Liar Loans Sting Our Schools

The Daily Pilot recently reported that the Newport-Mesa Unified School District was postponing the sale of bonds.

The money raised by the Measure F bonds was meant to fund improvement projects at various schools.

These projects are being pushed back at least one year. The reason for not selling the bonds now was because the assessed valuation of real estate in the district was much lower than anticipated.

California has a staggering estimated $15-billion deficit because tax receipts are much lower than anticipated.

Capital gains taxes are expected to be a lower percentage of personal taxes this year than previous years.

Capital gains tax is paid whenever assets such as stocks, bonds and real estate are sold for more than their purchase price.

In Fiscal 2000-01, just prior to the bubble bursting on the stock market, the state collected $17.5 billion in capital gains taxes. This represented 39.3% of all personal tax revenues.

By 2002-03, capital gains taxes in the state were only $5.4 billion or 16.6% of personal tax revenues.

Whether it is school bonds or state budgets, the drop in real estate values will affect the economy for at least the next 18 months.

But to be fair, the drop in real estate values is directly proportional to the artificial increase in value we had in the last couple of years, which was primarily due to the creation of no money down “liar loans.”

These no-documentation loans allowed borrowers to overstate their incomes and qualify for larger loans, which in turn pushed prices higher than anyone could really afford. They also allowed a lot of people to buy widescreen TVs and RVs with their newfound equity.

As I wrote previously, until the $100 billion in losses, that lenders on Wall Street have already taken get to Main Street, the number of real estate transactions will continue to drop thereby continuing to put downward pressure on prices. Homes are now selling in our area for about the same prices they did in 2005. Not surprisingly, that is the same year the liar loans really took off.

There is, however, some good news in the real estate market. The Wall Street lenders have finally gotten their “short sale” departments up to speed to handle the actual write down of loans.

A short sale is where the lender agrees to take less than what is owed on a home in order to facilitate a sale. Lenders seem to agree that it is better to do a short sale and have an orderly transaction from one homeowner to another than to do a foreclosure and still have to find a buyer. Homes always sell better furnished than vacant.

Though it may only be anecdotal, I know of at least two buyers in as many weeks who bought homes this way. In one case the previous owners, who bought in 2006, paid $750,000 (all borrowed) for a four-bedroom, two-bath Costa Mesa home.

My friends, after waiting four weeks for the lender’s approval, paid just $512,000. The lender agreed to accept a $250,000 loss on the loan. This is what I mean when I say moving the loan losses from Wall Street to Main Street. Not coincidently, $512,000 was what neighboring homes were selling for in 2005.

I spoke with Valerie Torelli of Torelli Realty, and she said last year her office did one short sale. This year they expect one out of three home sales to be a short sale.

The other good news is that President Bush signed HR 5140, the economic stimulus bill. The important part of the bill was not handing out $600 checks to anyone who can breathe.

Any idiot can borrow from Peter and give to Peter and Paul. That was a political stunt to show the American people how concerned Washington is about us in an election year. That’s another column.

The important part is increasing guarantors Fannie Mae and Freddie Mac limit on the size of loans they can buy from $417,000 to $729,750. This allows lenders to make loans at the higher amount knowing that Fannie or Freddie can buy it on the open market. Lenders should start making these loans in April.

Until now, even strong buyers with large down payments could not get a reasonable loan, over the $417,000 limit. Most lenders are afraid to make larger loans because they do not have any confidence they can sell the loan later if needed. Raising the limit raises confidence. Raising confidence brings liquidity to the mortgage market and allows home buyer to get loans.

The number of home sales will trend up throughout 2008. Notice I did not say prices will go up. Homes are worth what they were in 2005. But at least now you will be able to buy and sell them.