On June first of this year Fannie Mae and Freddie Mac released guidelines that propose to govern the short sale process flow for loans that are owned by either of these two institutions. The recent Home Affordable Mortgage Alternatives Program (HAFA) guidelines for GSE mortgages (mortgages held by Fannie or Freddie) do display marginal improvements over the HAFA guidelines for non-GSE mortgages launched back in April of this year. However then and now these guidelines can be likened to that beautiful storefront in your town built a couple years ago that no one can afford; gorgeous facade, vacant inside.

A little background on mortgages: There is a primary and a secondary market for mortgages. Banks such as Chase loan money to consumers (primary market), then sell those loans to secondary mortgages holders such as Fannie Mae or Freddie Mac. This provides Chase with money to continue offering loans to additional borrowers; the cycle continues. Even though Fannie Mae and Freddie Mac own a majority of the mortgages out there, they still enlist the help of banks to service their loans. For example: Chase may give you a mortgage and then sell the mortgage to Fannie Mae. At that point it is very common for Chase to act as a front for the loan, providing you, the borrower, customer service, the ability to monitor your loan, etc. This also gives Chase a chance to retain you as a customer and market additional services to you; a win-win for the banks. It is also important to note that if Chase wants to resell your mortgage they have to make sure that they lend you money based on guidelines set in place by the secondary mortgage company who will be buying it; in this case Fannie or Freddie. If Chase plans to keep the mortgage themselves, they do not have to conform to these lending guidelines.

HAFA Shortcomings

Opt-In

The HAFA program is opt-in for non-GSE mortgages. After the guidelines were put into place, there was an almost nonexistent response from banks who were already slammed with too much work. As a result, very few banks leapt at the idea of completely re-working the procedures they have been hacking together like a patchwork quilt for the past year or so; especially with one that has no track record to prove a direct benefit to their bottom line.

Learning Curve

Since the policies and procedures of these guidelines are largely untested they are constantly going through revisions. If anything this will discourage banks from participating until the revisions taper off, if ever. There is no way to test these policies except in real life scenarios and selling a financial institution on the stability of standardization, while simultaneously enduring frequent revisions, will be tumultuous at best.

Inconsistent

The fact that the HAFA guidelines for Fannie and Freddie have variations from the HAFA guidelines for non-GSE mortgages is a mistake that needs to be remedied. How can you wave a banner of standardization while at the same time have variations under the same name? Also, banks that service Fannie and Freddie loans will be required to conform to the GSE version of HAFA on loans they wish to resell and continue to service. One question that lingers unanswered in my mind is: If Fannie or Freddie strikes a deal for a bank to service a loan that wasn’t originated by that bank (common), will that bank need to be GSE HAFA “certified” on all of their loans? The answer is important, because if Fannie and Freddie require banks that service their loans to be GSE HAFA accountable, it would be a huge boon for the efforts to standardize the industry as a whole. If the answer is that banks servicing Fannie or Freddie loans can opt-out on all non-GSE short sales this would impede movement toward standardizing the short sale process, which is supposedly the goal of both HAFA programs. If the new GSE HAFA guidelines do not require banks that service their loans to be consistent with the way they handle all of their short sales it opens huge doors for banks to rob consumers out of their portion of the HAFA guidelines depending on what’s best for the bank.

Banks Have Too Much Control

On many mortgages, it may be financially beneficial for banks to opt-out of HAFA. For example: The proposed incentive is $1500 given to a bank for conforming to HAFA guidelines on a short sale ($2200 for GSE HAFA). These guidelines also protect Realtor commissions up to six percent, but given that even a one percent reduction in commission can save the bank many times that amount depending on the purchase price, how attractive are these incentives? Also when compared to the enormous amounts of money the lending institution is losing when they agree to a short sale, the $2200 seems like a drop in the bucket. Combined with the fact that banks are allowed to opt-in on a case-by-case basis, it seems like HAFA is encouraging banks to keep their ad-hoc guidelines running in parallel with those of HAFA. What this will allow them to do is analyze whether or not it is beneficial for them to go HAFA or not; regardless of what’s best for the consumer that is experiencing a financial hardship. If it works out that the bank can save more money by choosing not to go HAFA, then the consumer loses out on the relocation assistance money that HAFA would have awarded them to find a new place to live. Also because the HAFA program puts a cap on the money that junior mortgage holders are allowed to be awarded and many banks hold both the first and second mortgage on a given property, this will be another incentive for a bank to opt-out if they feel that they can recoup more money by doing so. Another thing that may push a bank to opt-out is the fact that with HAFA they can no longer go after the borrower for a deficiency judgement which in some cases is could be a huge loss for them. With regard to the time it takes to process a short sale, HAFA may make things take even longer as now banks have even more risk to analyze before moving forward one way or the other!

No Enforcement

As an optional program, initially there were few banks that chose to be the guinea pig for these guidelines. Many bank workers still have no idea what HAFA is. Anyone working on a short sale right now has undoubtedly encountered this lack of awareness. For many banks that did decide to get involved with HAFA it ended up being on a case-by-case basis rather than a company-wide policy. What is the point of implementing standard procedures if they are not standard across the board at a given institution? What this is turning out to be is more of a way to for banks to work the system by utilizing HAFA when it is financially beneficial to them and avoiding it when it is not. This may bode well for their bottom line but what about the consumer? What happened to focusing on Main Street not Wall Street? The fact of the matter is that in order to accomplish what HAFA claims to, the industry must adapt these guidelines as enforceable regulations, and a governing body must be created to evolve, educate and enforce said regulations with the power to enact penalties for noncompliance.

Prognosis

HAFA is a weak start in a long race.  While trying to regulate and streamline an already laborious process, it seems to accomplish the antithesis.   For now it’s more of a conversation piece than a tool to help us climb the short sale mountain.  At the very least (and not much more) HAFA gives us bloggers something new to BS about.   Until the revisions taper off and an agency to enforce these regulations is implemented, we’re like a hamster with two wheels in our tank… either one we choose, we’re just running in place.

Effective tonight we are moving the Getting Real blog (you may not have known that was it’s name) to Chicago Now. Chicago Now is a Chicago focused (duh!) online community, owned by the Chicago Tribune and comprised of over 200 blogs which are hand picked by the Tribune folks.

So why are we doing this? Because Chicago Now has at least 500,000 unique visitors per month and we want to get our word out to as many people as possible.

Sari will continue to occasionally post here but Gary will be doing all his posts at the Chicago Now site. Old posts will be archived here.

The new URL for the blog is http://www.chicagonow.com/blogs/chicago-real-estate-getting-real/ or you can also just type in chicagonow.com/gettingreal

I’m going to try to move the RSS feed over but in case I’m not successful you can subscribe to the new feed at http://www.chicagonow.com/blogs/chicago-real-estate-getting-real/atom.xml

Market conditions for 2 and 3 bedroom condos in the city of Chicago continue to show improvement through February. Once again inventory (months of supply) of these condos is lower on a year over year basis. This continues a trend that began in June, 2009, with February at about half of 2009′s level.

In addition, market times for condos that are on the market also continued their decline.

While inventories of unsold condos did show some decline in Chicago, the main driver of this improvement is an almost doubling of February sales volume from the previous year.

A bit of a caveat is in order here, as I recently discovered some issues with the underlying data. The calculations above differ from the standard industry practice of focusing on closed deals – for sales volume and for market times. In an effort to make the data more current and meaningful we use contracts written for sales volume and we report the market times for condos that are for sale instead of condos that sold. However, there is a problem with this approach in that as many as 15% of contracts written never materialize in a sale. When a contract falls through the property is reactivated and no longer counted as a sold condo in the data above. Consequently, as time progresses, the sales volume for February will decline and the inventory level will rise retroactively. Similarly, deals that fall through are returned to the inventory of unsold condos, having racked up additional market time without a sale. Consequently, the February market times will increase as these older properties are returned to the pool of unsold condos. In other words, both inventory levels and market times are initially understated but correct over the course of a couple of months as the data ages.

As always, you can find inventory levels and market times for some key Chicago neighborhoods and suburbs on our site:

• Edgewater
• Hyde Park
• Lakeview
• Lincoln Park
• Lincoln Square
• Logan Square
• Loop
• Near North Side
• Near South Side
• Near West Side
• North Center
• Rogers Park
• South Shore
• Uptown
• West Town

• Addison
• Bensenville
• Elmhurst
• Hinsdale

As I pointed out in a recent post, 1,000 realtors left the real estate business in Chicago last year. I can attest to how poorly most real estate agents are doing in this market because I periodically look up the sales statistics for agents that I know and most of the time their numbers are pretty low. So, finally, just the other day I decided to try to quantify realtor performance in the Chicago market. I pulled data on the last 12 month’s closings by realtor in the entire area covered by our MLS system, which is a huge area covering all the surrounding suburbs. I then ranked the real estate agents by the dollar value of their closings.

The bottom line is that of the almost 25,000 real estate agents with recorded residential sales in the last 12 months only 3,189 agents exceeded $3 MM in sales. If we make the simplifying assumption that those agents earned 50% (their split) of a 3% commission on average then close to 22,000 agents earned less than $45,000 last year – and that is before expenses. At the national level median expenses for realtors were $5,810 in 2008. When you factor in that this is not a cheap area to live in you can see that these agents are struggling. Furthermore, as you might expect, a minority of the agents closed most of the deals.

Now this analysis comes with a whole bunch of caveats:

• I emphasized above that this focuses on agents that had recorded sales. If an agent never closed a deal in the last 12 months then they are excluded from this analysis because I have no way to know who they are. But I suspect there are quite a few who did nothing in the last 12 months.
• Assuming that these agents earned 50% of 3% on average is a very big assumption. Many agents earn quite a bit more than 50% but on the other hand the commissions might be a bit less than 3% – e.g. typical cooperating commissions are 2.5% but could be as low as 2%.
• Many of the agents that are included in this analysis might actually make most of their income from commercial real estate and maybe they just did one or two residential deals in the last year.
• Many of the included agents might be part timers
• There may be quite a few agents that are excluded because they have no recorded sales in this time period but they might actually be quite profitably employed as members of a celebrity realtor‘s team, where the celebrity realtor takes all the credit for their business (this is a common practice).
• There may be a few agents that are included above who are members of a celebrity realtor’s team but one or two transactions appear under their name for one reason or another.
• As you start to get into the really high numbers – even as low as $16 MM – you start to run into the celebrity realtors who have teams working for them, some of which do a lot of developer work. So it’s not like the #1 realtor did $171 MM of closings all by himself.

Nevertheless, I believe that this data is directionally correct as it is consistent with data provided by the National Association of Realtors. In their 2009 member profile they show that on a national basis 62% of realtors had gross income of under $50,000 in 2008, with a median gross income of $36,700. After taxes and expenses those numbers drop to 64% earning under $35,000, with a median net income of $23,200. And those numbers are all for 2008. You can bet that 2009′s numbers are going to be a bit worse.

There are a bunch of headlines around today that broadcast a 7.2% plunge in January home sales for the nation. I’m not even going to bother to try to figure out how they came up with this number – is it from December to January? Is it seasonally adjusted? – because it sends the wrong message. The same articles go on to point out that January sales are 11.5% higher than last January. So…how is that a 7.2% plunge? It’s the year over year numbers that matter.

And in the Chicago area sales are up a whopping 29.2% over last year. In order to allow year over year comparisons of January data I have graphed 13 month histories below.

As you can see we are close to the January 2008 level now, though we are still below 2007 levels. No doubt this is extremely positive, though we have to wait until the tax credit expires to know what’s really going on. In the meantime, I think it’s a safe bet that activity will remain strong through April. Business has really picked up in the last few months and mortgage rates are still near 50 year lows.