If you were busy with holiday travels and shopping in late December, you might have missed the fact that President Bush signed into law new legislation designed to help homeowners in deep mortgage trouble.

Forgiven, Not Forgotten

The most significant change under the new law is tax relief for people who sell their home for less than the remaining balance on their mortgage. Under the old law, even if the lender agreed to "forgive" the difference between the home sale price and the mortgage balance, the IRS wasn't so lenient. Tax regulations required lenders to report the amount that was forgiven as gross income received by the seller, in effect handing sellers a tax bill on income they never actually received.

For example, if you sold your home for $200,000 but your remaining mortgage balance was $225,000, you would've faced a tax bill on the $25,000 difference that your lender forgave.

With the new legislation, that tax has been eliminated until Jan. 1, 2010. So at the very least, if you're forced to sell a home you can no longer afford, and your lender agrees to forgive any unpaid mortgage balance, you no longer have to worry about a hefty tax bill as well. (This tax break is retroactive to Jan. 1, 2007.)

Other Good News

There was also a small bit of good news for homeowners with private mortgage insurance (PMI): Congress voted to extend the deductibility of PMI premiums until Jan. 1, 2010.

Only homeowners with adjusted gross incomes below $100,000 are eligible for a full deduction (it phases out between $100,000 and $110,000), and only mortgages for primary residences originated after 2006 are eligible. A PMI trade association estimates this tax break will result in an average $350 annual savings for homeowners eligible for the deduction.

The final bit of housing-related legislation provides tax relief for surviving spouses. If a surviving spouse opts to sell a primary residence within two years of the death of the other spouse, the surviving spouse is eligible for a $500,000 capital gains exclusion, rather than the old $250,000 exclusion that applies to individuals.

Hope for Some

In addition to these new laws, Washington is also busy pushing a voluntary relief program for the mortgage-stressed. The HOPE NOW alliance, which features Treasury secretary Henry Paulson as a lead flag bearer, announced a plan in early December that should be up and running soon. The plan allows some subprime mortgage holders to refinance, or lets them lock in their current interest rate for five more years -- a deal that has been dubbed a "tease freeze."

I know the issue of mortgage assistance isn't necessarily popular with many of you. A December 2007 CNN poll reported that 51 percent of respondents were in favor of "special treatment" for homeowners facing default and foreclosure, while 46 percent were against any special treatment. Those of you facing a big mortgage reset are obviously in the pro-HOPE NOW camp.

But before you breathe a sigh of relief, you need to understand the severe limitations of the plan. First, it's voluntary, meaning lenders are encouraged to offer the relief programs but not required. In fact, the plan comes not straight from the White House or Treasury Department, but from the American Securitization Forum, a consortium of money managers (read: hedge funds and Wall Street firms sitting with the distressed debt), as well as all sorts of mortgage lenders and servicers.

You don't need to be a rocket scientist to realize that the group's primary motivation is to help investors holding the mortgage debt, not the actual homeowners with the exploding mortgages. Moreover, the eligibility rules will make it tough for many people to quality for help. In fact, the Center for Responsible Lending estimates that the president's plan being pushed by Secretary Paulson could help less than 10 percent of subprime borrowers.

Five-Year-Freeze Facts

The full rundown of the HOPE NOW plan is available here, but here are the major points that determine if you're eligible for a five-year freeze:

• If your mortgage has already reset, you're out of luck.

• Only adjustable rate mortgages made between Jan. 1, 2005, and July 31, 2007, are eligible. (Option-only loans aren't eligible.)

• You're also out of luck if your lender happened to keep the loan on his books rather than sell it into a securitization pool -- only securitized loans are eligible for this plan. Is there better proof that this effort isn't so much about bailing out homeowners as bailing out investors?

• Finally, your interest rate must reset between Jan. 1, 2008, and July 31, 2010, and the new payment must be at least 10 percent higher than your current payment.

Meet all the above criteria and get your restructure rolling before the initial reset and you may be in luck. But keep reading:

• Only subprime adjustable rate mortgages are eligible. What qualifies as subprime? Well, the quick test is that you must have a FICO credit score below 660. If you have a higher score, the lender will look at your income to determine eligibility.

The theory behind limiting the freeze option to homeowners with low FICO scores is that borrowers with higher FICO scores should be able to refinance. At least that's the theory for now; recently, Secretary Paulson has noted that more prime borrowers are falling behind on their mortgage payments.

• You better be up to date with your mortgage payments. If you're currently more than 30 days behind on a payment, or if you've been 60 days late more than once in the past 12 months, you won't qualify for the 5-year freeze program.

A Potential Security Blanket

FHASecure, launched in the summer of 2007, is another government push to help the mortgage-stressed. The crux of this program is to make it easier for borrowers hit with resets to refinance.

The program is extended to homeowners whose mortgages reset between June 2005 and December 2009. To qualify, you must have been on-time with your payments prior to the reset, have at least 3 percent equity in your home, and have a solid employment history and the ability to afford mortgage payments on a refinanced loan.

A Good Time to Buy

With all the negative news about the housing and mortgage industry, many people are waiting to see what happens before they make a decision to purchase real estate. However, the time is right to purchase property NOW. There are three reasons why the time is right.

Interest Rates

Interest rates on mortgages have fallen substantially over the past 30 days. Rates on conforming 30 year fixed loans ($417,000 and below) have been ranging from 5.25% - 5.50%. Rates on Jumbo loans (amounts above $417,000) are also very good. For example, the rate on a 7/1 Jumbo Adjustable Rate Mortgage is currently at 5.50% with a 20% down payment. That means the 5.50% is fixed for 7 years before the loan converts into an adjustable rate mortgage.

Rates usually get better when the housing market and economy slow down. The interest rate markets typically anticipate what will happen in the future, so if the markets feel we are heading towards a recession, rates decrease. Many times they decrease before we actually get into a full recession. The same is true as we come out of a recession. The markets anticipate that we are going into a recovery and rates start to increase. In a lot of cases, when the Fed aggressively cuts interest rates, (as they are doing now) this actually causes mortgage rates to start increasing, because the markets believe that the aggressive cuts by the Fed will begin to spark the economy. Generally, by the time the public hears that the economy is starting to recover, rates are already moving up in anticipation of a recovery and they miss the bottom of the interest rate market.

Rates are now at levels that we have not seen since 2003, when rates hit all time lows. In 2003 and other periods when rates hit all time lows, these rates only lasted for a couple of weeks. Therefore, the “bottom” of the interest rate market is generally short lived.

It is important to understand that saving 1.00% to 1.50% on your interest rate today will save you thousands of dollars the first 5 to 7 years of your loan. These savings can be much greater than what you save by waiting for prices to drop further on real estate. Therefore, waiting for prices to decrease could actually cost you more in the long run if rates are higher when you find that “great deal”.

Mortgage Programs

During the last 8 months, we have lost many mortgage programs and it appears that underwriting guidelines for certain mortgages will continue to tighten. This means it will get harder for people to qualify for mortgage programs in the future. Therefore, if you wait to see what happens with real estate prices, a loan program that would be perfect for your situation today may not exist tomorrow. This is something that I always discuss with the agents that I work with to remind their clients. When the clients ask me what I think and if it is wise for them to wait another 6 months, I always advise that ultimately it is their choice, but they may be risking the possibility of completely being out of the market with special programs that they are pre-approved with today that may be eliminated in the near future. Programs that otherwise would enable them to get into the market at the current time. This is especially the case with a declining market and the fact of the matter is that San Diego is currently determined to be a declining market.

Market Timing

The third reason the time is right to purchase real estate has to do with market timing. Everyone would love to “buy at the right time”, meaning when prices are at the bottom. Whether it is stocks, bonds or real estate, we all want to buy low. However, it is very hard to know when prices have hit bottom.

Let’s look at the current real estate slow down as an example. By the time news of the real estate melt down was being broadcast by the media, the melt down was already in full swing. Many mortgage companies were already out of business, houses were not selling and prices were falling. These things were all happening for several months before the general public became aware there was an issue.

The same is true when the real estate market begins to recover. By the time the media begins to talk about real estate recovery and the general public learns that things are improving; prices are already on the rise. As a result, it is very difficult to “time the market” and buy at the bottom.

 

Home seller quandary: Fix up house or offer credit?

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Many buyers have trouble envisioning 'home' that needs work

Monday, January 28, 2008

By Dian Hymer
Inman News

Sellers who anticipate losing money if they sell their home may wonder why they should spend a dime fixing the place up for sale. Isn't this throwing good money after bad? Even sellers with plenty of equity in their homes often figure the way to get the most out of the sale is to cut sale costs to a minimum.

This attitude is directly contrary to the notion that the way to make the most money on the sale of a home is by pricing the property appropriately for the market, and by making cost-effective improvements that will result in a higher sale price in a shorter time.

Job applicants don't show up for an important interview in tattered old clothes if they want to make a good impression, particularly if there were plenty of other qualified applicants. Likewise, if you wanted to get top dollar from the sale of a car you would have the car detailed so that it looked its best. The same principal applies to selling single-family homes.

Today, many housing markets have plenty of homes for sale and far too few buyers. For years, buyers competed with one another in order to buy a house. Now, in general, sellers are being forced to compete with other sellers in order to get their home sold.

Consider the competitive nature of the market when deciding if you're going to improve your home before selling it, and how much you'll invest. Keep in mind that the point of fixing up a home to sell is to maximize your return from the sale. Don't waste money on improvements that have little or no value to buyers.

HOUSE HUNTING TIP: Ask your real estate agent or a staging decorator to walk through your home with you for the purpose of determining what fix-up projects you should ideally complete before marketing the property. For example, you might be inclined to replace worn-out carpet. Your agent, however, might advise otherwise.

An agent who specializes in the sale of older homes in the area might recommend refinishing the hardwood floor that is hidden underneath the carpet instead. Buyers looking for charming older homes usually prefer hardwood floors to carpet.

A common opinion expressed by sellers is that it's pointless to fix up a place for someone else whose decorating preferences might be quite different. For example, why not just offer a credit to the buyers so that they can either change the carpet or refinish the hardwood floors -- whichever they prefer?

The problem with this approach is that most buyers have a difficult time imagining how a home will look fixed up. They remember what they see, not what the house could look like with this or that improvement.

Imagine there are five homes listed for sale in an area, all similarly priced, but not all in the same condition. Three houses have old, worn carpet covering most of the floors; one has linoleum over the floor; and the fifth has pristine, recently refinished hardwood floors. Most buyers will gravitate to the home with the beautiful hardwood floors.

The best houses in the best condition and offered for the best price usually sell quickly. A fast sale is important to some sellers in this market. The sooner your home is sold, the sooner you stop paying mortgage payments, property taxes and various maintenance costs.

THE CLOSING: In areas where prices are declining, a quick sale can result in a higher price than might be attainable in a few months.

 

Issuance of private mortgage insurance policies fell by 7.6 percent in November compared to the month before, even as defaults continued to climb.

That's according to the latest numbers from a trade association representing the private mortgage insurance industry, the Mortgage Insurance Companies of America (MICA).

Primary insurance defaults totaled 61,033 in November, MICA said, up 2.9 percent from October and a 34.6 percent increase from the 45,325 defaults recorded in November 2006.

Some 161,957 private mortgage insurance policies -- which lenders typically require when borrowers make down payments of less then 20 percent on a home purchase -- were issued in November. That's down from the October total of 175,383, but represents a 55.8 percent increase from the same month a year ago, MICA reported.

The use of private mortgage insurance grew dramatically in 2007 as lenders cut back on the use of "piggyback" second mortgages, and a change in the tax code allowed some families to deduct their insurance payments.

MICA estimates that 1.99 million private mortgage insurance policies were issued in the 12 months ending in November 2007. That's a 37.2 percent increase from the 1.45 million policies issued in the 12 months ending in November 2006.

Many mortgage lenders have stopped making second loans that allowed home buyers to avoid taking out private mortgage insurance.

But a change to the tax code allowed home buyers with incomes of $109,000 or less to deduct all or part of their private mortgage insurance premiums from their taxable income in 2007. The new deduction -- which MICA estimates could save the typical family $350 a year -- has been extended for three years under legislation signed into law Dec. 20.

IRA Owners Investing in Mortgages
Owners of self-directed IRAs are investing them in mortgages, according to companies that promote the strategy.

These entrepreneurs make loans with terms lasting from a few months to a few years to investors doing fixer-uppers, small-scale developers, and relocating families who need a bridge loan. They find borrowers through an informal network of real estate professionals, mortgage brokers, and other investors.

Self-directed IRA owners pay an annual custodial fee and transaction fees, ranging from $50 to a few thousand dollars a year, depending on asset size and activity. They typically charge borrowers a rate of at least 10 percent. These deals are typically structured with the property as collateral. If the borrower defaults, the IRA can wind up owning the property at a deep discount.

Two thousand of the 40,000 self-directed IRAs handled by Entrust Group Inc., which administers self-directed IRAs, are making real-estate loans, and the average account is valued at $250,000, says CEO Hugh Bromma. The number of accounts with such activity has doubled each year since 2005.

Source: The Wall Street Journal, Kelly Greene (09/11/07)

What’s to blame?
Making Sense of the Foreclosure Fallout

Mortgage defaults are on the rise, but risky subprime lending isn’t entirely to blame. Find out the reason for the spike, and most importantly, how you can help clients be financially safe.

BY BLANCHE EVANS

Foreclosures rose sharply in the first quarter to one filing for every 264 households, according to the latest quarterly report by RealtyTrac, an online database of foreclosure properties.

Obviously, for home owners who are in foreclosure or facing it, the situation can be bleak. But there is some good to come out of this spike in defaults — most notably new policies that lenders and regulators are putting in place to improving the mortgage market for the future.

The current foreclosure environment also opens the door for you to broach the topic with buyers and sellers. Use this chance to educate them on what they can do to avoid foreclosures. I provide some tips for you at the end of this article.

First, What the Stats Say

For the first-quarter of 2007, Realty Trac reported more than 430,000 foreclosure filings, including default notices, auction sale notices, and bank repossessions. That's up 27 percent from the previous quarter and up 35 percent from the first quarter of 2006. Indeed, 37 out of the 50 states reported year-over-year increases in foreclosures.

Continuing a trend from 2006, Detroit documented the highest overall foreclosure rate (16,351 filings and one foreclosure filing for every 51 households) of the nation's 100 largest metro areas. Other metros in the top 10: Riverside-San Bernardino, Calif.; Sacramento, Calif.; Stockton, Calif.; Atlanta; Denver; Bakersfield, Calif.; Fort Worth, Texas; and Dallas.

But be careful before you put all the blame on subprime lending, says James J. Saccacio, chief executive officer of RealtyTrac. “We estimate that more than 50 percent of the foreclosure activity we charted in the first quarter was from subprime loans,” he says. “However, it's not just low-end homes that are going into foreclosure. We're seeing a rising percentage of foreclosures with an estimated market value of more than $750,000."

Should We Have Expected It?

Experts point to many different reasons behind the rise in foreclosures. As Saccacio notes above, there’s more to the story than risky loan-making. Here’s what contributed to the peaking numbers:

• The Mortgage Bankers Association, in its testimony to Congress last fall, said that homeownership rates are at record levels, nearly 69 percent. It stands to reason that with a higher rate of ownership, there is a higher rate of foreclosure.

• Delinquency rates typically peak 3 to 5 years after origination, which is in keeping with record Home sales and record loans following 2001. In other words, this was to be expected.

• Approximately 1 percent of all loans are in the foreclosure process, well within historical norms, according to the MBA. That’s still less than the post-recession peak of 1.5 percent just four years ago.

• Three out of four loans that enter the foreclosure process will not wind up as a foreclosure sale, either because the home owner cures the delinquency, works out a payment plan with the lender, refinances, or sells the home.

• Somewhere between 0.5 percent and 1 percent of all homes going into foreclosure are owned by subprime borrowers, according to estimates by Walt Molony, spokesman for the NATIONAL ASSOCIATION OF REALTORS®. On the low end, that's one home in foreclosure out of approximately 200, suggesting that high foreclosure rates are not just a subprime problem but due to a wide range of other causes.

• Finally, subprime borrowers are higher risks and have always had a higher delinquency rate than prime borrowers. Yet, only six percent of home owners are nonprime borrowers with adjustable rate loans that are resetting to higher rates.

On the Bright Side

So what’s the silver lining? Wall Street investors are now requiring better underwriting and increasing the pricing for subprime loans. Federal and state banking regulators have issued guidance to tighten the underwriting standards for nontraditional mortgages and recently proposed similar guidelines for subprime mortgages. Congress is holding hearings that may very well result in the development of new laws to protect consumers.

Also, NAR has a newly adopted Enhanced Subprime Lending Policy, which proposes solutions to avoid repeating mistakes that led to the increases in home owners defaulting on their mortgages.

You don’t have to wait on the sidelines. Instead, NAR's Chief Economist David Lereah advises real estate professionals to be part of the solution. Here are three ways you can help your clients:

• Learn about new local or state programs. Some states such as Maryland's Department of Housing and Community Development are launching programs that allow certain borrowers to refinance their high-risk mortgages into affordable fixed rate loans. Maryland's program, called “Lifeline,” is aimed at preventing defaults and foreclosures, thereby protecting home values for other home owners. The program allows participating lenders to bundle the new loans and sell them back to the DHCD, which in turn uses cash from a bond issue to buy the bundled loans. Interest paid by the borrowers pays off the bonds.

• Check with lenders on new products. Ask if they have any new loan programs that could be helpful to borrowers in a volatile housing market. For example, Washington Mutual Inc. has just announced a new combination mortgage/home equity line of credit that allows customers to reset interest rates or switch between fixed and adjustable rates up to twice a year without having to refinance. The first reset is free, and $250 afterwards.

• Educate your buyers. NAR has developed several brochures to help clients understand their mortgage options, including those for homebuyers with less-than-perfect credit. The FHA and VA have recently made significant improvements to their programs that can be valuable financing tools for many homebuyers (stay alert to lenders in your area offering these products). NAR also has brochures describing the recent changes to the FHA program that may benefit your clients and help them avoid predatory lending.

(c) Copyright 2007 Realty Times. Reprinted with permission.