much impact on a situation that is effectively a non-fraud related civil dispute. Banking regulators have more influence over the actions of banks.

Call the eviction authority
Call the enforcement agency in charge of carrying out evictions and demand that they not proceed with the eviction because you have not been given proper notification as the renter. Different states have different rules about notification period requirements to people actually living in a home. A simple phone call with a follow-up letter may stop the authority from carrying out eviction proceedings until the bank can definitively prove that they have properly served you with an eviction notice and met the timeframe standards.

Pressure the banks for more time
Call the bank or mortgage company and demand 90 days notice. Under pressure from regulators and politicians a number of banks have implemented an unannounced adoption of this policy before it can be imposed on them from the states and federal government.

Demand your deposit back prior to leaving
Demand the deposit back from landlord and the bank in writing via registered mail prior to moving out. If they fail to return the deposit then they have failed to meet the terms of the lease. This will normally slow down the momentum of the eviction proceedings; however many banks will simply tell you to sue your old landlord for your deposit and it’s not their problem. On the positive side, the letter will provide a firm evidence trail for any further action after you leave.

Demand proper compensation to move out quickly
Many banks will pay you to move out quickly. A number offered is usually a measly amount like $500. Demand a sum that covers your entire security deposit back plus moving expenses to move with any urgency.

Be Prepared!
Be prepared to move out quickly if necessary. Line up a place to put your stuff on short notice, such as storage unit or at a friends/families garage if possible.

The Final Rent payment
If the eviction is inevitable within 30 days with no chance of extension and you have no commitment about the return of your security deposit, then stop paying rent. This is one of the very few real estate situations where you should consider withholding rent. Send registered letters to the landlord, management company, and/or bank stating that you are doing this, and you will take them to court if any negative references show up on your credit report relative to the final rent payment. Keep in mind that an owner that can’t pay their mortgage is unlikely to ever return your security deposit; nor will a bank or new owner return money they never collected. At worse the landlord or bank will take you to court about this, in the same hearing you can demand your security deposit back in front of a judge who will probably view the situation as a wash.

Contact the management company
Lean on the management company (if there is one) to strictly adhere to the terms of the lease in regards to eviction and notification. If you live in a state where management companies are regulated (usually by real estate boards) and the management company is not being cooperative in defining timelines in regards to when the home will be repossessed and when you have to leave, then explain to them that you will be contacting the agency that provides oversight and make a fuss. This may make the management company more cooperative. You would think that management companies would have a human interest in doing the right thing, but most don't.

If the management company is cooperative, you may want to ask them about other equivalent homes that you could potentially move into which are listed in their available inventory. You also may be able to cut a deal for the deferral of an upfront security deposit on the new residence if the management company has a conscience about your situation.

Leave the home in good order
Despite your dismay at being evicted for no good reason, it does not make sense to take your anger out on the rental home. Leave the home “broom clean” and in good order. It is not worth the headaches of having the bank or new owners come after you for ripped out light fixtures, broken plumbing, or other destructive problems. Nor would this benefit you in any civil legal action after you leave. Document any existing problems in the rental that are due to normal wear and tear (worn carpet, etc.) or other causes (water damage due to leaks from the roof, etc.) that are not your fault prior to leaving.

Keep Records!
Keep notes of all conversations and the full names of who you communicated with regarding the eviction situation.

Be Proactive
If you have any concerns that the home that you are renting may be at risk of foreclosure then it is important to search online to determine if the home is due to be foreclosed upon. There are a number of websites that provide this information for a small fee.

Summary
Taking the steps outlined above can help slow your eviction as a renter in a foreclosure situation, and provide you with critical time to find a new place to live. Always be polite when dealing with all the parties, but still be demanding and understand your rights as a renter within the state that you live. Many states have web-pages and government agencies that provide an overview of the rights of renters and landlords. The reality is that your eviction is inevitable in most foreclosure situations; the best you can hope to do is buy time. Rarely will you get the opportunity to stay with the property unless it is immediately sold to a private owner who plans to rent it.

Finally: Some Truth in Real Estate Projections

Most of the articles about real estate prices are sunny, projecting a quick pricing rebound in all local markets by late 2008. The majority of these media items almost read like a press release from the real estate industry, regularly quoting NAR and other stakeholders who have an interest in positive spin on the deteriorating situation.

Finally an article has come out that looks at the cold, hard facts and attempts to perform some realistic real estate market evaluation based on math. A recent article in Fortune projects the prices five years from now using the most reliable indicator of all, price-to-rent rates. The results clearly demonstrate that the quick recovery jubilantly projected by the real estate industry is fiction, and homeowners better be prepared for a multi-year cycle of pain.

Price-to-Rent rates are like a P/E for home prices. Similar to P/E’s for stocks, the price-to-rent ratios are mean reverting, and will always eventually come back to the mean once a speculative real estate market bursts. From 2000 to 2007 the nationwide P/R jumped from 15 to 24, an increase of 60%; this steep climb is not sustainable, and housing prices will eventually correct or rents rise to properly remedy the situation. Performing P/R calculations brings some disturbing conclusions; real estate will have to drop in price by an average of 16% across all markets to reflect proper pricing. This includes the expectations of increasing rents. Some local markets will show far worse downside performance.

The results for 54 areas around the country can be found in this table:
http://money.cnn.com/magazines/fortune/price_rent_ratios/

On average, a home that sells for $436K will drop in price to $372K five years from now. A house in San Francisco will be worth $1,568M in five years if the current value is $1,732M. In Raleigh, a house currently valued at $447K will be worth $381K in five years.

The information demonstrates that the real estate price decline is likely to last for a significant period of time, now that the era of lax lending standards has come to an abrupt halt. In the long run, the return to traditional lending standards and non-speculative valuation is a solid positive for the economy. However existing homeowners need to be able to deal with some valuation pain over the next few years as the situation corrects itself.


Real Estate: Buy, Sell, or Hold?
by Shawn Tully
Thursday, November 15, 2007
http://finance.yahoo.com/real-estate/article/103872/Real-Estate:-Buy,-Sell,-or-Hold

Rent vs. Buy: The Debate Continues

With the recent housing market turmoil, the controversy over rent versus buy has returned to the forefront in the financial press. This new focus varies greatly than the majority of the articles printed two years ago, which all emphasized the importance of purchasing a home at all costs.

In short term situations, renting has advantages over buying. For those who want to settle down for the long term, home ownership has some key advantages over renting; it provides some good tax breaks and allows you to build equity over time. Ownership is an excellent form of investing in your future.

However, it is important that you only put yourself in a home ownership position that you can afford. Avoid interest only and other exotic loans. If you can not qualify to purchase a home under traditional lending standards with a 30 year fixed rate loan then you should not pursue the situation. Currently most of the population is watching awestruck at what transpires when property owners over-extend themselves. In many cases these foreclosed owners should have never been given a mortgage. The good news is that banks are quickly returning to traditional lending standards which should avoid a repeat of this fiasco.

One good method of evaluating homeownership versus renting is to take a levelheaded dollar and cents based approach. For people that plan to hold onto a home for the long term, there is usually a significant financial edge for ownership. One valuable calculator that provides a comparison can be found at:
Should I Rent or Buy A Home?
http://finance.yahoo.com/calculator/family-home/hom-06

One recent article about the “New Realities of the Rent vs. Buy Debate” can be found at:

Now That Housing Has Soured, Renters Are Glad They Didn't Buy
With real estate in a slump and foreclosures soaring, renters are cheering now. Is the conventional wisdom that it's better to buy than rent mistaken in today's market?
http://finance.yahoo.com/real-estate/article/103796/Now-That-Housing-Has-Soured,-Renters-Are-Glad-They-Didn't-Buy;_ylt=AsBWkzMQVUcwR6U4hOjGB9i7YWsA