Thoughts From Your Valuation Source

"Part of the reason home prices are declining is a fundamental deterioration in the housing stock," said Glenn Kelman, CEO of the online, discount broker Redfin. "During the boom, nine out of 10 houses for sale in many markets were in prime condition. Now, for every 10 houses, at least three are dogs."

Most of these mutts are foreclosed properties that have been permitted to fall into disrepair by lenders overwhelmed with thousands of vacant homes. If these houses sell at all, they're going for bargain basement prices that are hurting home values throughout the neighborhood.

"I've never seen so many houses in this condition before," said Ray Anderson of Buyer's Advantage Real Estate in Auburn Calif., near Sacramento. "And I've been in the business 20 years. I've seen bank-owned properties in the past. They were never like this."

Distressed properties usually sell for discounts of 10% to 40% below comparable, well-maintained homes, according to Tom Inserra, executive vice president for Zaio, an appraisal company that is creating a national database of home values.

Richard Smith, CEO of Realogy, the parent company for Coldwell Banker, Century 21 and Sotheby's International Realty, estimates that homes that are not bank-owned have actually only seen price declines in the low single digits over the past 12 months. That's compared with the 15% price drop recorded by the S&P/Case-Shiller Index for all homes over the same period.

While the subprime crisis is still in full swing it will take time to see what kind of effect this will have overall.

The last few weeks have seemed to show an improvement in the economy but many economists are warning to stop looking for a silver lining. An article today in the LA Times had quite a bit to say about it.

Back-and-forth movements are typical when the market is trying to put in a bottom, said Scott Wren, equity strategist for Wachovia Securities. Plus, he said, "you're getting a lot of mixed news."

Last week, after seesawing, the Dow Jones industrial average finished down 0.6%. The Standard & Poor's 500 index ended the week up 0.1%, and the Nasdaq composite index rose 1.6%.

This week, investors will keep monitoring the energy markets and also see how the housing industry is faring in the National Assn. of Home Builder's index today and the Commerce Department's Tuesday report on July new home construction.

At the same time, Wall Street will be gauging the financial health of consumers in the earnings reports of retailers including Home Depot Inc., Target Corp., Gap Inc. and BJ's Wholesale Club Inc.

It has been hoped that the lowered prices for oil will help stimulate the economy again but inflation in other commodities seems to be picking up that slack. The job market is not helping matters either.

Because the job market tends to influence consumer spending even more than home, fuel or food prices, Wall Street has been nervous that the job market has shown few indications that it is improving.

The Labor Department disappointed the market last week when it reported a smaller-than-anticipated decline in the prior week's claims for unemployment. Another downbeat reading on unemployment this week could worry investors even more.

For every negative prediction there is a positive as well. It is anyone's guess where the economy will go from here.

Freddie Mac announced several incentives for those who help people facing foreclosure. With recent news describing Freddie Mac as being insolvent it may come as a surprise to some.

Freddie Mac today told mortgage servicers it was doubling the amount of money it pays
for each workout that keeps a delinquent borrower with a Freddie Mac-owned
mortgage out of foreclosure.

One of the nation's largest investors in residential mortgages, Freddie
Mac also announced it will start reimbursing servicers for the cost of
door-to-door outreach programs, give servicers more time to negotiate
workouts in states with fast foreclosure processes, and make administrative
changes intended to streamline the workout process.

"We are taking these steps because we want to reinforce the tremendous
importance of workouts and reward their use," said Freddie Mac Vice
President of Servicing and Asset Management Ingrid Beckles. "Giving our
servicers more time and greater compensation to help troubled borrowers is
fundamental to preserving homeownership and maximizing our efforts to
minimize foreclosures."

Freddie Mac is also extending the amount of time a person can negotiate their mortgage during the foreclosure process in the faster foreclosure states.

In addition to Washington, DC, the affected states include Alabama,
Alaska, Arizona, Arkansas, California, Georgia, Hawaii, Maryland, Michigan,
Minnesota, Mississippi, Missouri, New Hampshire, North Carolina, Rhode
Island, Tennessee, Texas, Virginia, West Virginia and Wyoming.

Specifically, starting August 1, 2008, servicers are allowed up to 300
days (10 months) from the due date of the last payment to the foreclosure
sale in these states to seek aggressive and sustainable workout solutions
for the borrowers and still meet the standards set in Freddie Mac's
Servicer Performance Profiles. The company uses the Servicer Performance
Profiles to measure and reward the quality of a servicers' investor
reporting and default management.

Even though the laws in these states permit a lender to foreclose in
less than 300 days, this announcement means Freddie Mac will permit its
servicers more time to complete foreclosures. The new policy won't affect
borrowers in states where the foreclosure process already exceeds 300 days.

A recent article in Market Watch said that Credit Unions are not experiencing the fallout from recent mortgage woes and are the safer place to be banking. The article praised the way they do business and said that their practices are helping them be the future of banking.

As much as that thought is comforting, a new reality is emerging. What is not being taken into account is the other types of loans as well. Not all loans being defaulted, and adversely affecting the credit of the borrower, are mortgage loans. This is made evident by an Arizona Credit Union, mentioned in an article yesterday.

In a sign financial problems are spreading to credit unions, Arizona Federal last week reported a sizable first-half loss stemming from delinquent auto, credit-card and home-equity loans.

Ron Westad, the credit union's president and chief executive officer, said the poor numbers reflect financial pressures faced by members, many of whom work for city governments around the state.

"Our members are having trouble carrying their obligations and meeting their commitments," he said. "Our members are in harm's way."

Arizona Federal had tried to delay reporting some of the delinquencies in hopes of helping members avoid demerits on their credit reports, "but we just couldn't do it any longer," Westad said.

Delinquent accounts, they're not just for mortgages anymore.

It seems like everywhere you look these days there is a new panic in the financial sector. From mortgage companies to coffee giants, it seems to be everywhere. Some are predicting another depression but not everyone is so worried, according to an article in the LA Times.

"We've gotten to that classic point in a financial crisis where it's gone on for long enough we know there are losses. We just don't know where they are," said Joseph R. Mason, a financial economist at Louisiana State University in Baton Rouge.

"The only way to find out is for investors to push every institution toward failure and see which ones keep operating," Mason said.

About the sunniest assessment that analysts will offer is that if the current crisis holds to historical patterns, it could end as unexpectedly as it began.

"Most panics are like summer storms," said David A. Moss, an economic historian at Harvard University. "They come up abruptly, are erratically intense, then suddenly dissipate."

Bears Stearns seemed to lead the pack and now even the expected "saviors" Fannie Mae and Freddie Mac are showing signs of trouble. In the midst of all this is some good news, especially for our SUV drivers.

Last week held true to the storm pattern Moss described. After another round of potentially catastrophic developments in the housing, financial and energy markets, the system pulled to the brink, caught its breath and took a turn for the better.

Oil prices not only halted their upward rush, they fell back a remarkable $16 a barrel in the space of a few days. And after a frenzy of concern about the banking system, markets suddenly calmed when three major institutions -- Citigroup Inc., Wells Fargo & Co. and JPMorgan Chase & Co. -- reported better-than-expected results.

No one is claiming that the storm is over or that this is the sign that nothing else will go wrong. No, instead they are simply referring to it as a sign that, no matter what the doomsday proclaimers are saying, there will be an end to this.

The Fed is adopting a plan in order to protect home buyers from what they consider "shady lending practices". According to an article on ABC7 the changes would be as follows:

Chairman Ben Bernanke and his central bank colleagues approved a plan Monday that would crack down on dubious lending practices that have hurt many of the riskiest "subprime" borrowers - people with tarnished credit histories or low incomes.

In that regard, the plan would:
- bar lenders from making loans without proof of a borrower's income.
- require lenders to make sure risky borrowers set aside money to pay for taxes and insurance.
- restrict lenders from penalizing risky borrowers who pay loans off early. Such "prepayment" penalties are banned if the payment can change during the initial four years of the mortgage. In other cases, a penalty can't be imposed in the first two years of the mortgage.
- prohibit lenders from making a loan without considering a borrower's ability to repay a home loan from sources other than the home's value. The borrower need not have to prove that the lender engaged in a "pattern or practice" for this to be deemed a violation. That marks a change - sought by consumer advocates - from the Fed's initial proposal and should make it easier for borrowers to lodge a complaint.

"Rates of mortgage delinquencies and foreclosures have been increasing rapidly lately, imposing large costs on borrowers, their communities and the national economy," Bernanke said.

Although some lenders did employ rather shady practices the focus seems to be solely on lenders when it comes to reform. Not everyone thinks that the blaming of lenders is the way to go and others are calling for even more strict measures.

For all mortgages, the plan would require advertising to contain additional information about rates, monthly payments and other loan features, and it would curtail certain deceptive or misleading advertising practices.

Other practices also would be clamped down on. Lenders, for instance, have to credit a mortgage payment to the homeowner's account on the day it is received. And, brokers and others are forbidden from "coercing or encouraging" an appraiser to misrepresent the value of a home.

Consumer groups initially complained that the new rules are not strong enough. Lenders worry they are too tough, could limit mortgage options for people and made it harder for some to obtain financing.

The new lending rules may not get a test for some time because there are fewer home buyers these days, given all the problems in the housing and credit markets. Also, some of the shady practices - along with some lenders - have not survived, felled by the mortgage meltdown.

"Clearly this is closing the barn door after the fact," said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania's Wharton School of Business. Yet, she said, "this is a very important move. It absolutely will make a difference going forward."

Much will hinge on effective enforcement.

In an article from the Daily News City Hall promised to take on some of the crunch from budget budget shortfall in the $400 million range. There were to be cutbacks and layoffs. Los Angelos Mayor Antonio Villaraigosa also said there'd be higher charges for everything from parking tickets to fees at public golf courses.

This summer, it's become clear that the pain will be unequally distributed. After enthusiastically hiking all those promised fees, city officials reneged on the promise of frugality.

To convince the public that this time the city means business - after 25 years of not laying off a single employee - the mayor even came up with a specific number of employees, 767, to trim from a citywide work force of nearly 50,000. That was how many city jobs would be cut - about half of them purportedly filled by actual workers drawing a salary.

But that number has turned out to be as fictional as the "hiring freezes" City Hall undertakes from time to time to feign frugality. The Daily News has learned that, in the end, only four workers out of 50,000 may lose their jobs - and even the four likely will be safe, as city officials are still trying to find them other city jobs.

In fact, many of these "laid off" workers are finding themselves with better paying jobs.

About 78 workers found jobs in the city's three proprietary departments (Water and Power, World Airports and Port of Los Angeles), which typically pay even better.

What is so offensive about this is that local companies are laying off many in the area and while those people are struggling for jobs others are getting better ones in an attempt to mask that City Hall is not doing what it promised and is still charging more for everything they provide.

Energy prices that were grossly inflated by illegal trading schemes have been brought before the Supreme Court by officials from California, Washington and Nevada in an effort to nullify or renegotiate the terms according to an article today on the LA Times website. Unfortunately it seems that the chances are slim that this will happen. The U.S. Supreme Court only asked that the Federal Energy Regulatory Commission rework its analysis on only two points used to justify its position that there are no changes needed in the contracts.

FERC's refusal to void the contracts years ago stemmed from what the agency called a "long-standing policy . . . to recognize the sanctity of contracts." The commission held to that position throughout the six-year court battle over the energy contracts and it appears unwilling to change its tune now.

"The court recognized the importance of contract certainty to both buyers and sellers in competitive wholesale power and gas markets," FERC Chairman Joseph Kelliher said in a statement. "The court has directed the commission to 'amplify or clarify' its findings on two specific points, so the commission will have further work to do in reviewing these contracts."

A second member of the commission, Philip Moeller, also applauded the court's decision, noting that, "contract uncertainty can have a chilling effect on needed investment in the energy industry and may deter parties from entering into long-term arrangements."

This point of view is not being shared by most, especially those paying the exorbitant rates being charged.

Roger Berliner, an attorney who worked on the case for Nevada utility Sierra Pacific Resources, said he was disappointed by the ruling: "This decision is not a positive decision for consumers."

California had hoped to renegotiate a handful of long-term contracts between the state Department of Water Resources and several power providers that are in still in force and were never renegotiated.

The California Public Utilities Commission and state officials believed that crisis-era pacts with San Diego-based Sempra Energy and others were costing consumers an extra $1.45 billion to $3.08 billion -- an amount they had hoped to return to electricity customers, possibly by reducing or eliminating future charges.

A Washington utility had hoped to get relief from a nine-year power contract with Morgan Stanley Capital Group. Under that contract, the Snohomish County Public Utility District is paying $105 a megawatt-hour, well above the historic norm for the Pacific Northwest of $24 a megawatt-hour, but also well under the $3,300 a megawatt-hour hit at the peak of the energy crisis that spread beyond California's borders, according to the court's synopsis.

The FERC and the power providers have all claimed that the market prices at the time set deal prices and that there was no manipulation and thus no need to adjust or revise contracts.

"It was the failure of regulators to protect consumers from market manipulation" that caused the utilities to overpay for power. "I don't think the court appreciated the extent to which the dysfunction in the market made it impossible for there to be just and reasonable contracts."

California utility regulators nonetheless struck an optimistic tone. "We are pleased the Supreme Court agrees that FERC needs to take another look at this case," the state Public Utilities Commission said in a statement. "We look forward to further proceedings and continuing our challenge to long-term contracts entered into during what FERC itself has described the 'worst electricity market crisis in American history' in order to obtain financial relief for California electricity consumers."