In a shocking move, even to most of us in the biz, the morning began with the news that Financial Title Company had locked its doors and laid off all its California employees as of 6pm last night. Oh, oh, that’s not good.

Apparently Financial Title’s parent company Mercury Cos of Colorado had defaulted on some of its obligations, causing lenders to shut off its lines of credit. Without any notice that I’m aware of, Mercury closed all of its companies operating outside Colorado.

But what of all those unclosed escrows and client deposits? Hmmm….that is a rather critical question. One of my clients just deposited their substantial down payment into Financial’s account in anticipation of closing today. It’s some relief to know that,

Examiners representing the California Department of Insurance, which regulates and polices title-policy underwriters and agents, were on hand at all 57 Financial Title offices in the state Wednesday to ensure that escrow funds were properly handled and not stolen or lost, said Darrel Ng, press secretary for the agency.

But as of the end of the day, the dust hadn’t settled enough to know when First American–the company stepping into the breach– might be able to pick up the files and get them closed.

This event follows the demise of another Mercury-owned company in December. Then, Alliance Title suddenly shut its doors and transfered its files to Financial Title where possible. By June, Alliance had filed for bankruptcy, reporting $100 mil in liabilities and only$.5 mil in assets.

Efforts to pierce Mercury’s corporate veil and force the parent to assume responsibility for Allliance’s debts has so far been stifled. Mercury, a privately held company founded in 1946, is owned by the Paul Hauptman family who is refusing to take any responsibility for paying its former Alliance employees and vendors what is owed.

The US House of Representatives voted yesterday (check the date of this article, how’s that for a early scoop) 272 to 152 to pass the housing bill that is steaming through Congress on the fast track. This is the little piece of legislation that authorizes additional funds for FHA guarantees, props up Fannie Mae and Freddie Mac, and wipes out the Nehemiah down payment assistance program and all its lookalikes.

Here is the wording from Section 113 of the Bill regarding down payment:

(C) PROHIBITED SOURCES.—In no case shall the funds required by subparagraph (A) consist, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale:

(i) The seller or any other person or entity that financially benefits from the transaction.

(ii) Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in clause (i).

IF THE TRUTH BE TOLD

Let’s face it, it was a little surprising that Nehemiah was approved in the first place. Lenders have never allowed a seller to give the buyer the required down payment.  That opens the door a little too wide for creative financing arrangements between desperate sellers and buyers who might otherwise not qualify.  Critics argue that Nehemiah allows sellers to do just that.  However, the process is tightly regulated because the borrower must qualify for a primary loan–FHA is one of the few–that allows the gift to come from a non-profit company.

The other accusations leveled against the program, that a) it is responsible for increased FHA defaults and b) it artificially inflates housing prices thereby putting out of reach the purchase of homes by the very folks it is designed to help, are arguable. While a seller who contributes to Nehemiah might ask a higher price, the same is true for sellers who give credits for closing costs or rate buydowns.

The biggest issue to my way of thinking is timing. This is a lousy time to pull the plug on the last program propping up real estate values…at least in this market. Once Nehemiah goes, there will be fewer people who can afford to buy at any price.

The Sacramento Bee reports this morning that the end may be very near for the Nehemiah program.  Included in the housing bill just passed by the U.S. Senate is a provision eliminating the popular down payment assistance program.  The House votes later this week but is expected to go along with the Senate and President Bush. 

It isn’t clear how quickly this would take effect.  Loans in process are often given a reasonable period to close, and buyers pre-approved but not yet in Contract may be given a deadline by which they must successfully entered into Contract for the purchase of a home. 

Recent figures on real estate sales activity showed that 85% of the sales closing in Sacramento involved homes under $350,000.  Many buyers are using FHA and Nehemiah to help them cover the down payment and closing costs.  While buyers can continue to use a seller credit to help cover closing costs, the loss of Nehemiah would mean that buyers would have to save cash for a down payment or secure a gift from family members.  This could throw a wet blanket over the recovering Sacramento real estate market and slow the absorption of the inventory of bank owned properties for sale. 

 Stay tuned…..

Well, it’s time to get back on my pony here. The site hack I experienced recently combined with this crazy market took the wind out of my sails. But like the fires that have brought nuclear winter to Sacramento–maybe I should say nuclear summer since it’s a 111 degrees today–conflagration in the mortgage industry show no signs of coming under control. So here are a few updates:

INDYMAC BANK IMPLODES

Renown for their dismal customer service attitude toward the mortgage broker community, Indymac Bank bellied up this week. Confessing that federal banking auditors had found the bank to be “no longer well capitalized”, Chairman and CEO Michael Perry announced that the company would take a powder, lay off 3800 or so employees (including some very decent folks locally), and completely exit the forward mortgage business until they can “improve their capital ratios.” That’s corporate double speak for “we’re outta here.”

While promising “to honor all of our existing rate-locked loans and will continue to fund these loans in the coming weeks,” the company has left borrowers stranded and attempted to extort additional fees in exchange for not canceling existing rates locks. I had one refinance ready for docs that isn’t going to fund, and my associates have buyers packed in to the Bekins van who must now quickly find an Extended Stay while they secure alternative financing. At this point, we are having trouble working through the remaining staff to resolve issues. If you have an Indymac loan, find a replacement, now.

PMI IN RETREAT

Kiss 10% down investor loans goodbye. The same is true for owner occupied, cash out refinances. The mortgage insurance (MI) companies are in full retreat. In recent weeks there have been announcements that as of July 14, MI will no longer be available for any investment properties or cash-out owner refinances in declining markets.

That basically leaves only owner occupied purchases and rate & term owner refinances eligible for 80%+ LTV financing.  And MI for 5% down payments are evaporating as well, leaving borrowers scrounging around for at least 10% down on conventional loans.  If this announcement is a canary in the coal mine, it is quite conceivable that we will soon find ourselves in a 20% down payment world again. Wouldn’t that be lovely. If everyone suddenly needed 20% down, do you think that would freeze the recovery in its tracks?

Thank God for FHA and 97% financing, not to mention the Nehemiah down payment assistance program, which brings me to my next update…

NEHEMIAH FACES RENEWED CHALLENGE

Although I think it unlikely that we’ll see any tightening of FHA requirements in this election year, Nehemiah is facing new challenges from HUD. If it is decided that Nehemiah does artificially inflate property values and distort the market, say goodbye to this program. Sacramento’s sub $350k market has been re energized by investors and first-time buyers, the latter category leaning heavily on substantial seller concessions to overcome their lack of funds for down payment and closing costs. For now, Nehemiah is still around. Best to save up some money. FHA won’t go away, but buyers may have to have their own 3% down payment before long.

That’s it for now. Call me if you need help with financing on the west coast.