Mortgage Rate Hits a 4-Year Low at 5.47%
By Amy Hoak and Ruth Simon
Rates on fixed-rate home mortgages fell again this week, bringing the 30-year fixed-rate to its lowest level in more than four years, according to Freddie Mac's weekly survey.
The 30-year fixed-rate mortgage averaged 5.47% for the week ended Dec. 11, down from last week's 5.53% average and 6.11% a year ago. The rate hasn't been lower since March 25, 2004, when it averaged 5.40%.
Mortgage rates dropped again on Thursday, with rates on 30-year fixed-rate conforming mortgages averaging 5.33%, according to HSH Associates in Pompton Plains, N.J. The highest-quality borrowers can do even better.
Rates on 30-year fixed-rate conforming mortgages have fallen to as low as 5.125% with no points or origination fee for borrowers with credit scores of 740 and higher and at least 20% equity, said Lou Barnes, a mortgage banker in Boulder, Colo. Rates had dropped to about 5.5% from roughly 6% in response to the government's announcement just before Thanksgiving that it would take steps to push mortgage rates lower.
The latest drop means that rates have now fallen low enough that even borrowers with credit scores of 660 to 700 may find it attractive to refinance, said Chris Freemott, a mortgage banker in Naperville, Ill. These borrowers can wind up paying as much as a half a percentage point more in rate than borrowers with the highest credit scores because of extra charges levied by Fannie Mae and Freddie Mac, he says.
Still, many borrowers who would like to refinance can't either because their credit is weak or they don't have sufficient equity in their homes.
Meanwhile, according to the Mortgage Bankers Association, conventional mortgage applications were up 2.0% from four weeks prior, over the week ending Dec. 5, but were still 51% below the year-ago period.
Tuesday, December 16, 2008
Thursday, December 04, 2008
All About Short Sales
by Marie de Espinosa
What is a Short Sale?
This is a question I am hearing from both Buyers and Sellers these days. For a Seller the short sale is a method and an opportunity to sell a home that is worth less than what is owed on it without bringing any money to the table.
For example, Mark and Mary purchased a home in 2005 and now they need to sell it— the home has become unaffordable. Perhaps there is a job loss, a rate adjustment or just a reality check. In some circumstances there is a need to move for work, but the employer will not provide moving assistance benefits.
Let’s say Mark and Mary purchased the home in 2005 for $250,000 and now it is worth $220,000; based on a professional Broker’s Comparative Market Analysis (CMA). A CMA looks at all recent sales and compares them with your home, to come up with a realistic selling price. Let’s say Mark and Mary put 3% down on an FHA loan, and have a balance very close to their original loan amount of $242,500 (since much of the first payments go towards interest). In order to sell their home for a realistic price of $220,000, they will need to bring $22,500 to the closing table when it sells, just to pay off their loan. They cannot afford to ride out the market and live there, for whatever reason. This is when a short sale occurs.
The Seller approaches the bank and asks them to take less than the original loan amount for the loan. In addition, Mark and Mary may not have the funds to cover the real estate fees associated with a sale. These are closing costs such as taxes, transfers and title fees along with 6% a Broker typically charges to the Seller for marketing and selling the home. If nothing can be paid towards these expenses, they are also requested of the lender.
Why would the lender accept less and contribute to the sale of the home? Often times, in order to avoid a costly foreclosure. Foreclosures are very time-consuming and expensive for lenders. A Seller in this situation needs to be able to prove financial distress. Late or missed payments, financial documentation and a letter explaining the situation is what your Broker needs to get the ball rolling.
What proceeds is a fairly typical sale scenario. The Seller lives in the home, maintains it, makes it available for showings and continues to provide whatever documentation is requested of the Lender. The Seller in the scenario typically does not make any more payments once the request is submitted.
For Buyers, Short Sales can be value opportunities Buyers submit their offers and they are presented to the bank—who wants to unload this property and get paid. It does take some patience; there are more short sales than the banks can now handle and there is not enough staff to deal with them all. However, for a Buyer who wants some extra value in this market, it’s a great option.
I have experience selling and buying Short Sale homes for my clients and this is just an overview. For specific information to meet your needs, send me an eMail or just give me a call at (720) 275-3926. - Marie
What is a Short Sale?
This is a question I am hearing from both Buyers and Sellers these days. For a Seller the short sale is a method and an opportunity to sell a home that is worth less than what is owed on it without bringing any money to the table.
For example, Mark and Mary purchased a home in 2005 and now they need to sell it— the home has become unaffordable. Perhaps there is a job loss, a rate adjustment or just a reality check. In some circumstances there is a need to move for work, but the employer will not provide moving assistance benefits.
Let’s say Mark and Mary purchased the home in 2005 for $250,000 and now it is worth $220,000; based on a professional Broker’s Comparative Market Analysis (CMA). A CMA looks at all recent sales and compares them with your home, to come up with a realistic selling price. Let’s say Mark and Mary put 3% down on an FHA loan, and have a balance very close to their original loan amount of $242,500 (since much of the first payments go towards interest). In order to sell their home for a realistic price of $220,000, they will need to bring $22,500 to the closing table when it sells, just to pay off their loan. They cannot afford to ride out the market and live there, for whatever reason. This is when a short sale occurs.
The Seller approaches the bank and asks them to take less than the original loan amount for the loan. In addition, Mark and Mary may not have the funds to cover the real estate fees associated with a sale. These are closing costs such as taxes, transfers and title fees along with 6% a Broker typically charges to the Seller for marketing and selling the home. If nothing can be paid towards these expenses, they are also requested of the lender.
Why would the lender accept less and contribute to the sale of the home? Often times, in order to avoid a costly foreclosure. Foreclosures are very time-consuming and expensive for lenders. A Seller in this situation needs to be able to prove financial distress. Late or missed payments, financial documentation and a letter explaining the situation is what your Broker needs to get the ball rolling.
What proceeds is a fairly typical sale scenario. The Seller lives in the home, maintains it, makes it available for showings and continues to provide whatever documentation is requested of the Lender. The Seller in the scenario typically does not make any more payments once the request is submitted.
For Buyers, Short Sales can be value opportunities Buyers submit their offers and they are presented to the bank—who wants to unload this property and get paid. It does take some patience; there are more short sales than the banks can now handle and there is not enough staff to deal with them all. However, for a Buyer who wants some extra value in this market, it’s a great option.
I have experience selling and buying Short Sale homes for my clients and this is just an overview. For specific information to meet your needs, send me an eMail or just give me a call at (720) 275-3926. - Marie
Monday, November 17, 2008
HUD's Latest Lending Rules
NOVEMBER 13, 2008, 9:39 A.M. ET
HUD Unveils New Rules for Mortgages
By JAMES R. HAGERTY
The Department of Housing and Urban Development announced rules aimed at helping Americans shop for mortgages more effectively, but said it lacks powers to enforce those rules.
The rules update requirements of the Real Estate Settlement Procedures Act, known as Respa, a 1974 law that sets standards for home-purchase transactions. HUD Secretary Steve Preston said changes were needed because "many people made uninformed decisions" in taking out loans. That, he said, contributed to a surge in mortgage defaults.
HUD, which pushed ahead with the rules despite opposition from lenders and others involved in mortgage transactions, estimated the changes will bring savings of nearly $700 in loan-closing costs for the typical consumer.
In a news conference, HUD officials conceded they lack legal authority to penalize violators of the rule. Legislation would be required to give HUD those powers. But they said state and federal regulators of lenders and brokers can insist on compliance with federal rules and that the threat of class-action suits may keep lenders in line.
The rules require a three-page "good-faith estimate" for borrowers explaining rates, fees, any prepayment penalties and the possibility of later increases in monthly payments. HUD said it shrank that form from four pages to three in response to industry complaints.
The rules also limit to 10% the maximum amount certain fees can increase from the initial estimate. A new HUD-1 form, provided to consumers before they sign loan documents, is designed to help consumers more easily compare what they were promised with what they are actually being charged. One problem is that consumers may see that HUD-1 form only shortly before the closing, when they are pressed for time and may feel it is too late to resume their mortgage shopping.
HUD said the rules will help consumers understand how much a broker is being paid in fees, often called "yield spread premiums." But Rebecca Borne, a lawyer at the Center for Responsible Lending, a nonprofit group pushing for changes in mortgage regulation, said the new HUD forms fail to make those fees clear and won't prevent abuses of them.
Lenders and brokers will have until Jan. 1, 2010, to start using the forms. HUD dropped a provision that would have required a lengthy "script" to be read to borrowers at the closing table, setting out terms of the loan.
HUD Unveils New Rules for Mortgages
By JAMES R. HAGERTY
The Department of Housing and Urban Development announced rules aimed at helping Americans shop for mortgages more effectively, but said it lacks powers to enforce those rules.
The rules update requirements of the Real Estate Settlement Procedures Act, known as Respa, a 1974 law that sets standards for home-purchase transactions. HUD Secretary Steve Preston said changes were needed because "many people made uninformed decisions" in taking out loans. That, he said, contributed to a surge in mortgage defaults.
HUD, which pushed ahead with the rules despite opposition from lenders and others involved in mortgage transactions, estimated the changes will bring savings of nearly $700 in loan-closing costs for the typical consumer.
In a news conference, HUD officials conceded they lack legal authority to penalize violators of the rule. Legislation would be required to give HUD those powers. But they said state and federal regulators of lenders and brokers can insist on compliance with federal rules and that the threat of class-action suits may keep lenders in line.
The rules require a three-page "good-faith estimate" for borrowers explaining rates, fees, any prepayment penalties and the possibility of later increases in monthly payments. HUD said it shrank that form from four pages to three in response to industry complaints.
The rules also limit to 10% the maximum amount certain fees can increase from the initial estimate. A new HUD-1 form, provided to consumers before they sign loan documents, is designed to help consumers more easily compare what they were promised with what they are actually being charged. One problem is that consumers may see that HUD-1 form only shortly before the closing, when they are pressed for time and may feel it is too late to resume their mortgage shopping.
HUD said the rules will help consumers understand how much a broker is being paid in fees, often called "yield spread premiums." But Rebecca Borne, a lawyer at the Center for Responsible Lending, a nonprofit group pushing for changes in mortgage regulation, said the new HUD forms fail to make those fees clear and won't prevent abuses of them.
Lenders and brokers will have until Jan. 1, 2010, to start using the forms. HUD dropped a provision that would have required a lengthy "script" to be read to borrowers at the closing table, setting out terms of the loan.
Saturday, November 15, 2008
Denver Area Apartment Rental Report
Denver-area apartment vacancies rise
By John Rebchook, Rocky Mountain News
Published October 28, 2008 at 7:54 a.m.
Apartment vacancy rates in the Denver Metro area increased to 6.5 percent during the third quarter of 2008, rising from 5.3 percent during the same period last year, according to a report released this morning.
The third-quarter vacancy rate also rose from 6.2 percent in the second quarter and is the highest vacancy rate in six quarters, according to the report by by the Apartment Association of Metro Denver and the Colorado Department of Local Affairs' Division of Housing.
The vacancy rate has not dropped below 5 percent since the first quarter of 2001, and they peaked at 13.1 percent during the first half of 2003.
Adams County reported the highest vacancy rate of 7.5 percent, and the Boulder/Broomfield area reported the lowest rate at 4.7 percent. All areas except Boulder/Broomfield and Douglas County reported increases in vacancies since the second quarter. Vacancy rates for all counties surveyed were: Adams, 7.5 percent; Arapahoe, 6.9 percent; Boulder/Broomfield, 4.7 percent; Denver, 6.0 percent; Douglas, 5.9 percent; and Jefferson, 6.5 percent.
In general, a vacancy rate of 5 percent is considered the "equilibrium" rate. Rates below 5 percent indicate tight markets.
The third quarter's increase marks the second quarter in a row during which vacancy rates have increased, although vacancies have historically declined during the second and third quarters.
"There's clearly some softness in the market given the increases in concessions and vacancies," Gordon Von Stroh, a professor of Business at the University of Denver, and the vacancy report's author. "It remains to be seen how much the national economy will affect the local markets."
Average rents during the third quarter hit a new high of $892.22, increasing 33 dollars since the third quarter of last year. Although rents have been increasing, rental losses from discounts and concessions have also been increasing since the third quarter of last year.
The highest average rent was reported in Douglas County at $1051.05, and the lowest was reported in Jefferson County at $847.43. Average rents for all counties were: Adams, $882.52; Arapahoe, $850.72; Boulder/Broomfield, $974.68; Denver, $906.12; Douglas, $1051.05; and Jefferson, $847.43.
Although vacancies are increasing, few predict substantial declines in occupancies in the metro area.
"It's much more difficult to buy a home today than it was a couple of years ago, so people are looking to rental housing," said Kathi Williams, Director of the Colorado Division of Housing. "That's good news for apartment owners."
The Vacancy and Rent Surveys are a service provided by the Colorado Department of Local Affairs' Colorado Division of Housing and the Apartment Association of Metro Denver to renters and the multi-family housing industry on a quarterly basis.
By John Rebchook, Rocky Mountain News
Published October 28, 2008 at 7:54 a.m.
Apartment vacancy rates in the Denver Metro area increased to 6.5 percent during the third quarter of 2008, rising from 5.3 percent during the same period last year, according to a report released this morning.
The third-quarter vacancy rate also rose from 6.2 percent in the second quarter and is the highest vacancy rate in six quarters, according to the report by by the Apartment Association of Metro Denver and the Colorado Department of Local Affairs' Division of Housing.
The vacancy rate has not dropped below 5 percent since the first quarter of 2001, and they peaked at 13.1 percent during the first half of 2003.
Adams County reported the highest vacancy rate of 7.5 percent, and the Boulder/Broomfield area reported the lowest rate at 4.7 percent. All areas except Boulder/Broomfield and Douglas County reported increases in vacancies since the second quarter. Vacancy rates for all counties surveyed were: Adams, 7.5 percent; Arapahoe, 6.9 percent; Boulder/Broomfield, 4.7 percent; Denver, 6.0 percent; Douglas, 5.9 percent; and Jefferson, 6.5 percent.
In general, a vacancy rate of 5 percent is considered the "equilibrium" rate. Rates below 5 percent indicate tight markets.
The third quarter's increase marks the second quarter in a row during which vacancy rates have increased, although vacancies have historically declined during the second and third quarters.
"There's clearly some softness in the market given the increases in concessions and vacancies," Gordon Von Stroh, a professor of Business at the University of Denver, and the vacancy report's author. "It remains to be seen how much the national economy will affect the local markets."
Average rents during the third quarter hit a new high of $892.22, increasing 33 dollars since the third quarter of last year. Although rents have been increasing, rental losses from discounts and concessions have also been increasing since the third quarter of last year.
The highest average rent was reported in Douglas County at $1051.05, and the lowest was reported in Jefferson County at $847.43. Average rents for all counties were: Adams, $882.52; Arapahoe, $850.72; Boulder/Broomfield, $974.68; Denver, $906.12; Douglas, $1051.05; and Jefferson, $847.43.
Although vacancies are increasing, few predict substantial declines in occupancies in the metro area.
"It's much more difficult to buy a home today than it was a couple of years ago, so people are looking to rental housing," said Kathi Williams, Director of the Colorado Division of Housing. "That's good news for apartment owners."
The Vacancy and Rent Surveys are a service provided by the Colorado Department of Local Affairs' Colorado Division of Housing and the Apartment Association of Metro Denver to renters and the multi-family housing industry on a quarterly basis.
Monday, November 10, 2008
No Sale: A Bad Agent, or a Lousy Market?
Here's how to tell whether your agent is suffering from market malaise.
By JUNE FLETCHER Wall Street Journal
My 12-year-old home has been on the market for almost three months now. It's in excellent shape, and from the start we set the price close to recent comparable sales, at our agent's recommendation. In the beginning, we got a lot of showings, but lately, nothing. Our listing agreement is about to expire, and we can't decide whether to keep this agent. (Since we've already moved away, it would be tough to interview new agents.) How we can tell whether our current agent is doing a good job, or if the problem is just this horrible real estate market?
It's easy to get depressed about selling your house these days, when bad news about the housing market crops up daily. It's especially discouraging when you've been keeping up your home, following professional advice about staging and are trying to be clear-sighted about your price.
That real estate agents, as well as sellers, can get into a blue funk these days about the real estate market is also understandable—but far less forgivable. Given that you typically pay $25,000 in real estate commissions on a $500,000 house, you deserve an all-out effort to bring in buyers. And the blitz should be unrelenting, not just when the listing is fresh.
Too often, that's not what I'm seeing. I'm not sure whether it's caused by despondency over market conditions, laziness or simply incompetence, but many agents are overlooking the basic tenets of marketing these days.
To illustrate, I've been randomly driving around Northern Virginia for the past several months looking at homes for sale in the $500,000 to $1 million range. In many cases, the for-sale signs have plastic boxes to hold listing sheets and brochures, but inevitably, these are empty. So home shoppers must guess if the home fits their basic needs and price range before calling the agent, which some people find intimidating or embarrassing, especially if the home turns out to be above their price range.
Then there's the question of open houses. Although sellers often insist on them, many agents can't be bothered to do them any more—or they just hold so-called "broker's opens" for the benefit of fellow real estate agents. Worse, many of the agents who do hold open houses spend their time hanging out in the kitchen rather than engaging buyers in conversation and determining their ability and willingness to buy (I've been to some where the agent didn't even ask me my name). The oft-repeated rationale that no one ever buys a home they've seen at an open house is simply untrue—in fact, a buyer did exactly that when I sold my first home in the late '80s.
Similarly, according to an article written last month by Bill Shue, president of Realty U Group in Aliso Viejo, Calif., for National Realty News, a Web site targeted to Realtors, some agents are failing to return buyers' e-mails promptly. He cites one instance where 50 real estate agents were sent an urgent e-mail message from a buyer saying he was in town and wanted to buy immediately; all failed to respond. He also criticizes agents who spend a lot of money to drive traffic to their Web sites, but fail to provide enough "content rich" material when they arrive.
I can appreciate how hard it is for agents to stay motivated and upbeat when anxious sellers are constantly pushing them for results. And having to handle more listings, for a longer period of time, during these troubled times is a double burden.
But sellers shouldn't be shortchanged. That's why it's critical for you to do some detective work before you relist with this agent. Ask a friend from the old neighborhood to go to check your brochure box, visit your open house and send an e-mail asking a few questions about your listing. You'll soon learn whether the problem with selling your house lies with the market or the marketing.
By JUNE FLETCHER Wall Street Journal
My 12-year-old home has been on the market for almost three months now. It's in excellent shape, and from the start we set the price close to recent comparable sales, at our agent's recommendation. In the beginning, we got a lot of showings, but lately, nothing. Our listing agreement is about to expire, and we can't decide whether to keep this agent. (Since we've already moved away, it would be tough to interview new agents.) How we can tell whether our current agent is doing a good job, or if the problem is just this horrible real estate market?
It's easy to get depressed about selling your house these days, when bad news about the housing market crops up daily. It's especially discouraging when you've been keeping up your home, following professional advice about staging and are trying to be clear-sighted about your price.
That real estate agents, as well as sellers, can get into a blue funk these days about the real estate market is also understandable—but far less forgivable. Given that you typically pay $25,000 in real estate commissions on a $500,000 house, you deserve an all-out effort to bring in buyers. And the blitz should be unrelenting, not just when the listing is fresh.
Too often, that's not what I'm seeing. I'm not sure whether it's caused by despondency over market conditions, laziness or simply incompetence, but many agents are overlooking the basic tenets of marketing these days.
To illustrate, I've been randomly driving around Northern Virginia for the past several months looking at homes for sale in the $500,000 to $1 million range. In many cases, the for-sale signs have plastic boxes to hold listing sheets and brochures, but inevitably, these are empty. So home shoppers must guess if the home fits their basic needs and price range before calling the agent, which some people find intimidating or embarrassing, especially if the home turns out to be above their price range.
Then there's the question of open houses. Although sellers often insist on them, many agents can't be bothered to do them any more—or they just hold so-called "broker's opens" for the benefit of fellow real estate agents. Worse, many of the agents who do hold open houses spend their time hanging out in the kitchen rather than engaging buyers in conversation and determining their ability and willingness to buy (I've been to some where the agent didn't even ask me my name). The oft-repeated rationale that no one ever buys a home they've seen at an open house is simply untrue—in fact, a buyer did exactly that when I sold my first home in the late '80s.
Similarly, according to an article written last month by Bill Shue, president of Realty U Group in Aliso Viejo, Calif., for National Realty News, a Web site targeted to Realtors, some agents are failing to return buyers' e-mails promptly. He cites one instance where 50 real estate agents were sent an urgent e-mail message from a buyer saying he was in town and wanted to buy immediately; all failed to respond. He also criticizes agents who spend a lot of money to drive traffic to their Web sites, but fail to provide enough "content rich" material when they arrive.
I can appreciate how hard it is for agents to stay motivated and upbeat when anxious sellers are constantly pushing them for results. And having to handle more listings, for a longer period of time, during these troubled times is a double burden.
But sellers shouldn't be shortchanged. That's why it's critical for you to do some detective work before you relist with this agent. Ask a friend from the old neighborhood to go to check your brochure box, visit your open house and send an e-mail asking a few questions about your listing. You'll soon learn whether the problem with selling your house lies with the market or the marketing.
Saturday, November 08, 2008
JP Morgan Chase's Plan to Help Delinquent Mortgages
Massive Effort to Save Mortgages
By Robin Sidel 11/01/08 Wall Street Journal
JP Morgan Chase & Co. launched an ambitious plan Friday to modify the terms of $70 billion in mortgages for borrowers who are behind on their payments or soon could be.
The move by the New York bank will cover as many as 400,000 borrowers. They'll be moved into loans carrying lower interest rates, smaller principal amounts or other more-affordable terms.
The changes will particularly focus on a type of loan structured in such a way that the borrower's outstanding balance sometimes grows month after month. J.P. Morgan inherited $54 billion of such loans with its takeover of the beleaguered thrift Washington Mutual Inc. in September.
The plan comes amid intense national focus on a root cause of global financial turmoil: rising home foreclosures, and what the role of banks and government should be in helping struggling homeowners. The banking industry is under much political pressure address the foreclosure problem.
Rival Bank of America Corp. has two loan-modification pools in place, one hashed out with state attorneys general. At the government level, after other programs failed to halt the rise in foreclosures, the Federal Deposit Insurance Corp. recently floated a plan that could help three million troubled borrowers; it is being considered by the White House. The FDIC also is assisting strapped borrowers who had mortgages with IndyMac Bancorp, which the FDIC seized this summer.
Such moves would tackle one of the last elements of the global financial upheaval as yet untouched by a major federal program. The mortgage crunch that began in the middle of last year spawned the financial crisis. Big financial players had invested trillions of dollars in securities backed by risky mortgages, which starting in mid-2007 became difficult to value. Banks hobbled by these bad investments reined in lending, spawning the wider credit crunch as a result.
The U.S. government has tackled problems in the banking system and credit markets, but thus far hasn't succeeding in stanching the bleeding of failing homeowners. Economists and government officials agree that the economy and financial markets can't fully revive until there's a halt to the decline in housing prices, a phenomenon that is worsened by foreclosures.
"It doesn't make sense for us to wait" to tackle the problem, said a J.P. Morgan executive, Charles Scharf. "We've heard loud and clear and are listening to what some of the thought leaders around the country are saying." Mr. Scharf runs the retail division, which includes mortgages and branch banking, at J.P. Morgan, the largest U.S. bank in stock-market value.
The move also suggests that banks are realizing they can improve the value of their loan portfolios through mass modifications rather than foreclosures, which tend to produce larger losses. Until now, mortgage holders have been reluctant to renegotiate loans or have been doing so one-by-one, a time-consuming process. The bundling of loans into securities that are then sold to investors further complicates matters.
The announcement by J.P. Morgan steps up pressure on other mortgage companies to respond with relief programs for stressed borrowers, said Stuart Feldstein, president and co-founder of SMR Research Corp., a Hackettstown N.J., firm that specializes in consumer lending. "The precedent has clearly been set and we can expect to see more of these," he said.
Nationwide, 7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010, about triple the usual rate, according to Moody's Economy.com, a research firm. Some 4.3 million of those are expected to lose their homes.
J.P. Morgan's exposure to the problems increased sharply when it acquired the assets of the Seattle-based Washington Mutual. WaMu, which was seized by regulators, had a large exposure to the difficult housing market of California. In taking it over, J.P. Morgan acquired $16 billion of subprime mortgages.
The mortgages affected by J.P. Morgan's program represent 4.7% of the home loans it owns or that are serviced by one of the bank's units, EMC Mortgage Corp. While the program to give these mortgages easier terms is likely to cost J.P. Morgan billions of dollars in interest payments and loan fees, it is also likely to save the bank from the costly and lengthy process of foreclosing homes and selling them. The plan expands upon programs already in place at the bank to help strapped homeowners.
The bank's Mr. Scharf declined to estimate the plan's financial impact on the bank. "Our goal in doing this was to come up with something that we think will lead the industry in helping as much as possible on this issue," he said.
J.P. Morgan's push is especially aimed at so-called option adjustable-rate mortgages, or options ARMs. These allow borrowers to make a minimum payment that may not even cover the interest due -- resulting in a higher loan balance.
Under the plan, option ARMs that are accumulating interest will be replaced with fixed-rate loans that are more stable for borrowers and seen as far less likely to default. J.P. Morgan said it wouldn't begin the foreclosure process on borrowers during the next 90 days, as it opens loan-counseling centers and takes other steps to launch the program.
J.P. Morgan unveiled the plan days after receiving $25 billion in federal capital from the Treasury's program to shore up financial institutions and get credit flowing. Mr. Scharf declined to comment on whether the bank would use any of those funds for the mortgage overhaul. "The stronger you are, the more willing you are to spend money and do a whole series of things," he said, noting that the government cash "certainly makes decisions easier."
Of the two loan-modification pools at rival Bank of America, one targets 265,000 borrowers with all types of mortgages. The other was hashed out with 14 state attorneys generals and involves 400,000 subprime and option-ARM customers serviced by the big lender Countrywide Financial Corp., which Bank of America purchased July 1.
Another big rival bank, Wachovia Corp., acquired roughly $120 billion of option ARMs as part of its 2006 purchase of Golden West Financial Corp. Wachovia initiated a loan-refinancing program before agreeing to its pending takeover by Wells Fargo & Co. That effort targets the option-ARM portfolio.
J.P. Morgan's plan drew cautious optimism from Iowa Attorney General Thomas Miller, who recently called on mortgage lenders to launch broad loan-modification programs.
John Taylor, chief executive of the National Community Reinvestment Coalition, called it "a gutsy move on their part," adding : "They are bending over backward to try to reach out to these people." The coalition represents 600 community groups and has urged the government and industry to help homeowners.
Republican presidential candidate John McCain has gone further than any program in place, proposing a to have the government buy $300 billion in troubled mortgages outright.
By Robin Sidel 11/01/08 Wall Street Journal
JP Morgan Chase & Co. launched an ambitious plan Friday to modify the terms of $70 billion in mortgages for borrowers who are behind on their payments or soon could be.
The move by the New York bank will cover as many as 400,000 borrowers. They'll be moved into loans carrying lower interest rates, smaller principal amounts or other more-affordable terms.
The changes will particularly focus on a type of loan structured in such a way that the borrower's outstanding balance sometimes grows month after month. J.P. Morgan inherited $54 billion of such loans with its takeover of the beleaguered thrift Washington Mutual Inc. in September.
The plan comes amid intense national focus on a root cause of global financial turmoil: rising home foreclosures, and what the role of banks and government should be in helping struggling homeowners. The banking industry is under much political pressure address the foreclosure problem.
Rival Bank of America Corp. has two loan-modification pools in place, one hashed out with state attorneys general. At the government level, after other programs failed to halt the rise in foreclosures, the Federal Deposit Insurance Corp. recently floated a plan that could help three million troubled borrowers; it is being considered by the White House. The FDIC also is assisting strapped borrowers who had mortgages with IndyMac Bancorp, which the FDIC seized this summer.
Such moves would tackle one of the last elements of the global financial upheaval as yet untouched by a major federal program. The mortgage crunch that began in the middle of last year spawned the financial crisis. Big financial players had invested trillions of dollars in securities backed by risky mortgages, which starting in mid-2007 became difficult to value. Banks hobbled by these bad investments reined in lending, spawning the wider credit crunch as a result.
The U.S. government has tackled problems in the banking system and credit markets, but thus far hasn't succeeding in stanching the bleeding of failing homeowners. Economists and government officials agree that the economy and financial markets can't fully revive until there's a halt to the decline in housing prices, a phenomenon that is worsened by foreclosures.
"It doesn't make sense for us to wait" to tackle the problem, said a J.P. Morgan executive, Charles Scharf. "We've heard loud and clear and are listening to what some of the thought leaders around the country are saying." Mr. Scharf runs the retail division, which includes mortgages and branch banking, at J.P. Morgan, the largest U.S. bank in stock-market value.
The move also suggests that banks are realizing they can improve the value of their loan portfolios through mass modifications rather than foreclosures, which tend to produce larger losses. Until now, mortgage holders have been reluctant to renegotiate loans or have been doing so one-by-one, a time-consuming process. The bundling of loans into securities that are then sold to investors further complicates matters.
The announcement by J.P. Morgan steps up pressure on other mortgage companies to respond with relief programs for stressed borrowers, said Stuart Feldstein, president and co-founder of SMR Research Corp., a Hackettstown N.J., firm that specializes in consumer lending. "The precedent has clearly been set and we can expect to see more of these," he said.
Nationwide, 7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010, about triple the usual rate, according to Moody's Economy.com, a research firm. Some 4.3 million of those are expected to lose their homes.
J.P. Morgan's exposure to the problems increased sharply when it acquired the assets of the Seattle-based Washington Mutual. WaMu, which was seized by regulators, had a large exposure to the difficult housing market of California. In taking it over, J.P. Morgan acquired $16 billion of subprime mortgages.
The mortgages affected by J.P. Morgan's program represent 4.7% of the home loans it owns or that are serviced by one of the bank's units, EMC Mortgage Corp. While the program to give these mortgages easier terms is likely to cost J.P. Morgan billions of dollars in interest payments and loan fees, it is also likely to save the bank from the costly and lengthy process of foreclosing homes and selling them. The plan expands upon programs already in place at the bank to help strapped homeowners.
The bank's Mr. Scharf declined to estimate the plan's financial impact on the bank. "Our goal in doing this was to come up with something that we think will lead the industry in helping as much as possible on this issue," he said.
J.P. Morgan's push is especially aimed at so-called option adjustable-rate mortgages, or options ARMs. These allow borrowers to make a minimum payment that may not even cover the interest due -- resulting in a higher loan balance.
Under the plan, option ARMs that are accumulating interest will be replaced with fixed-rate loans that are more stable for borrowers and seen as far less likely to default. J.P. Morgan said it wouldn't begin the foreclosure process on borrowers during the next 90 days, as it opens loan-counseling centers and takes other steps to launch the program.
J.P. Morgan unveiled the plan days after receiving $25 billion in federal capital from the Treasury's program to shore up financial institutions and get credit flowing. Mr. Scharf declined to comment on whether the bank would use any of those funds for the mortgage overhaul. "The stronger you are, the more willing you are to spend money and do a whole series of things," he said, noting that the government cash "certainly makes decisions easier."
Of the two loan-modification pools at rival Bank of America, one targets 265,000 borrowers with all types of mortgages. The other was hashed out with 14 state attorneys generals and involves 400,000 subprime and option-ARM customers serviced by the big lender Countrywide Financial Corp., which Bank of America purchased July 1.
Another big rival bank, Wachovia Corp., acquired roughly $120 billion of option ARMs as part of its 2006 purchase of Golden West Financial Corp. Wachovia initiated a loan-refinancing program before agreeing to its pending takeover by Wells Fargo & Co. That effort targets the option-ARM portfolio.
J.P. Morgan's plan drew cautious optimism from Iowa Attorney General Thomas Miller, who recently called on mortgage lenders to launch broad loan-modification programs.
John Taylor, chief executive of the National Community Reinvestment Coalition, called it "a gutsy move on their part," adding : "They are bending over backward to try to reach out to these people." The coalition represents 600 community groups and has urged the government and industry to help homeowners.
Republican presidential candidate John McCain has gone further than any program in place, proposing a to have the government buy $300 billion in troubled mortgages outright.
Tuesday, October 21, 2008
New Home Builders Help Potential Buyers Raise Credit Scores
Builders Help Buyers to Help Themselves
By Dawn Wotapka
Home builders are working with potential buyers, enrolling them in programs that address everything from credit-report errors to managing debt, in order to raise their credit scores so they can qualify for a mortgage or a better interest rate.
It is another move by a sector desperate to unload inventory as the credit crisis roils the globe, causing lenders to shun borrowers with blemished credit histories and to demand higher credit scores.
Burnishing Buyers
Home builders such as D.R. Horton are turning to credit-enhancement programs to help make potential buyers more attractive to lenders.
Programs address everything from debt-to-income ratios to store-branded cards and budgeting.
Critics say free credit counseling can be had from independent, nonprofit groups with no ties to builders.
The programs, conducted over the Internet and in face-to-face meetings, have recently become "a very, very high focus," said Dean Bloxom, president of imortgage.com, a mortgage banker that works with builder Meritage Homes Corp.
Florida-based Debt Resource USA, which uses certified credit counselors and works with builders such as Hovnanian Enterprises Inc. and M/I Homes Inc., has seen business triple since it started 18 months ago, said Chief Executive David Vizzi. Hovnanian, an industry trailblazer when it rolled out credit-enhancement programs nationwide last year, has more than 100 enrollees.
D.R. Horton Inc., the nation's largest builder by number of annual closings, offers a free credit-improvement program called Home Buyers Club, which assists with credit coaching and analysis and monthly disputes.
Though no one expects the programs to significantly increase sales -- Hovnanian reports just 51 graduates in the last 18 months -- every sale counts for builders as they see earnings plummet, orders tank and cancellations rise as the worst housing correction in decades shows few signs of letting up.
Critics of the programs say credit reports are available for free, and consumers can challenge errors online. In addition, independent groups with no ties to builders offer complimentary assistance and advice.
Consumer Credit Counseling Service of Greater Atlanta Inc. has developed interactive Web-based podcasts, PowerPoint slides, social networking and journals. The nonprofit group suggests all buyers go through prepurchase counseling and a six-hour buyer's workshop.
Builders make their involvement clear to consumers and say they hope the process will build loyalty and lead to a deal for the builder and its mortgage arm.
"It becomes a win-win," said Dan Klinger, president of K. Hovnanian American Mortgage, which doesn't charge potential buyers to work with Debt Resource USA. "We get to sell one of our homes, and the customer gets to clean up his credit and learn good, fiscal responsibility at the same time."
During the housing boom, money flowed freely, even to those with weak credit scores, and builders raked in big profits. But as those buyers defaulted, scores of lenders went out of business and foreclosures swelled to record levels.
Lenders are avoiding risky subprime loans -- which made up 24% of mortgage originations in 2006 -- as well as most of the no-money-down and adjustable-rate mortgages that once inflated sales.
More recently, builders have been hurt by the loss of seller-funded down-payment assistance, in which third parties contribute to the buyer's down payment via the seller. This summer's housing law banned seller-funded down-payment assistance on mortgages insured by the Federal Housing Administration as of Oct. 1, essentially ending the practice.
Qualifying for even a basic 30-year fixed mortgage also has gotten more difficult. Lenders and mortgage insurance companies are scrutinizing credit reports and scores, which detail housing-payment history and length of credit and debt, helping gauge a borrower's risk.
Builders said they screen applicants for their credit-repair programs. They avoid those who refuse to pay bills on time and seek those willing to change payment behavior and aspiring buyers hurt by life events such as a divorce, illness or identity theft.
Everyone involved is aware there is no way to instantly rebuild a tattered score, though addressing errors is a good start. Depending on what needs to be done, the programs can take weeks or months.
The programs address everything from debt to income ratios to why opening a store-branded card at the cash register might not be a good deal. They also teach students about budgeting -- not spending a fortune on furniture for the new house or forgoing that daily latte to build up a safety net should a pipe break or the homeowner get laid off.
By Dawn Wotapka
Home builders are working with potential buyers, enrolling them in programs that address everything from credit-report errors to managing debt, in order to raise their credit scores so they can qualify for a mortgage or a better interest rate.
It is another move by a sector desperate to unload inventory as the credit crisis roils the globe, causing lenders to shun borrowers with blemished credit histories and to demand higher credit scores.
Burnishing Buyers
Home builders such as D.R. Horton are turning to credit-enhancement programs to help make potential buyers more attractive to lenders.
Programs address everything from debt-to-income ratios to store-branded cards and budgeting.
Critics say free credit counseling can be had from independent, nonprofit groups with no ties to builders.
The programs, conducted over the Internet and in face-to-face meetings, have recently become "a very, very high focus," said Dean Bloxom, president of imortgage.com, a mortgage banker that works with builder Meritage Homes Corp.
Florida-based Debt Resource USA, which uses certified credit counselors and works with builders such as Hovnanian Enterprises Inc. and M/I Homes Inc., has seen business triple since it started 18 months ago, said Chief Executive David Vizzi. Hovnanian, an industry trailblazer when it rolled out credit-enhancement programs nationwide last year, has more than 100 enrollees.
D.R. Horton Inc., the nation's largest builder by number of annual closings, offers a free credit-improvement program called Home Buyers Club, which assists with credit coaching and analysis and monthly disputes.
Though no one expects the programs to significantly increase sales -- Hovnanian reports just 51 graduates in the last 18 months -- every sale counts for builders as they see earnings plummet, orders tank and cancellations rise as the worst housing correction in decades shows few signs of letting up.
Critics of the programs say credit reports are available for free, and consumers can challenge errors online. In addition, independent groups with no ties to builders offer complimentary assistance and advice.
Consumer Credit Counseling Service of Greater Atlanta Inc. has developed interactive Web-based podcasts, PowerPoint slides, social networking and journals. The nonprofit group suggests all buyers go through prepurchase counseling and a six-hour buyer's workshop.
Builders make their involvement clear to consumers and say they hope the process will build loyalty and lead to a deal for the builder and its mortgage arm.
"It becomes a win-win," said Dan Klinger, president of K. Hovnanian American Mortgage, which doesn't charge potential buyers to work with Debt Resource USA. "We get to sell one of our homes, and the customer gets to clean up his credit and learn good, fiscal responsibility at the same time."
During the housing boom, money flowed freely, even to those with weak credit scores, and builders raked in big profits. But as those buyers defaulted, scores of lenders went out of business and foreclosures swelled to record levels.
Lenders are avoiding risky subprime loans -- which made up 24% of mortgage originations in 2006 -- as well as most of the no-money-down and adjustable-rate mortgages that once inflated sales.
More recently, builders have been hurt by the loss of seller-funded down-payment assistance, in which third parties contribute to the buyer's down payment via the seller. This summer's housing law banned seller-funded down-payment assistance on mortgages insured by the Federal Housing Administration as of Oct. 1, essentially ending the practice.
Qualifying for even a basic 30-year fixed mortgage also has gotten more difficult. Lenders and mortgage insurance companies are scrutinizing credit reports and scores, which detail housing-payment history and length of credit and debt, helping gauge a borrower's risk.
Builders said they screen applicants for their credit-repair programs. They avoid those who refuse to pay bills on time and seek those willing to change payment behavior and aspiring buyers hurt by life events such as a divorce, illness or identity theft.
Everyone involved is aware there is no way to instantly rebuild a tattered score, though addressing errors is a good start. Depending on what needs to be done, the programs can take weeks or months.
The programs address everything from debt to income ratios to why opening a store-branded card at the cash register might not be a good deal. They also teach students about budgeting -- not spending a fortune on furniture for the new house or forgoing that daily latte to build up a safety net should a pipe break or the homeowner get laid off.
Thursday, October 09, 2008
There's Work Involved in Buying a Short Sale
Selling for less
Lenders can take so long to approve a mortgage that buyers just fade away.
Margaret Jackson The Denver Post
Article Last Updated: 10/04/2008 09:15:22 AM MDT
Catherine Bacchus has had a frustrating nine months trying to unload her Strasburg home in a short sale.
Three times she's had buyers accepted by the lender. And three times the sale has fallen through.
A short sale occurs when the proceeds of a real estate sale fall short of the balance owed on the property.
"We are on our fourth actual buyer that the lender accepted," said Laura Lomba-Berg, a broker with Your Castle Real Estate who is listing the four-bedroom, two-bath house. "The biggest problem is how long (the lenders) take to evaluate things."
In the first three cases, the bank took so long that the buyers were no longer qualified for a loan for which they had already been approved. In two of the cases, market conditions changed and in the third, a health problem prevented the buyer from getting the mortgage.
"The banks are not living in a very logical realm," Lomba-Berg said. "Part of it is the unrealistic information they are basing their decisions on. They're sitting in another part of the world and pulling up desktop comparables."
Comparing real estate sales in a given neighborhood is a standard way of establishing home values. Comparables are often found through computer databases.
In new developments like the Wolf Creek Run neighborhood where Bacchus' home is, the builders are still trying to sell homes and are able to slash prices.
Bacchus, who hasn't made a mortgage payment since July 2007, bought the 1,500-square-foot house for $207,000 in December 2005. She put it on the market Jan. 1 for $138,000.
"Her house was competing with a brand new house, fully furnished for $155,000," Lomba-Berg said. "People are going to gravitate toward that new house with all that furniture."
But often, it's just that the banks are so busy they've had to create special divisions to deal with the properties they own, said mortgage banker Jim Smith of American Guaranty Mortgage.
"If your offer and the way it's structured isn't complete and it isn't packaged correctly, you're going to have some hiccups and it's going to be a rough road," Smith said.
The key, he said, is to be fully preapproved and underwritten before the real estate agent even puts an offer in.
"It's a waste of time otherwise," he said. "You need to show the bank that you're qualified and ready to buy."
Mortgage broker Mike Oswald of American Home Funding said banks have become less flexible in providing loans to homebuyers, so it's a good idea to get the loan first.
"It's always been get a Realtor, find a house, go get a loan," Oswald said. "Now it's the opposite. Now, it's get a loan, get a house."
Will Berry of Foreclosure Brokers LLC said often real estate agents are more harmful than helpful.
"They believe they're going to protect their buyer at all costs because they believe it's a buyers' market," said Berry, whose team helps homeowners and real estate agents in closing pre-foreclosure and short sale transactions. "But when it comes to short sales, it's not a buyers' market."
One reason is that the seller often has not paid — and is unable to pay — the property taxes or homeowners association fees, and the lender isn't willing to pay.
"We've seen buyers walk away from transactions after we have worked for months to get the offer approved because they're refusing to come up with an extra $600 at closing," Berry said.
Lenders can take so long to approve a mortgage that buyers just fade away.
Margaret Jackson The Denver Post
Article Last Updated: 10/04/2008 09:15:22 AM MDT
Catherine Bacchus has had a frustrating nine months trying to unload her Strasburg home in a short sale.
Three times she's had buyers accepted by the lender. And three times the sale has fallen through.
A short sale occurs when the proceeds of a real estate sale fall short of the balance owed on the property.
"We are on our fourth actual buyer that the lender accepted," said Laura Lomba-Berg, a broker with Your Castle Real Estate who is listing the four-bedroom, two-bath house. "The biggest problem is how long (the lenders) take to evaluate things."
In the first three cases, the bank took so long that the buyers were no longer qualified for a loan for which they had already been approved. In two of the cases, market conditions changed and in the third, a health problem prevented the buyer from getting the mortgage.
"The banks are not living in a very logical realm," Lomba-Berg said. "Part of it is the unrealistic information they are basing their decisions on. They're sitting in another part of the world and pulling up desktop comparables."
Comparing real estate sales in a given neighborhood is a standard way of establishing home values. Comparables are often found through computer databases.
In new developments like the Wolf Creek Run neighborhood where Bacchus' home is, the builders are still trying to sell homes and are able to slash prices.
Bacchus, who hasn't made a mortgage payment since July 2007, bought the 1,500-square-foot house for $207,000 in December 2005. She put it on the market Jan. 1 for $138,000.
"Her house was competing with a brand new house, fully furnished for $155,000," Lomba-Berg said. "People are going to gravitate toward that new house with all that furniture."
But often, it's just that the banks are so busy they've had to create special divisions to deal with the properties they own, said mortgage banker Jim Smith of American Guaranty Mortgage.
"If your offer and the way it's structured isn't complete and it isn't packaged correctly, you're going to have some hiccups and it's going to be a rough road," Smith said.
The key, he said, is to be fully preapproved and underwritten before the real estate agent even puts an offer in.
"It's a waste of time otherwise," he said. "You need to show the bank that you're qualified and ready to buy."
Mortgage broker Mike Oswald of American Home Funding said banks have become less flexible in providing loans to homebuyers, so it's a good idea to get the loan first.
"It's always been get a Realtor, find a house, go get a loan," Oswald said. "Now it's the opposite. Now, it's get a loan, get a house."
Will Berry of Foreclosure Brokers LLC said often real estate agents are more harmful than helpful.
"They believe they're going to protect their buyer at all costs because they believe it's a buyers' market," said Berry, whose team helps homeowners and real estate agents in closing pre-foreclosure and short sale transactions. "But when it comes to short sales, it's not a buyers' market."
One reason is that the seller often has not paid — and is unable to pay — the property taxes or homeowners association fees, and the lender isn't willing to pay.
"We've seen buyers walk away from transactions after we have worked for months to get the offer approved because they're refusing to come up with an extra $600 at closing," Berry said.
Wednesday, October 08, 2008
One in Six Homeowners "Under Water"
OCTOBER 8, 2008
Housing Pain Gauge: Nearly 1 in 6 Owners 'Under Water'
More Defaults and Foreclosures Are Likely as Borrowers With Greater Debt Than Value in Their Homes Are Put in a Tight Spot
ByJames R. Hagerty and Ruth Simon
The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year.
The result of homeowners being "under water" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.
And having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.
About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody's Economy.com.
The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm's chief economist, Mark Zandi, who adds that "it is very possible that there will ultimately be more homeowners under water in this period than any time in our history."
Among people who bought within the past five years, it's worse: 29% are under water on their mortgages, according to an estimate by real-estate Web site Zillow.com.
The majority of homeowners still have equity, and even among those who don't, many continue to make their mortgage payments on time. The financial-bailout legislation could at least "keep things from getting much worse" by helping banks avoid the need to tighten credit further, says Celia Chen, director of housing economics at Economy.com. Still, she expects housing credit to remain tight and home prices to decline in much of the country for another year or so.
Prices are back to 2003 levels in the San Diego and Boston metropolitan areas, and back to 2004 levels in Las Vegas, Los Angeles, San Francisco, Fort Lauderdale, Fla., and Minneapolis, according to First American CoreLogic, a data firm in Santa Ana, Calif.
Stephanie and Jason Kirschenman thought they were being prudent when they agreed in late 2004 to buy a new four-bedroom home in Lodi, Calif., for $458,000. They put a substantial 20% down and chose a loan with a fixed interest rate for the first 10 years. Two years later, they took out a second mortgage to pay off some bills.
At the time, the home was appraised for about $550,000. But a mortgage broker recently estimated its value at well below the $380,000 the family owes on it, says Ms. Kirschenman. "We were quite shocked," she says.
The Kirschenmans, who both work for a company that makes trailer hitches, thought about sending the keys to the lender. But their financial planner, Christopher Olsen, helped persuade them to stick with the house, noting that they could still afford the payments.
Others aren't so lucky. Among mortgages on one- to four-family homes, 9.16% were a month or more overdue or were in foreclosure in the second quarter, according to the Mortgage Bankers Association. That compared with 6.52% a year before and was the highest level since the association began such surveys 39 years ago.
Falling values have contributed to a sharp pullback in mortgage lending. In the third quarter, mortgage lending fell to the lowest level in eight years -- down 44% in a year -- says the publication Inside Mortgage Finance.
One reason is that as home values slip, growing numbers of would-be borrowers lack sufficient equity to refinance. The falling values also make mortgage lending look riskier to banks, spurring them to tighten credit standards.
Most mortgages in default were issued in 2006 and 2007, when lending standards were loosest and the housing market was peaking. Many who bought then made small down payments or none, so they had little equity in their homes from the start.
The performance of loans made earlier is getting worse, too, as price declines deplete the equity people built up. In Las Vegas, 6% of home loans made in 2004 are now 30 days or more overdue, up from 3.7% a year earlier, according to research firm LPS Applied Analytics.
In July, Congress enacted legislation designed to help borrowers who owe more than their homes are worth by allowing them to refinance into a government-backed loan, provided their mortgage company forgives part of their principal. It's not clear how many borrowers the program will help, because before reducing the principal, lenders would almost always try first to freeze or reduce borrowers' interest rate to make payments more affordable, says Tom Deutsch, deputy executive director of the American Securitization Forum, an industry group.
In contrast with the 12 million home borrowers estimated to be under water, 64 million have equity in their homes. These include 24 million households who own their homes free and clear, and 40 million whose homes remain worth more than is owed on them.
Even so, some borrowers fret that declining prices and tighter lending standards could make it hard for them to tap their equity.
Steven Schneider, a mortgage broker in Miami, bought his home at the end of 1992. When he refinanced about four years ago, he pulled out $150,000 in cash that he intended to use to build an addition. The transaction raised his total debt to about $350,000, at a time when his home had a value of about $650,000.
Recently, Mr. Schneider pulled out roughly $90,000 by tapping a home-equity line of credit. He says he put the funds in a money-market account that yields less than the 5% interest rate on the loan. "I was afraid they were going to shut down" access to the credit line, says Mr. Schneider. He figures his home, once valued at $750,000, now is worth about $600,000.
How much pain homeowners feel varies greatly from place to place. The most severe drops in home values are in parts of California, Florida, Nevada, Arizona and other areas where speculation pushed prices up and builders far overestimated demand.
Within metro areas, neighborhoods with short commutes are holding up better than others. And in many parts of Texas and North Carolina, home prices have continued to rise slowly, have leveled off or have declined only modestly.
On a national basis, home prices peaked in mid-2006 after rising 86% since January 2000, according to the First American index. Since peaking, that index has fallen 13%.
The declines have made homes more affordable, bringing prices in many areas closer to their long-term relationship to incomes. In the second quarter, the median home price of about $203,000 was 1.9 times average pretax household income, according to Economy.com. That was close to 1.87 times income for 1985 through 2000, prior to the housing boom.
Housing markets don't tend to turn around quickly. The price slump in California in the early 1990s, for instance, was a long grind. According to the S&P/Case-Shiller home-price indexes, Los Angeles prices peaked in June 1990 and didn't bottom until March 1996. They didn't get back to their 1990 peak until 2000.
Housing Pain Gauge: Nearly 1 in 6 Owners 'Under Water'
More Defaults and Foreclosures Are Likely as Borrowers With Greater Debt Than Value in Their Homes Are Put in a Tight Spot
ByJames R. Hagerty and Ruth Simon
The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year.
The result of homeowners being "under water" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.
And having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.
About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody's Economy.com.
The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm's chief economist, Mark Zandi, who adds that "it is very possible that there will ultimately be more homeowners under water in this period than any time in our history."
Among people who bought within the past five years, it's worse: 29% are under water on their mortgages, according to an estimate by real-estate Web site Zillow.com.
The majority of homeowners still have equity, and even among those who don't, many continue to make their mortgage payments on time. The financial-bailout legislation could at least "keep things from getting much worse" by helping banks avoid the need to tighten credit further, says Celia Chen, director of housing economics at Economy.com. Still, she expects housing credit to remain tight and home prices to decline in much of the country for another year or so.
Prices are back to 2003 levels in the San Diego and Boston metropolitan areas, and back to 2004 levels in Las Vegas, Los Angeles, San Francisco, Fort Lauderdale, Fla., and Minneapolis, according to First American CoreLogic, a data firm in Santa Ana, Calif.
Stephanie and Jason Kirschenman thought they were being prudent when they agreed in late 2004 to buy a new four-bedroom home in Lodi, Calif., for $458,000. They put a substantial 20% down and chose a loan with a fixed interest rate for the first 10 years. Two years later, they took out a second mortgage to pay off some bills.
At the time, the home was appraised for about $550,000. But a mortgage broker recently estimated its value at well below the $380,000 the family owes on it, says Ms. Kirschenman. "We were quite shocked," she says.
The Kirschenmans, who both work for a company that makes trailer hitches, thought about sending the keys to the lender. But their financial planner, Christopher Olsen, helped persuade them to stick with the house, noting that they could still afford the payments.
Others aren't so lucky. Among mortgages on one- to four-family homes, 9.16% were a month or more overdue or were in foreclosure in the second quarter, according to the Mortgage Bankers Association. That compared with 6.52% a year before and was the highest level since the association began such surveys 39 years ago.
Falling values have contributed to a sharp pullback in mortgage lending. In the third quarter, mortgage lending fell to the lowest level in eight years -- down 44% in a year -- says the publication Inside Mortgage Finance.
One reason is that as home values slip, growing numbers of would-be borrowers lack sufficient equity to refinance. The falling values also make mortgage lending look riskier to banks, spurring them to tighten credit standards.
Most mortgages in default were issued in 2006 and 2007, when lending standards were loosest and the housing market was peaking. Many who bought then made small down payments or none, so they had little equity in their homes from the start.
The performance of loans made earlier is getting worse, too, as price declines deplete the equity people built up. In Las Vegas, 6% of home loans made in 2004 are now 30 days or more overdue, up from 3.7% a year earlier, according to research firm LPS Applied Analytics.
In July, Congress enacted legislation designed to help borrowers who owe more than their homes are worth by allowing them to refinance into a government-backed loan, provided their mortgage company forgives part of their principal. It's not clear how many borrowers the program will help, because before reducing the principal, lenders would almost always try first to freeze or reduce borrowers' interest rate to make payments more affordable, says Tom Deutsch, deputy executive director of the American Securitization Forum, an industry group.
In contrast with the 12 million home borrowers estimated to be under water, 64 million have equity in their homes. These include 24 million households who own their homes free and clear, and 40 million whose homes remain worth more than is owed on them.
Even so, some borrowers fret that declining prices and tighter lending standards could make it hard for them to tap their equity.
Steven Schneider, a mortgage broker in Miami, bought his home at the end of 1992. When he refinanced about four years ago, he pulled out $150,000 in cash that he intended to use to build an addition. The transaction raised his total debt to about $350,000, at a time when his home had a value of about $650,000.
Recently, Mr. Schneider pulled out roughly $90,000 by tapping a home-equity line of credit. He says he put the funds in a money-market account that yields less than the 5% interest rate on the loan. "I was afraid they were going to shut down" access to the credit line, says Mr. Schneider. He figures his home, once valued at $750,000, now is worth about $600,000.
How much pain homeowners feel varies greatly from place to place. The most severe drops in home values are in parts of California, Florida, Nevada, Arizona and other areas where speculation pushed prices up and builders far overestimated demand.
Within metro areas, neighborhoods with short commutes are holding up better than others. And in many parts of Texas and North Carolina, home prices have continued to rise slowly, have leveled off or have declined only modestly.
On a national basis, home prices peaked in mid-2006 after rising 86% since January 2000, according to the First American index. Since peaking, that index has fallen 13%.
The declines have made homes more affordable, bringing prices in many areas closer to their long-term relationship to incomes. In the second quarter, the median home price of about $203,000 was 1.9 times average pretax household income, according to Economy.com. That was close to 1.87 times income for 1985 through 2000, prior to the housing boom.
Housing markets don't tend to turn around quickly. The price slump in California in the early 1990s, for instance, was a long grind. According to the S&P/Case-Shiller home-price indexes, Los Angeles prices peaked in June 1990 and didn't bottom until March 1996. They didn't get back to their 1990 peak until 2000.
Tuesday, October 07, 2008
Two Points of View: Is It Time To Buy a Home?
Time To Buy? Contrasting Views
By Erin Peterson • Bankrate.com
The housing market's tumble has left many people wondering if it's time to snap up bargains or if it's still better to stay on the sidelines. Two experts on opposite sides of the spectrum give their best advice to would-be buyers.
Danielle Lynn Babb, Ph.D., is an author, entrepreneur and real estate consultant. A California native, she has appeared frequently on national television and radio. She is the author of several books, including "Finding Foreclosures: An Insiders Guide to Cashin' In on this Hidden Market," and "Real Estate v. 2.0."
Warren R. Bland, Ph.D., is a professor of geography at California State University, Northridge, and has traveled doing geographical research across North America. Bland has also authored books on the topic, including "Retire in Style: 60 Outstanding Places Across the USA and Canada."
Dr. Dani Babb: 'Go for it'
With all the uncertainty in the housing market, buyers have been staying away in droves.
While the reaction may be understandable, it's not necessarily smart.
Some buyers should be taking advantage of the situation -- not sitting on the sidelines and waiting for prices to fall even more, says Babb, real estate analyst. It's not necessarily a wise decision. If you've got good credit, a plan to stay in the new home for a few years and your dream house in your sights, snap it up.
"If you're renting right now, there's a really good chance your mortgage won't be much more than your rent in many areas," says Babb. "You'll get a tax break, and if you stay a few years, you'll see it start to appreciate as well.
While we may not have seen the market bottom out just yet, that's not significant for people who plan on staying in a home for the long haul. "There is a chance that more foreclosures will put downward pressure on prices," she says. "But if you're going to be holding that property for more than five years, another $10,000 or even $20,000 drop isn't going to matter much." The market will recover, and your house will appreciate.
You've also got selection on your side. Homebuilders are offering steep discounts and posh upgrades on brand-new digs. Fixer-uppers and foreclosed properties are selling for a song. Eager sellers are offering incentives from all-expenses paid tropical vacations to brand-new cars to help move their property.
Babb argues that the stricter lending requirements may be a boon for buyers as well. While a prospective buyer might look at the housing market today and worry that an exotic loan might leave them in foreclosure a few years from now, Babb says it's far less likely. You may not get a loan for that million-dollar home, but it's probably because you couldn't have paid for it, anyway.
"Tighter lending standards are a good thing overall, because it helps make certain that a borrower really can afford the home," she says.
Unlike the hot market of a few years ago, where buyers had to put in offers -- often above the selling price -- just days after a house appeared on the market, buyers today are in the driver's seat. You can take your time finding a house, visit it a few times and do necessary research before putting in an offer. And you'll likely be able to haggle with the seller to drop the price, do repairs or pay for closing costs.
Finally, Babb notes that interest rates remain at low levels, which means lower monthly mortgage payments. "As rates drop, those who qualify will find it even less expensive to buy the home of their dreams." Lock in a low rate today and you'll reap the benefits for years to come.
While Babb is bullish on buying, she adds a few caveats. "If you want to buy a property and flip it in six months, now is not the time to get back in the market," she says. "And if you've got a low credit score or are cash-poor, I'd recommend staying away from homes." She also recommends staying away from neighborhoods that have many foreclosures and areas that have sustained significant job losses during the past few years.
Since the market won't likely recover overnight, people who aren't quite ready to buy still have options. Spend the next few months polishing your credentials and get in the market. "Improve your credit score, build up your savings, and go for it," she says.
Dr. Warren Bland: 'Resist temptation to buy'
Bland says that when it comes to the housing slump, we've only seen the tip of the iceberg.
If you think the housing slump is bad now, just wait. Bland says it's about to get much, much worse. Unless you've got no choice, plan to stay put. Prices will likely drop much further and the deals will get even sweeter.
Bland says it's useful to start with a big-picture view: Home prices in some areas doubled or even tripled during the boom during the past several years. Prices have started to drop, but they're still high, he says. "A year or two ago, prices had reached wildly unsustainable levels, and a lot of it was fueled by speculation and funny-money loans," he says. "Prices may have dropped 10 percent or even 25 percent in some cases, but I think they can still drop another 20 (percent) to 40 percent, depending on the market."
As the credit market shrinks, so does the universe of potential buyers who have the means to pay high prices. Spiking prices on food, gasoline and heating oil have taken their toll on consumers. They're worried about recession and losing their jobs, which Bland argues will further dampen demand. "I'm certain we're still nearer to the top of the market than the bottom," he says. "If I had any flexibility, I would resist the temptation to buy now."
The high housing inventories in many markets suggest a significant imbalance between buyers and sellers, according to Bland. Sellers are looking at the prices their neighbors got a year or two ago to justify their prices.
Buyers, meanwhile, see those prices and wait on the sidelines. As bad economic news piles up, they feel little sense of urgency.
While any one of these factors might have an effect on housing prices, all of these in combination may end up being devastating for sellers.
"The mortgage crisis, the swelling inventories, and the threat of recession are combining to create a 'perfect storm' that moves us to a new, lower equilibrium," he says.
Bland points out history is on buyers' side. It took about four years to recover from the previous housing slump in the late 1980s and early 1990s -- which he says suggests there will be a few more years of pain in this downturn before prices begin to stabilize.
Many buyers recognize that it's even more important than ever for a house to be a good investment.
"The traditional pension is disappearing, and with the debt burdens that most people are carrying, it's increasingly difficult for people to save for retirement," he says. "A house is a big asset that can potentially yield cash at retirement through downsizing, relocating to someplace cheaper or taking out cash to invest it."
Bland says he's confident that good things will come to those who wait before buying, but he says there are risks. "Interest rates may go up in the future," he cautions. "And depending how much they go up, that can at least partially undo the advantage of lower prices."
Overall, he says, don't buy simply because you feel the market may be close to the bottom. "Consider whether or not you'd be happy with your home if you saw 20 percent or more of your equity vanish," he says. "I would definitely urge patience."
By Erin Peterson • Bankrate.com
The housing market's tumble has left many people wondering if it's time to snap up bargains or if it's still better to stay on the sidelines. Two experts on opposite sides of the spectrum give their best advice to would-be buyers.
Danielle Lynn Babb, Ph.D., is an author, entrepreneur and real estate consultant. A California native, she has appeared frequently on national television and radio. She is the author of several books, including "Finding Foreclosures: An Insiders Guide to Cashin' In on this Hidden Market," and "Real Estate v. 2.0."
Warren R. Bland, Ph.D., is a professor of geography at California State University, Northridge, and has traveled doing geographical research across North America. Bland has also authored books on the topic, including "Retire in Style: 60 Outstanding Places Across the USA and Canada."
Dr. Dani Babb: 'Go for it'
With all the uncertainty in the housing market, buyers have been staying away in droves.
While the reaction may be understandable, it's not necessarily smart.
Some buyers should be taking advantage of the situation -- not sitting on the sidelines and waiting for prices to fall even more, says Babb, real estate analyst. It's not necessarily a wise decision. If you've got good credit, a plan to stay in the new home for a few years and your dream house in your sights, snap it up.
"If you're renting right now, there's a really good chance your mortgage won't be much more than your rent in many areas," says Babb. "You'll get a tax break, and if you stay a few years, you'll see it start to appreciate as well.
While we may not have seen the market bottom out just yet, that's not significant for people who plan on staying in a home for the long haul. "There is a chance that more foreclosures will put downward pressure on prices," she says. "But if you're going to be holding that property for more than five years, another $10,000 or even $20,000 drop isn't going to matter much." The market will recover, and your house will appreciate.
You've also got selection on your side. Homebuilders are offering steep discounts and posh upgrades on brand-new digs. Fixer-uppers and foreclosed properties are selling for a song. Eager sellers are offering incentives from all-expenses paid tropical vacations to brand-new cars to help move their property.
Babb argues that the stricter lending requirements may be a boon for buyers as well. While a prospective buyer might look at the housing market today and worry that an exotic loan might leave them in foreclosure a few years from now, Babb says it's far less likely. You may not get a loan for that million-dollar home, but it's probably because you couldn't have paid for it, anyway.
"Tighter lending standards are a good thing overall, because it helps make certain that a borrower really can afford the home," she says.
Unlike the hot market of a few years ago, where buyers had to put in offers -- often above the selling price -- just days after a house appeared on the market, buyers today are in the driver's seat. You can take your time finding a house, visit it a few times and do necessary research before putting in an offer. And you'll likely be able to haggle with the seller to drop the price, do repairs or pay for closing costs.
Finally, Babb notes that interest rates remain at low levels, which means lower monthly mortgage payments. "As rates drop, those who qualify will find it even less expensive to buy the home of their dreams." Lock in a low rate today and you'll reap the benefits for years to come.
While Babb is bullish on buying, she adds a few caveats. "If you want to buy a property and flip it in six months, now is not the time to get back in the market," she says. "And if you've got a low credit score or are cash-poor, I'd recommend staying away from homes." She also recommends staying away from neighborhoods that have many foreclosures and areas that have sustained significant job losses during the past few years.
Since the market won't likely recover overnight, people who aren't quite ready to buy still have options. Spend the next few months polishing your credentials and get in the market. "Improve your credit score, build up your savings, and go for it," she says.
Dr. Warren Bland: 'Resist temptation to buy'
Bland says that when it comes to the housing slump, we've only seen the tip of the iceberg.
If you think the housing slump is bad now, just wait. Bland says it's about to get much, much worse. Unless you've got no choice, plan to stay put. Prices will likely drop much further and the deals will get even sweeter.
Bland says it's useful to start with a big-picture view: Home prices in some areas doubled or even tripled during the boom during the past several years. Prices have started to drop, but they're still high, he says. "A year or two ago, prices had reached wildly unsustainable levels, and a lot of it was fueled by speculation and funny-money loans," he says. "Prices may have dropped 10 percent or even 25 percent in some cases, but I think they can still drop another 20 (percent) to 40 percent, depending on the market."
As the credit market shrinks, so does the universe of potential buyers who have the means to pay high prices. Spiking prices on food, gasoline and heating oil have taken their toll on consumers. They're worried about recession and losing their jobs, which Bland argues will further dampen demand. "I'm certain we're still nearer to the top of the market than the bottom," he says. "If I had any flexibility, I would resist the temptation to buy now."
The high housing inventories in many markets suggest a significant imbalance between buyers and sellers, according to Bland. Sellers are looking at the prices their neighbors got a year or two ago to justify their prices.
Buyers, meanwhile, see those prices and wait on the sidelines. As bad economic news piles up, they feel little sense of urgency.
While any one of these factors might have an effect on housing prices, all of these in combination may end up being devastating for sellers.
"The mortgage crisis, the swelling inventories, and the threat of recession are combining to create a 'perfect storm' that moves us to a new, lower equilibrium," he says.
Bland points out history is on buyers' side. It took about four years to recover from the previous housing slump in the late 1980s and early 1990s -- which he says suggests there will be a few more years of pain in this downturn before prices begin to stabilize.
Many buyers recognize that it's even more important than ever for a house to be a good investment.
"The traditional pension is disappearing, and with the debt burdens that most people are carrying, it's increasingly difficult for people to save for retirement," he says. "A house is a big asset that can potentially yield cash at retirement through downsizing, relocating to someplace cheaper or taking out cash to invest it."
Bland says he's confident that good things will come to those who wait before buying, but he says there are risks. "Interest rates may go up in the future," he cautions. "And depending how much they go up, that can at least partially undo the advantage of lower prices."
Overall, he says, don't buy simply because you feel the market may be close to the bottom. "Consider whether or not you'd be happy with your home if you saw 20 percent or more of your equity vanish," he says. "I would definitely urge patience."
Monday, September 29, 2008
The Basics of Being a Landlord
Renting Your Home Carries Risks
By Lora Shin • Bankrate.com
Stephanie Smith couldn't sell her home.
Smith, her husband Mike, and their three children moved from Woods Cross, Utah, to Duvall, Wash., in 2007 after Mike was offered a Washington-based job.
In 2005, the Smiths paid $195,000 for their four-bedroom new construction home in Woods Cross and had almost no equity. So, the couple needed to sell the house for at least $250,000 to bring down the monthly payment on their new home in more expensive Duvall.
But in Woods Cross, the housing market turned sour.
"All of a sudden there was a dip," Smith says. "In our neighborhood, most people sold their houses within a week. But suddenly there were a lot of houses for sale and nobody was buying anything."
Because the Smiths couldn't sell the Woods Cross home, they took another tack: They decided to rent out the house and serve as long-distance landlords.
However, the decision to rent created new issues. In the past year, the Smiths have gone through two renters. They barely make enough in rent to cover their Utah mortgage.
The Smiths rely on Mike's brother to do repairs on the home. They hope to sell it -- to either the current renters or to new buyers -- this fall.
But living in two states away makes things more difficult, Smith says.
"I can't see the house, I have no idea what's going on," Smith says. "What does it look like? I can't pop in and just check.
"I'm so far away, there's hardly anything I can do."
Sell or rent
The Smiths are hardly the only couple to suddenly and unexpectedly become long-distance landlords. When faced with both a relocation and a house that won't sell, some owners decide renting the house is the only option left.
Such a decision should not be taken lightly, experts warn.
While the Smiths haven't faced any disastrous scenarios as landlords, others living thousands of miles away aren't so lucky. Mansion-sized headaches can include destructive tenants, missing rent and eviction notices.
“There are two ways you really get to know someone -- when you marry them and when you rent to them.”
Denny Grimes, a Fort Myers, Fla., real estate agent and real estate columnist for the Fort Myers News-Press, says long-distance landlords must remove the rose-colored glasses and prepare for the realities of turning their home into a rental.
"When people make a decision to rent, most make the mistake of not renting property like a business," Grimes says.
He shares a real estate saying that underscores the challenges facing long-distance landlords.
"There are two ways you really get to know someone -- when you marry them and when you rent to them," Grimes says.
Dale Siegel, a real estate attorney and mortgage broker with Circle Mortgage Group in White Plains, N.Y., agrees that homeowners need to tread carefully before jumping into the landlord business.
"If you plan on renting, make sure you can cover your monthly nut," Siegel says, referring to the cost of principle, interest, taxes, insurance and unexpected repairs.
"If not, how much will renting cost you each month?" Siegel asks.
Before deciding to rent out the house, an owner should closely look at the competition's rent and decide whether the market rates are high enough for the owner to break even.
In areas glutted with new construction or large-scale developments, it can be hard to generate the level of rent necessary to cover expenses.
High vacancy rates also tend to depress rents. Rental vacancy rates are highest in the U.S. South at 13 percent and lowest in the West at 6.9 percent, according to the Department of Commerce's Census Bureau. The Midwest (10.6 percent) and Northeast (7.4 percent) fall between the two.
Still, renting out the house at a rate that doesn't quite cover expenses could be preferable to selling the house at a huge discount, Siegel says.
"It might be better than taking a big loss," he says.
Expert help
Homeowners who become long-distance landlords overnight need to follow the basic rules of finding good tenants.
Rather than just renting to anyone, Grimes urges landlords to ask prospective tenants to fill out an application with references who can attest to a tenant's history of paying rent on time.
Grimes also recommends running a credit report on a prospective tenant and using a rental contract that spells out the terms of the rental agreement.
These contracts often are available in state-by-state layman's books available at libraries and bookstores. Laws vary by state, so it's important to choose the appropriate contract.
Including damage clauses and documents that spell out late payment fees (or on-time payment incentives) and eviction procedures can assist the absentee homeowner if trouble arises.
"Don't waive those requirements, thinking it's cheaper in the long run to get somebody in there," Grimes says. "If they're not paying their bills other places, they won't be paying you. Go in with your eyes open."
"If you think finding a tenant is hard," Grimes says, "try getting rid of one."
Long-distance landlords also face some unique challenges. For this reason, owners who are relocating and considering renting out their homes may benefit from consulting with specialists before making any final decisions.
For example, a tax adviser can share how deductions may change as a result of moving out of a primary residence and renting it. Property taxes may increase now that the home is being used as a rental instead of serving as the owner's primary residence.
Homeowners who become landlords also should ask lenders about any new rules that may affect them. Siegel says many lenders recently tightened standards for borrowers who intend to buy a second home while renting out their first property.
In such cases, a lender might do an appraisal of the first house to more accurately gauge whether or not the homeowner is likely to get a decent amount of rent for the property, Siegel says.
Or, the lender may require documented proof of a renter and rental income for the first house before providing mortgage insurance on a second home.
Property management: A solution?
Some long-distance landlords worry about how they'll address day-to-day emergencies when they live so far away. Others don't possess the expertise or stomach for doing landlord duties.
In such situations, Grimes suggests hiring a professional property manager as a practical alternative.
"When the toilet breaks, they get the call," he says.
Professional property management companies screen potential renters, make sure rent arrives on time, perform minor repairs and thoroughly check properties for wear and tear. In exchange, they take 5 percent to 10 percent of gross rent received.
While this can cut into the owner's profit -- or increase the owner's debt if the rent isn't high enough to cover the owner's costs -- it can provide peace of mind, Grimes says.
- advertisement -
"For absentee owners, there's a difference between handling a rental and having boots on the ground," Grimes says.
To preserve value and make sure the front lawn stays sales-ready, homeowners often need someone willing to thoroughly examine the home inside and out.
While neighbors, friends and family may be able to do quick spot-checks, they won't be as invested as someone paid to do so.
And some property management companies are headed by real estate agents, so they can do double-duty when it's time to sell.
Of course, not all property management companies provide high-quality services.
Before choosing a property management company, it's important to ask the right questions. Mark Heppard, president of Mutual Property Management in Farmington, Mich., suggests the following questions.
14 questions to ask a property manager
1. Do you work with the owners of single-family homes or condos? Can you provide references?
2. How do you communicate long-distance (e.g., e-mail, phone, letter) and on which topics?
3. Can I see a sample service agreement, outlining the services provided?
4. Do you handle property staging for rental?
5. How will you advertise my property (e.g., newspaper, Internet)?
6. How do you screen tenants and handle viewings?
7. Do you provide a trust account for security deposits?
8. How do you handle routine maintenance issues? Are your contractors licensed?
9. If a property emergency arises, what procedures are in place to respond quickly?
10. Who drafts and executes the lease documents?
11. What's the procedure to deal with late payments and handle the eviction process?
12. Do your services comply with government regulations?
13. How do you report monthly and year-end accounting?
14. If I decide to sell, do you offer additional services?
"Consider the reputation, accreditations, fees and testimonials of current clients," Heppard says.
"If financially doable, the right property management company can save you a tremendous amount of effort, money and heartache."
Best of both worlds?
Sharon Simms, a real estate agent in St. Petersburg, Fla., knows that today's economic environment is tough on those who wish to sell.
So, she offers a potential solution to her clients -- she can place properties on the market for sale and for lease.
"In the MLS listings, we state that the property is listed as both and that the owner will do whichever produces a successful contract first," Simms says.
A lease can either state a fixed purchase price or leave the price open to a future agreement between parties, Simms says. However, a fixed purchase price won't entice many buyers until prices start rising again, as today's homes cost less than last year's.
And even the best agent can't change economic realities, especially for owners who are "upside down" -- meaning they owe more on their house than it's actually worth.
"In most cases, especially if the owner bought the house in 2005 or 2006, they will be losing money on either the sale or the rental," Simms says.
By Lora Shin • Bankrate.com
Stephanie Smith couldn't sell her home.
Smith, her husband Mike, and their three children moved from Woods Cross, Utah, to Duvall, Wash., in 2007 after Mike was offered a Washington-based job.
In 2005, the Smiths paid $195,000 for their four-bedroom new construction home in Woods Cross and had almost no equity. So, the couple needed to sell the house for at least $250,000 to bring down the monthly payment on their new home in more expensive Duvall.
But in Woods Cross, the housing market turned sour.
"All of a sudden there was a dip," Smith says. "In our neighborhood, most people sold their houses within a week. But suddenly there were a lot of houses for sale and nobody was buying anything."
Because the Smiths couldn't sell the Woods Cross home, they took another tack: They decided to rent out the house and serve as long-distance landlords.
However, the decision to rent created new issues. In the past year, the Smiths have gone through two renters. They barely make enough in rent to cover their Utah mortgage.
The Smiths rely on Mike's brother to do repairs on the home. They hope to sell it -- to either the current renters or to new buyers -- this fall.
But living in two states away makes things more difficult, Smith says.
"I can't see the house, I have no idea what's going on," Smith says. "What does it look like? I can't pop in and just check.
"I'm so far away, there's hardly anything I can do."
Sell or rent
The Smiths are hardly the only couple to suddenly and unexpectedly become long-distance landlords. When faced with both a relocation and a house that won't sell, some owners decide renting the house is the only option left.
Such a decision should not be taken lightly, experts warn.
While the Smiths haven't faced any disastrous scenarios as landlords, others living thousands of miles away aren't so lucky. Mansion-sized headaches can include destructive tenants, missing rent and eviction notices.
“There are two ways you really get to know someone -- when you marry them and when you rent to them.”
Denny Grimes, a Fort Myers, Fla., real estate agent and real estate columnist for the Fort Myers News-Press, says long-distance landlords must remove the rose-colored glasses and prepare for the realities of turning their home into a rental.
"When people make a decision to rent, most make the mistake of not renting property like a business," Grimes says.
He shares a real estate saying that underscores the challenges facing long-distance landlords.
"There are two ways you really get to know someone -- when you marry them and when you rent to them," Grimes says.
Dale Siegel, a real estate attorney and mortgage broker with Circle Mortgage Group in White Plains, N.Y., agrees that homeowners need to tread carefully before jumping into the landlord business.
"If you plan on renting, make sure you can cover your monthly nut," Siegel says, referring to the cost of principle, interest, taxes, insurance and unexpected repairs.
"If not, how much will renting cost you each month?" Siegel asks.
Before deciding to rent out the house, an owner should closely look at the competition's rent and decide whether the market rates are high enough for the owner to break even.
In areas glutted with new construction or large-scale developments, it can be hard to generate the level of rent necessary to cover expenses.
High vacancy rates also tend to depress rents. Rental vacancy rates are highest in the U.S. South at 13 percent and lowest in the West at 6.9 percent, according to the Department of Commerce's Census Bureau. The Midwest (10.6 percent) and Northeast (7.4 percent) fall between the two.
Still, renting out the house at a rate that doesn't quite cover expenses could be preferable to selling the house at a huge discount, Siegel says.
"It might be better than taking a big loss," he says.
Expert help
Homeowners who become long-distance landlords overnight need to follow the basic rules of finding good tenants.
Rather than just renting to anyone, Grimes urges landlords to ask prospective tenants to fill out an application with references who can attest to a tenant's history of paying rent on time.
Grimes also recommends running a credit report on a prospective tenant and using a rental contract that spells out the terms of the rental agreement.
These contracts often are available in state-by-state layman's books available at libraries and bookstores. Laws vary by state, so it's important to choose the appropriate contract.
Including damage clauses and documents that spell out late payment fees (or on-time payment incentives) and eviction procedures can assist the absentee homeowner if trouble arises.
"Don't waive those requirements, thinking it's cheaper in the long run to get somebody in there," Grimes says. "If they're not paying their bills other places, they won't be paying you. Go in with your eyes open."
"If you think finding a tenant is hard," Grimes says, "try getting rid of one."
Long-distance landlords also face some unique challenges. For this reason, owners who are relocating and considering renting out their homes may benefit from consulting with specialists before making any final decisions.
For example, a tax adviser can share how deductions may change as a result of moving out of a primary residence and renting it. Property taxes may increase now that the home is being used as a rental instead of serving as the owner's primary residence.
Homeowners who become landlords also should ask lenders about any new rules that may affect them. Siegel says many lenders recently tightened standards for borrowers who intend to buy a second home while renting out their first property.
In such cases, a lender might do an appraisal of the first house to more accurately gauge whether or not the homeowner is likely to get a decent amount of rent for the property, Siegel says.
Or, the lender may require documented proof of a renter and rental income for the first house before providing mortgage insurance on a second home.
Property management: A solution?
Some long-distance landlords worry about how they'll address day-to-day emergencies when they live so far away. Others don't possess the expertise or stomach for doing landlord duties.
In such situations, Grimes suggests hiring a professional property manager as a practical alternative.
"When the toilet breaks, they get the call," he says.
Professional property management companies screen potential renters, make sure rent arrives on time, perform minor repairs and thoroughly check properties for wear and tear. In exchange, they take 5 percent to 10 percent of gross rent received.
While this can cut into the owner's profit -- or increase the owner's debt if the rent isn't high enough to cover the owner's costs -- it can provide peace of mind, Grimes says.
- advertisement -
"For absentee owners, there's a difference between handling a rental and having boots on the ground," Grimes says.
To preserve value and make sure the front lawn stays sales-ready, homeowners often need someone willing to thoroughly examine the home inside and out.
While neighbors, friends and family may be able to do quick spot-checks, they won't be as invested as someone paid to do so.
And some property management companies are headed by real estate agents, so they can do double-duty when it's time to sell.
Of course, not all property management companies provide high-quality services.
Before choosing a property management company, it's important to ask the right questions. Mark Heppard, president of Mutual Property Management in Farmington, Mich., suggests the following questions.
14 questions to ask a property manager
1. Do you work with the owners of single-family homes or condos? Can you provide references?
2. How do you communicate long-distance (e.g., e-mail, phone, letter) and on which topics?
3. Can I see a sample service agreement, outlining the services provided?
4. Do you handle property staging for rental?
5. How will you advertise my property (e.g., newspaper, Internet)?
6. How do you screen tenants and handle viewings?
7. Do you provide a trust account for security deposits?
8. How do you handle routine maintenance issues? Are your contractors licensed?
9. If a property emergency arises, what procedures are in place to respond quickly?
10. Who drafts and executes the lease documents?
11. What's the procedure to deal with late payments and handle the eviction process?
12. Do your services comply with government regulations?
13. How do you report monthly and year-end accounting?
14. If I decide to sell, do you offer additional services?
"Consider the reputation, accreditations, fees and testimonials of current clients," Heppard says.
"If financially doable, the right property management company can save you a tremendous amount of effort, money and heartache."
Best of both worlds?
Sharon Simms, a real estate agent in St. Petersburg, Fla., knows that today's economic environment is tough on those who wish to sell.
So, she offers a potential solution to her clients -- she can place properties on the market for sale and for lease.
"In the MLS listings, we state that the property is listed as both and that the owner will do whichever produces a successful contract first," Simms says.
A lease can either state a fixed purchase price or leave the price open to a future agreement between parties, Simms says. However, a fixed purchase price won't entice many buyers until prices start rising again, as today's homes cost less than last year's.
And even the best agent can't change economic realities, especially for owners who are "upside down" -- meaning they owe more on their house than it's actually worth.
"In most cases, especially if the owner bought the house in 2005 or 2006, they will be losing money on either the sale or the rental," Simms says.
Wednesday, September 24, 2008
This Week in Mortgages: Rates Go Down Then Up Again
Mortgage rates go down, then up again
By Holden Lewis • Bankrate.com
Mortgage shoppers got stuck inside an old-fashioned melodrama in the last week.
In the first act, mortgage rates sank as markets digested the federal government's takeover of Freddie Mac and Fannie Mae. Mortgage shoppers exulted at Uncle Sam's rescue of Fannie and Freddie. Some dared to hope that rates would fall even lower.
The melodrama's second act occurred over a tense weekend: The investment bank Lehman Brothers lay tied up on the railroad tracks. Would Uncle Sam ride to the rescue? No! Lehman was gorily dismembered as Uncle Sam stood by, impassively. The mortgage market enjoyed the spectacle, as rates fell even more.
Weekly national mortgage survey
"The bald eagle has said, 'We're done bailing anyone out,'" mortgage broker Dan Dowling opined Monday morning. His advice on whether to lock a rate or float: "I think right now, your best ploy is to lock and monitor."
Act III: Tuesday afternoon, Uncle Sam cackled as he denied the Fed rate cut that the villagers desperately wanted. That night, Wall Street and rating agencies fitted insurance giant AIG with a noose. Just as the trapdoor opened, a bullet sliced through the hangman's rope, and AIG landed on its feet. Uncle Sam rode up, rifle in hand. "You belong to me now," he told AIG.
The mortgage market reacted badly to the plot twists of Act III. Fixed-rate mortgages rebounded Wednesday morning and took back the declines of the previous five workdays and then some. And Dowling, president of United Mortgage Capital in Altamonte Springs, Fla., was looking mighty smart for advising clients to lock the day before.
The benchmark 30-year fixed-rate mortgage rose 1 basis point, to 6.16 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.41 discount and origination points. One year ago, the mortgage index was 6.32 percent; four weeks ago, it was 6.66 percent.
The benchmark 15-year fixed-rate mortgage rose 3 basis points, to 5.84 percent, and the 30-year, fixed-rate jumbo, for larger loans, fell 5 basis points, to 7.36 percent. The benchmark 5/1 adjustable-rate mortgage fell 1 basis point, to 6.07 percent.
A thick plot
The performance of mortgage rates in the past week brought generally negative reviews. For one thing, the plot was hard to follow. "I don't know. I stopped trying to figure this out a long time ago," mortgage broker Dan Green, of Mobium Mortgage in Cincinnati, said. Actually, he spends a lot of time trying to figure it out, but lately all has been confusion.
Green's advice: "Stay aware, take advantage of opportunities that present themselves, and be ready to act. When mortgage markets move so quickly, it's because there's a market imbalance. And Wall Street seeks balance, and that's why they're short-lived."
Steve Habetz, owner of Threshold Mortgage, a brokerage in Westport, Conn., said he believes rates will remain low, "to where people say, 'I'm willing to assume the risk of owning a home" that could lose value. He said the other outcome -- higher mortgage rates -- "is far too painful for this nation to endure."
Alan Rosenbaum, president of Guardhill Financial, a mortgage bank in New York City, said he believes the mortgage marketplace is edging close to capitulation, when holders of mortgage debt recognize the true values of their degraded portfolios. "I think that we may realize that we're very close to a bottom," he said. "If we can get banks lending again, I think real estate will come back and the overall economy will come back."
By Holden Lewis • Bankrate.com
Mortgage shoppers got stuck inside an old-fashioned melodrama in the last week.
In the first act, mortgage rates sank as markets digested the federal government's takeover of Freddie Mac and Fannie Mae. Mortgage shoppers exulted at Uncle Sam's rescue of Fannie and Freddie. Some dared to hope that rates would fall even lower.
The melodrama's second act occurred over a tense weekend: The investment bank Lehman Brothers lay tied up on the railroad tracks. Would Uncle Sam ride to the rescue? No! Lehman was gorily dismembered as Uncle Sam stood by, impassively. The mortgage market enjoyed the spectacle, as rates fell even more.
Weekly national mortgage survey
"The bald eagle has said, 'We're done bailing anyone out,'" mortgage broker Dan Dowling opined Monday morning. His advice on whether to lock a rate or float: "I think right now, your best ploy is to lock and monitor."
Act III: Tuesday afternoon, Uncle Sam cackled as he denied the Fed rate cut that the villagers desperately wanted. That night, Wall Street and rating agencies fitted insurance giant AIG with a noose. Just as the trapdoor opened, a bullet sliced through the hangman's rope, and AIG landed on its feet. Uncle Sam rode up, rifle in hand. "You belong to me now," he told AIG.
The mortgage market reacted badly to the plot twists of Act III. Fixed-rate mortgages rebounded Wednesday morning and took back the declines of the previous five workdays and then some. And Dowling, president of United Mortgage Capital in Altamonte Springs, Fla., was looking mighty smart for advising clients to lock the day before.
The benchmark 30-year fixed-rate mortgage rose 1 basis point, to 6.16 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.41 discount and origination points. One year ago, the mortgage index was 6.32 percent; four weeks ago, it was 6.66 percent.
The benchmark 15-year fixed-rate mortgage rose 3 basis points, to 5.84 percent, and the 30-year, fixed-rate jumbo, for larger loans, fell 5 basis points, to 7.36 percent. The benchmark 5/1 adjustable-rate mortgage fell 1 basis point, to 6.07 percent.
A thick plot
The performance of mortgage rates in the past week brought generally negative reviews. For one thing, the plot was hard to follow. "I don't know. I stopped trying to figure this out a long time ago," mortgage broker Dan Green, of Mobium Mortgage in Cincinnati, said. Actually, he spends a lot of time trying to figure it out, but lately all has been confusion.
Green's advice: "Stay aware, take advantage of opportunities that present themselves, and be ready to act. When mortgage markets move so quickly, it's because there's a market imbalance. And Wall Street seeks balance, and that's why they're short-lived."
Steve Habetz, owner of Threshold Mortgage, a brokerage in Westport, Conn., said he believes rates will remain low, "to where people say, 'I'm willing to assume the risk of owning a home" that could lose value. He said the other outcome -- higher mortgage rates -- "is far too painful for this nation to endure."
Alan Rosenbaum, president of Guardhill Financial, a mortgage bank in New York City, said he believes the mortgage marketplace is edging close to capitulation, when holders of mortgage debt recognize the true values of their degraded portfolios. "I think that we may realize that we're very close to a bottom," he said. "If we can get banks lending again, I think real estate will come back and the overall economy will come back."
Thursday, August 07, 2008
A Seller's Saga
We Managed to Sell Our Home And Keep Our Marriage Intact
August 7, 2008
Neal Templin, Wall Street Journal
When we put our Dallas house on the market for $490,000 in February, we thought it would sell in weeks with little discounting.
Talk about being delusional.
We ended up lowering the price of our house five times before it finally sold last month. We didn't get our first offer until late June, and it was $102,000 below where we had started.
All the uncertainty made us delay buying a new home near New York City, and we've been scrambling to find a place before the school year starts. During my 28 years as a journalist, I've moved 11 times for my job. This was in some ways the hardest one.
The whole experience made me a tiny part of a huge story -- the collapse in housing prices -- affecting millions of Americans. It was humbling for me, your typical know-it-all reporter, to find myself caught up in a situation where I had no ready answers.
In previous columns, I've waxed about my penny-pinching approach on everything from restaurant meals to vacations to buying new books. But all that pales in comparison to the stakes during a home sale. In our case, we needed to extract as much money as possible from our Dallas home so we could afford the higher prices in the Northeast.
My wife, Clarissa, and I were on the same page for some decisions. But we quarreled early on how much to spend fixing up the house -- and later on how quickly to chop the price when it wouldn't sell.
Whereas Clarissa has always been the generous one, and I the one who sweats every last dollar, she wanted to hold out for a higher price, convinced the house was worth it. I became haunted by the belief that the market was tanking, and that we needed to get our price down as quickly as possible and get the house sold now.
Our odyssey began last fall when The Wall Street Journal named me its personal-finance editor, a New York-based job. For the previous three-plus years, I had been its Dallas bureau chief. The plan was that I would move the family to northern New Jersey in June when the school year ended.
It soon became clear that Clarissa and I had different visions for getting the house ready for sale.
I simply wanted to paint it and correct obvious defects, such as exterior wood that rotted during heavy rains last year. Clarissa wanted to redo the kitchen, install new fixtures in at least one of the bathrooms and much, much more. I fretted we wouldn't get that money back when we sold.
So we compromised. We spent $2,000 putting granite countertops and a new sink in the kitchen, and we merely painted the bathrooms.
But Clarissa didn't stop there. She paid a carpenter to put inlaid patterns on the wooden mantle. She spent hundreds on plants. She put in new lighting fixtures and new curtains and replaced a tattered awning.
Periodically, I would try to get her to slow down the spending, and she would tell me to buzz off. I was the one forcing the family to move yet again, and this time she was going to do the things to get top dollar for her house so she could afford a decent house in New Jersey.
We had paid about $360,000 for the house in 2004. Now, with all the things we'd fixed or improved over the years, I figured our total investment was more like $390,000.
We had reason to believe we could come out way ahead. Our 1937 brick-and-stone house sat in a pretty neighborhood of older homes and towering trees about five miles from downtown Dallas.
The city's real-estate market had remained relatively strong, and we lived in one of the strongest submarkets.
Based on selling prices the previous fall, our Realtor, Gia Marshello of the local Coldwell Banker office, predicted our three-bedroom house would fetch $485,000. We put the asking price at $490,000, and waited for the buyers to line up. They didn't.
After a month, only 10 had visited our house, and I was beginning to panic. We had planned a March home-buying trip to New Jersey, but I put it on hold -- indefinitely.
Gia suggested that we discount the house by $10,000 or perhaps $15,000. I pushed for the bigger discount. Clarissa reluctantly agreed, even though she saw comparable houses priced the same or higher in our neighborhood. The problem was that they weren't selling either.
The feedback from people visiting our house was worrisome. Too many said the layout didn't work for them. Our house had two bedrooms and one bathroom upstairs, and one bedroom and one bathroom downstairs. Parents with small children wanted all the bedrooms on one floor.
A couple of buyers complained the kitchen wasn't open enough. I sputtered to Gia: "This is a 1937 house -- they didn't make open kitchens back then. We're not getting the right buyers."
At one point, Gia left me a voicemail on the latest developments. She sent out postcards about our house to everyone in the neighborhood and buried a statue of St. Joseph in our yard, which some believe brings good luck to home sellers. "Oh my gosh," I thought to myself. "This is our marketing plan?"
As the months stretched on, we kept lowering our price, first to $469,000, then to $455,000, then to $448,000 with another $4,000 in "credits." We thought we had a buyer with that last price. A young woman made three visits to the home and told us to let her know if any other offers came in. But her father was paying for the home, and he didn't like the house, and that was that.
Gia left no stone unturned to sell our house. She held open house after open house. Each time we lowered our price, she would contact anyone who had expressed interest in the house. Nothing worked.
I talked to a real-estate agent friend of mine in New Jersey, and he advised us to cut the house to its bare-bones price. "If only three houses sell in your neighborhood, you've got to make sure you're one of the three homes," he told me.
Gia advised the same. Clarissa finally caved in, and we priced the home on a Monday afternoon in late June at $429,900, putting it thousands of dollars below most comparable houses in our neighborhood. Almost immediately, buyers flocked to check it out. Gia got word an offer was coming. On Thursday, she called me. The offer was for $388,000 -- more than $40,000 below our last asking price.
How could this be, we asked ourselves. We just made this the best bargain in the neighborhood, and now this guy wants another 40 grand off. Clarissa wanted to reject the offer, but I felt we had to make it work. After all, we'd had the house on the market for more than four months, and this was our first offer. There was no guarantee there'd be another one.
So we exchanged a series of offers and counteroffers with the buyer. It was like pulling teeth. After three days, he offered $399,310. Clarissa found this insulting and wanted to counter with $412,666, to send a message. "I don't think that's a good idea," I told her.
Finally, on Monday, the buyer raised his offer to $409,000. I got him up to $410,000, and I was resigned to sign a contract later that day. Clarissa, who had to sign off on any deal, was convinced that would be a big mistake and we ought to wait for another buyer. She called Gia to say, "Don't let him give away the house."
While all this was playing out, a new offer rolled in that afternoon from another buyer.
"Are you sitting down?" Gia asked me. "They want to offer full price," or $429,900. Gia then went back to the first buyer to say we had a higher offer, in case he wanted to improve his bid. He didn't. We signed the $429,900 contract.
We soon met the buyers, a young couple expecting their first baby. They said they were thrilled to get the house. And they seemed to appreciate the unusual plants Clarissa had picked out and all her touches inside the house. Her strategy had worked after all.
Our selling price amounted to a 12% discount from our starting price. I don't expect any violins for us. Some regions of California have seen home prices decline more than 30% from their actual selling prices a year earlier. We got off very lightly by comparison.
Our house went on the market when there were few homes for sale in our neighborhood. That's no longer true. When I took my last drive through my old neighborhood, the streets were beginning to bristle with "for sale" and "open house" signs -- though many were above our price range. I shudder to think.
August 7, 2008
Neal Templin, Wall Street Journal
When we put our Dallas house on the market for $490,000 in February, we thought it would sell in weeks with little discounting.
Talk about being delusional.
We ended up lowering the price of our house five times before it finally sold last month. We didn't get our first offer until late June, and it was $102,000 below where we had started.
All the uncertainty made us delay buying a new home near New York City, and we've been scrambling to find a place before the school year starts. During my 28 years as a journalist, I've moved 11 times for my job. This was in some ways the hardest one.
The whole experience made me a tiny part of a huge story -- the collapse in housing prices -- affecting millions of Americans. It was humbling for me, your typical know-it-all reporter, to find myself caught up in a situation where I had no ready answers.
In previous columns, I've waxed about my penny-pinching approach on everything from restaurant meals to vacations to buying new books. But all that pales in comparison to the stakes during a home sale. In our case, we needed to extract as much money as possible from our Dallas home so we could afford the higher prices in the Northeast.
My wife, Clarissa, and I were on the same page for some decisions. But we quarreled early on how much to spend fixing up the house -- and later on how quickly to chop the price when it wouldn't sell.
Whereas Clarissa has always been the generous one, and I the one who sweats every last dollar, she wanted to hold out for a higher price, convinced the house was worth it. I became haunted by the belief that the market was tanking, and that we needed to get our price down as quickly as possible and get the house sold now.
Our odyssey began last fall when The Wall Street Journal named me its personal-finance editor, a New York-based job. For the previous three-plus years, I had been its Dallas bureau chief. The plan was that I would move the family to northern New Jersey in June when the school year ended.
It soon became clear that Clarissa and I had different visions for getting the house ready for sale.
I simply wanted to paint it and correct obvious defects, such as exterior wood that rotted during heavy rains last year. Clarissa wanted to redo the kitchen, install new fixtures in at least one of the bathrooms and much, much more. I fretted we wouldn't get that money back when we sold.
So we compromised. We spent $2,000 putting granite countertops and a new sink in the kitchen, and we merely painted the bathrooms.
But Clarissa didn't stop there. She paid a carpenter to put inlaid patterns on the wooden mantle. She spent hundreds on plants. She put in new lighting fixtures and new curtains and replaced a tattered awning.
Periodically, I would try to get her to slow down the spending, and she would tell me to buzz off. I was the one forcing the family to move yet again, and this time she was going to do the things to get top dollar for her house so she could afford a decent house in New Jersey.
We had paid about $360,000 for the house in 2004. Now, with all the things we'd fixed or improved over the years, I figured our total investment was more like $390,000.
We had reason to believe we could come out way ahead. Our 1937 brick-and-stone house sat in a pretty neighborhood of older homes and towering trees about five miles from downtown Dallas.
The city's real-estate market had remained relatively strong, and we lived in one of the strongest submarkets.
Based on selling prices the previous fall, our Realtor, Gia Marshello of the local Coldwell Banker office, predicted our three-bedroom house would fetch $485,000. We put the asking price at $490,000, and waited for the buyers to line up. They didn't.
After a month, only 10 had visited our house, and I was beginning to panic. We had planned a March home-buying trip to New Jersey, but I put it on hold -- indefinitely.
Gia suggested that we discount the house by $10,000 or perhaps $15,000. I pushed for the bigger discount. Clarissa reluctantly agreed, even though she saw comparable houses priced the same or higher in our neighborhood. The problem was that they weren't selling either.
The feedback from people visiting our house was worrisome. Too many said the layout didn't work for them. Our house had two bedrooms and one bathroom upstairs, and one bedroom and one bathroom downstairs. Parents with small children wanted all the bedrooms on one floor.
A couple of buyers complained the kitchen wasn't open enough. I sputtered to Gia: "This is a 1937 house -- they didn't make open kitchens back then. We're not getting the right buyers."
At one point, Gia left me a voicemail on the latest developments. She sent out postcards about our house to everyone in the neighborhood and buried a statue of St. Joseph in our yard, which some believe brings good luck to home sellers. "Oh my gosh," I thought to myself. "This is our marketing plan?"
As the months stretched on, we kept lowering our price, first to $469,000, then to $455,000, then to $448,000 with another $4,000 in "credits." We thought we had a buyer with that last price. A young woman made three visits to the home and told us to let her know if any other offers came in. But her father was paying for the home, and he didn't like the house, and that was that.
Gia left no stone unturned to sell our house. She held open house after open house. Each time we lowered our price, she would contact anyone who had expressed interest in the house. Nothing worked.
I talked to a real-estate agent friend of mine in New Jersey, and he advised us to cut the house to its bare-bones price. "If only three houses sell in your neighborhood, you've got to make sure you're one of the three homes," he told me.
Gia advised the same. Clarissa finally caved in, and we priced the home on a Monday afternoon in late June at $429,900, putting it thousands of dollars below most comparable houses in our neighborhood. Almost immediately, buyers flocked to check it out. Gia got word an offer was coming. On Thursday, she called me. The offer was for $388,000 -- more than $40,000 below our last asking price.
How could this be, we asked ourselves. We just made this the best bargain in the neighborhood, and now this guy wants another 40 grand off. Clarissa wanted to reject the offer, but I felt we had to make it work. After all, we'd had the house on the market for more than four months, and this was our first offer. There was no guarantee there'd be another one.
So we exchanged a series of offers and counteroffers with the buyer. It was like pulling teeth. After three days, he offered $399,310. Clarissa found this insulting and wanted to counter with $412,666, to send a message. "I don't think that's a good idea," I told her.
Finally, on Monday, the buyer raised his offer to $409,000. I got him up to $410,000, and I was resigned to sign a contract later that day. Clarissa, who had to sign off on any deal, was convinced that would be a big mistake and we ought to wait for another buyer. She called Gia to say, "Don't let him give away the house."
While all this was playing out, a new offer rolled in that afternoon from another buyer.
"Are you sitting down?" Gia asked me. "They want to offer full price," or $429,900. Gia then went back to the first buyer to say we had a higher offer, in case he wanted to improve his bid. He didn't. We signed the $429,900 contract.
We soon met the buyers, a young couple expecting their first baby. They said they were thrilled to get the house. And they seemed to appreciate the unusual plants Clarissa had picked out and all her touches inside the house. Her strategy had worked after all.
Our selling price amounted to a 12% discount from our starting price. I don't expect any violins for us. Some regions of California have seen home prices decline more than 30% from their actual selling prices a year earlier. We got off very lightly by comparison.
Our house went on the market when there were few homes for sale in our neighborhood. That's no longer true. When I took my last drive through my old neighborhood, the streets were beginning to bristle with "for sale" and "open house" signs -- though many were above our price range. I shudder to think.
Saturday, July 26, 2008
Cashing In on real Estate - It's Still Possible!
Cashing In on Real Estate, It's Still Possible
July 25, 2008 3:16 p.m.
Is it still possible to make money in real estate?
With home prices continuing to plummet, many people have finally stopped seeing their family manse as a big bottomless bag of cash. But look beyond your front door, and you'll find some alternative real-estate related opportunities that are holding up despite the current economic downturn:
• Rural land: Rising food prices, demand for corn-based ethanol and a growing desire by many urbanites for a place in the country are making rural land more valuable. In 2007 over the year before, the average value of farmland rose 19.6% in Nebraska, 20.9% in Wyoming and 22.6% in Iowa, according to a survey by the Farm Credit Services of America.
In his May 22 "Country Real Estate," column, Blue Grass, Va., land consultant Curtis Seltzer observed that asking prices for rural land "in most places seem to be holding their own, and are trending up in certain markets."
• Foreign real estate: Although home price growth is slowing around the globe, some countries are still on a tear, according to GlobalPropertyGuide.com. While none of these places may be your first choice for a vacation hideaway, in the first quarter of this year, home prices rose 29% in Slovakia, 28% in China, 15% in Bulgaria, 13% in Cyprus and 9% in Australia over the same period a year earlier.
• Dockominiums: With higher gas prices, the market for both dry and wet slips for small boats has been softening. Not so for the big yachts, meaning those over 80-feet long. Real estate brokers say demand for big-boat docks is so high that having one in the backyard can double a property's value.
But you don't even need a residence attached to make money: At the Ocean Reef Club in the Florida Keys, a dockominium big enough for a 100-footer sold last year for $2 million; it had sold for $700,000 in 2004. The dock market is likely to remain buoyant: A study by yacht broker Camper & Nicholsons International says that there are 3,800 mega-yachts currently afloat, and predicts the number will grow to 5,000 in just two years.
• Fractional real estate: Many people who don't want to acquire and maintain a second home in a declining market still yearn for a vacation getaway. That's a big reason why fractional real estate, where an owner buys a deeded share of a residence, is gaining popularity. In many cases, developers are creating reservation systems that allow for spontaneous visits rather than locking owners into using the unit for only certain days of the year.
They are also offering upscale amenities: Harborview in Nantucket, Mass., for instance, offers a private owners' lounge, access to boats, and organized beach activities. According to NorthCourse, a real estate advisory firm based in Parsippany, N.J., fractional real estate sales reached $1.98 billion in 2007, a 20% increase over the year before.
July 25, 2008 3:16 p.m.
Is it still possible to make money in real estate?
With home prices continuing to plummet, many people have finally stopped seeing their family manse as a big bottomless bag of cash. But look beyond your front door, and you'll find some alternative real-estate related opportunities that are holding up despite the current economic downturn:
• Rural land: Rising food prices, demand for corn-based ethanol and a growing desire by many urbanites for a place in the country are making rural land more valuable. In 2007 over the year before, the average value of farmland rose 19.6% in Nebraska, 20.9% in Wyoming and 22.6% in Iowa, according to a survey by the Farm Credit Services of America.
In his May 22 "Country Real Estate," column, Blue Grass, Va., land consultant Curtis Seltzer observed that asking prices for rural land "in most places seem to be holding their own, and are trending up in certain markets."
• Foreign real estate: Although home price growth is slowing around the globe, some countries are still on a tear, according to GlobalPropertyGuide.com. While none of these places may be your first choice for a vacation hideaway, in the first quarter of this year, home prices rose 29% in Slovakia, 28% in China, 15% in Bulgaria, 13% in Cyprus and 9% in Australia over the same period a year earlier.
• Dockominiums: With higher gas prices, the market for both dry and wet slips for small boats has been softening. Not so for the big yachts, meaning those over 80-feet long. Real estate brokers say demand for big-boat docks is so high that having one in the backyard can double a property's value.
But you don't even need a residence attached to make money: At the Ocean Reef Club in the Florida Keys, a dockominium big enough for a 100-footer sold last year for $2 million; it had sold for $700,000 in 2004. The dock market is likely to remain buoyant: A study by yacht broker Camper & Nicholsons International says that there are 3,800 mega-yachts currently afloat, and predicts the number will grow to 5,000 in just two years.
• Fractional real estate: Many people who don't want to acquire and maintain a second home in a declining market still yearn for a vacation getaway. That's a big reason why fractional real estate, where an owner buys a deeded share of a residence, is gaining popularity. In many cases, developers are creating reservation systems that allow for spontaneous visits rather than locking owners into using the unit for only certain days of the year.
They are also offering upscale amenities: Harborview in Nantucket, Mass., for instance, offers a private owners' lounge, access to boats, and organized beach activities. According to NorthCourse, a real estate advisory firm based in Parsippany, N.J., fractional real estate sales reached $1.98 billion in 2007, a 20% increase over the year before.
Thursday, July 17, 2008
Mortgage Solutions: FHA Loan Limits and Features
In February, President Bush signed a bill that made a temporary increase to both conforming and FHA loan limits. The U.S. Department of Housing and Urban Development (HUD) recently released the new limits, which range from $271,050 to $729,750 depending on the county.
Previously, they were capped at $362,790. With FHA loans rising in popularity, especially among first-time homebuyers, these new limits could have a very positive impact. However, the changes are currently set to expire December 31, 2008, so you should act now to take advantage.
Benefits to Homebuyers
Many borrowers who were shopping in markets where entry-level homes were above the FHA loan limit may now be able to obtain an FHA loan. The most incremental change is likely to occur at entry-level and first-time move-up prices. The effects are also expected to have the greatest and most immediate impact in markets where entry-level home prices were above the previous FHA limits, such as California.
According to a statement released by the Federal Housing Administration, the change in loan limits will “give nearly 240,000 additional homeowners and homebuyers a safer, more affordable mortgage alternative.”¹
Because FHA focuses on 30-year fixed rate mortgages, homeowners may be able to avoid some of the risks associated with subprime mortgage products. Click here to view the new FHA loan limits for counties across the nation.
FHA: Fast Facts
If you are unfamiliar with FHA loans, here are a few facts to know. One important point is that FHA does not actually loan money to the buyer. Financing is obtained through a mortgage company such as HomeAmerican Mortgage Corporation.
FHA insures the lender against loss if the buyer defaults on the mortgage. The lender still has the final decision of whether or not to loan the buyer money, but having the FHA insurance can help them in making their loan decision.
In addition to offering insurance to the lender, FHA loan programs can offer many benefits. These are a few of the advantages:
Flexible qualification: FHA programs offer more flexible qualification, allowing more borrowers to obtain financing.
Less than perfect credit: FHA loans are often more forgiving of a buyer’s credit history. For example, buyers may still be able to qualify if they’ve had a bankruptcy as recently as two years ago.
Low down payment: Homebuyers typically only need 3-5% for their down payment, and this money may be a gift from a family member or other acceptable source.
How to Learn MoreHomeAmerican Mortgage Corporation (HMC) often offers special limited-time programs that enhance the benefits of FHA loans and provide exceptional value for homebuyers.
To learn about current programs and how to qualify, call a HomeAmerican Mortgage Consultant toll-free at 866-400-7126.
Sources:¹ Federal Housing Administration. New Loan Limits to Help Homeowners – Economy. Retrieved April 7, 2008, from http://portal.hud.gov/portal/page?_pageid=33,717234&_dad=portal&_schema=PORTAL
Previously, they were capped at $362,790. With FHA loans rising in popularity, especially among first-time homebuyers, these new limits could have a very positive impact. However, the changes are currently set to expire December 31, 2008, so you should act now to take advantage.
Benefits to Homebuyers
Many borrowers who were shopping in markets where entry-level homes were above the FHA loan limit may now be able to obtain an FHA loan. The most incremental change is likely to occur at entry-level and first-time move-up prices. The effects are also expected to have the greatest and most immediate impact in markets where entry-level home prices were above the previous FHA limits, such as California.
According to a statement released by the Federal Housing Administration, the change in loan limits will “give nearly 240,000 additional homeowners and homebuyers a safer, more affordable mortgage alternative.”¹
Because FHA focuses on 30-year fixed rate mortgages, homeowners may be able to avoid some of the risks associated with subprime mortgage products. Click here to view the new FHA loan limits for counties across the nation.
FHA: Fast Facts
If you are unfamiliar with FHA loans, here are a few facts to know. One important point is that FHA does not actually loan money to the buyer. Financing is obtained through a mortgage company such as HomeAmerican Mortgage Corporation.
FHA insures the lender against loss if the buyer defaults on the mortgage. The lender still has the final decision of whether or not to loan the buyer money, but having the FHA insurance can help them in making their loan decision.
In addition to offering insurance to the lender, FHA loan programs can offer many benefits. These are a few of the advantages:
Flexible qualification: FHA programs offer more flexible qualification, allowing more borrowers to obtain financing.
Less than perfect credit: FHA loans are often more forgiving of a buyer’s credit history. For example, buyers may still be able to qualify if they’ve had a bankruptcy as recently as two years ago.
Low down payment: Homebuyers typically only need 3-5% for their down payment, and this money may be a gift from a family member or other acceptable source.
How to Learn MoreHomeAmerican Mortgage Corporation (HMC) often offers special limited-time programs that enhance the benefits of FHA loans and provide exceptional value for homebuyers.
To learn about current programs and how to qualify, call a HomeAmerican Mortgage Consultant toll-free at 866-400-7126.
Sources:¹ Federal Housing Administration. New Loan Limits to Help Homeowners – Economy. Retrieved April 7, 2008, from http://portal.hud.gov/portal/page?_pageid=33,717234&_dad=portal&_schema=PORTAL
Mortgage Solutions: FHA Loan Limits and Features
In February, President Bush signed a bill that made a temporary increase to both conforming and FHA loan limits. The U.S. Department of Housing and Urban Development (HUD) recently released the new limits, which range from $271,050 to $729,750 depending on the county.
Previously, they were capped at $362,790. With FHA loans rising in popularity, especially among first-time homebuyers, these new limits could have a very positive impact. However, the changes are currently set to expire December 31, 2008, so you should act now to take advantage.
Benefits to Homebuyers
Many borrowers who were shopping in markets where entry-level homes were above the FHA loan limit may now be able to obtain an FHA loan. The most incremental change is likely to occur at entry-level and first-time move-up prices. The effects are also expected to have the greatest and most immediate impact in markets where entry-level home prices were above the previous FHA limits, such as California.
According to a statement released by the Federal Housing Administration, the change in loan limits will “give nearly 240,000 additional homeowners and homebuyers a safer, more affordable mortgage alternative.”¹
Because FHA focuses on 30-year fixed rate mortgages, homeowners may be able to avoid some of the risks associated with subprime mortgage products. Click here to view the new FHA loan limits for counties across the nation.
FHA: Fast Facts
If you are unfamiliar with FHA loans, here are a few facts to know. One important point is that FHA does not actually loan money to the buyer. Financing is obtained through a mortgage company such as HomeAmerican Mortgage Corporation.
FHA insures the lender against loss if the buyer defaults on the mortgage. The lender still has the final decision of whether or not to loan the buyer money, but having the FHA insurance can help them in making their loan decision.
In addition to offering insurance to the lender, FHA loan programs can offer many benefits. These are a few of the advantages:
Flexible qualification: FHA programs offer more flexible qualification, allowing more borrowers to obtain financing.
Less than perfect credit: FHA loans are often more forgiving of a buyer’s credit history. For example, buyers may still be able to qualify if they’ve had a bankruptcy as recently as two years ago.
Low down payment: Homebuyers typically only need 3-5% for their down payment, and this money may be a gift from a family member or other acceptable source.
How to Learn MoreHomeAmerican Mortgage Corporation (HMC) often offers special limited-time programs that enhance the benefits of FHA loans and provide exceptional value for homebuyers.
To learn about current programs and how to qualify, call a HomeAmerican Mortgage Consultant toll-free at 866-400-7126.
Sources:¹ Federal Housing Administration. New Loan Limits to Help Homeowners – Economy. Retrieved April 7, 2008, from http://portal.hud.gov/portal/page?_pageid=33,717234&_dad=portal&_schema=PORTAL
Previously, they were capped at $362,790. With FHA loans rising in popularity, especially among first-time homebuyers, these new limits could have a very positive impact. However, the changes are currently set to expire December 31, 2008, so you should act now to take advantage.
Benefits to Homebuyers
Many borrowers who were shopping in markets where entry-level homes were above the FHA loan limit may now be able to obtain an FHA loan. The most incremental change is likely to occur at entry-level and first-time move-up prices. The effects are also expected to have the greatest and most immediate impact in markets where entry-level home prices were above the previous FHA limits, such as California.
According to a statement released by the Federal Housing Administration, the change in loan limits will “give nearly 240,000 additional homeowners and homebuyers a safer, more affordable mortgage alternative.”¹
Because FHA focuses on 30-year fixed rate mortgages, homeowners may be able to avoid some of the risks associated with subprime mortgage products. Click here to view the new FHA loan limits for counties across the nation.
FHA: Fast Facts
If you are unfamiliar with FHA loans, here are a few facts to know. One important point is that FHA does not actually loan money to the buyer. Financing is obtained through a mortgage company such as HomeAmerican Mortgage Corporation.
FHA insures the lender against loss if the buyer defaults on the mortgage. The lender still has the final decision of whether or not to loan the buyer money, but having the FHA insurance can help them in making their loan decision.
In addition to offering insurance to the lender, FHA loan programs can offer many benefits. These are a few of the advantages:
Flexible qualification: FHA programs offer more flexible qualification, allowing more borrowers to obtain financing.
Less than perfect credit: FHA loans are often more forgiving of a buyer’s credit history. For example, buyers may still be able to qualify if they’ve had a bankruptcy as recently as two years ago.
Low down payment: Homebuyers typically only need 3-5% for their down payment, and this money may be a gift from a family member or other acceptable source.
How to Learn MoreHomeAmerican Mortgage Corporation (HMC) often offers special limited-time programs that enhance the benefits of FHA loans and provide exceptional value for homebuyers.
To learn about current programs and how to qualify, call a HomeAmerican Mortgage Consultant toll-free at 866-400-7126.
Sources:¹ Federal Housing Administration. New Loan Limits to Help Homeowners – Economy. Retrieved April 7, 2008, from http://portal.hud.gov/portal/page?_pageid=33,717234&_dad=portal&_schema=PORTAL
Tuesday, July 15, 2008
How Fannie and Freddie Grew So Big as Dangers Mounted
Plenty of Blame to Go Around for Fannie, Freddie; How the Pair Grew So Big, as Dangers Mounted, Morphed
By JOHN D. MCKINNON and JAMES R. HAGERTY
July 15, 2008; Page A14 Wall Street Journal
For years, Washington officialdom enabled Fannie Mae and Freddie Mac, the congressionally chartered mortgage companies, to grow until they dominated the U.S. market.
Now lawmakers are confronting the result: a crisis of confidence in the two companies that raises questions about whether they can make it through the deep downturn that has struck the real-estate market. And nobody wants to get stuck with the blame.
If there's one decision that is being second-guessed, it's the 1992 legislation that created the companies' regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo. In the 1992 debate, Ofheo came away with fairly weak powers, and capital requirements for the companies were set very low. (Congress is now putting the final touches on legislation creating a much stronger regulator with powers to raise their capital requirements -- a bit late, critics say.)
Lobbyists from the companies are said to have strongly influenced the 1992 legislation, particularly in the House Banking Committee, whose chairman then was Rep. Henry Gonzalez, a Texas Democrat. Critics of the companies say that Rep. Barney Frank (D., Mass.), the current chairman of the committee, also helped put forth the companies' arguments.
Mr. Frank now is widely regarded as a strong voice for tougher regulation. "I've been a supporter of their role in housing, but I've been pushing for some time to improve the regulation," he said in a telephone interview on Monday. As for the legislation in the early 1990s, he said he doesn't recall being involved in weakening it.
A spokesman for Fannie Mae declined to comment on the company's prior approach. "It's a different era [now] and there's a very different approach to our dealings with policy makers and regulators," he said.
Fannie and Freddie issue debt to the public in order to buy up home mortgages from banks. They hold some of those mortgages as investments and securitize the rest, adding a guarantee of repayment in the event homeowners default. By now, Fannie and Freddie own or guarantee about $5 trillion in mortgages, almost half of the U.S. total.
The two companies have been so successful because they combine the private sector's appetite for profit with the government's ability to borrow money. Even officials who gave them their unique structure 40 years ago didn't entirely appreciate how powerful -- and potentially dangerous -- the combination would prove to be.
"I don't think anyone had any inkling that they were doing anything but good," says Thomas Stanton, a Washington lawyer and longtime critic of the companies' massive growth. "People hadn't really worked out what would happen."
When it comes to their dealings with Fannie and Freddie, politicians often have had self-interested motives, in addition to the lofty public purposes they proclaimed.
Congress created Fannie as a government agency during the Great Depression, to encourage banks to lend. Fannie continued to function as a government-run agency during the 1940s and 1950s, even as it took steps toward privatization.
In 1968, President Lyndon Johnson decided to turn Fannie into a shareholder-owned company as part of a broader housing bill. Mr. Johnson proclaimed that the new Fannie Mae would "close an important gap in the existing network of financial institutions." In fact, administration officials acknowledged that the move actually was aimed at shifting Fannie's growing operations off the government's books.
Investors continued to assume that Fannie's debt carried the full faith and credit of the U.S. government, however. Congress did little to dispel that idea, bestowing a range of breaks on the companies, as well as other government ties.
Fannie's model proved so effective at aiding business for mortgage bankers that the savings-and-loan industry soon wanted one of its own. So in 1970, Congress created Freddie Mac. Nowadays, both serve the same customers -- mortgage lenders.
The companies' operations suited a lot of other people, too: home builders, real-estate agents, Wall Street investment houses and politicians. And, of course, the companies have helped millions of people buy homes, particularly in times of economic uncertainty.
Critics have popped up over the years, but they were always drowned out. In the early part of this decade, Alan Greenspan became the most powerful voice calling for a reining in of the companies.
At that time, though, the main worry about Fannie and Freddie was the interest-rate risks that arise from holding long-term mortgages and funding them with borrowing. This prompted the companies to use huge amounts of derivatives to hedge. And that worried a lot of people. It also led to the accounting scandals as Fannie and Freddie tried to smooth over the fluctuations in earnings created by those interest hedges. That added to the interest in strengthening their regulation, particularly among conservatives in the Bush administration.
Few critics focused then on the credit default risks. That's because of a widespread assumption that homeowners rarely default. Now that assumption is being undermined in the current weakening real-estate market.
Fannie and Freddie's survival is crucial not just for the U.S. mortgage market, but the entire financial system, because of the widespread reliance on their debt not only by legions of investors but also by banks around the world.
The failure of one of the companies would create a "world-wide panic," says Peter Wallison, a critic of the companies' structure and operations.
By JOHN D. MCKINNON and JAMES R. HAGERTY
July 15, 2008; Page A14 Wall Street Journal
For years, Washington officialdom enabled Fannie Mae and Freddie Mac, the congressionally chartered mortgage companies, to grow until they dominated the U.S. market.
Now lawmakers are confronting the result: a crisis of confidence in the two companies that raises questions about whether they can make it through the deep downturn that has struck the real-estate market. And nobody wants to get stuck with the blame.
If there's one decision that is being second-guessed, it's the 1992 legislation that created the companies' regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo. In the 1992 debate, Ofheo came away with fairly weak powers, and capital requirements for the companies were set very low. (Congress is now putting the final touches on legislation creating a much stronger regulator with powers to raise their capital requirements -- a bit late, critics say.)
Lobbyists from the companies are said to have strongly influenced the 1992 legislation, particularly in the House Banking Committee, whose chairman then was Rep. Henry Gonzalez, a Texas Democrat. Critics of the companies say that Rep. Barney Frank (D., Mass.), the current chairman of the committee, also helped put forth the companies' arguments.
Mr. Frank now is widely regarded as a strong voice for tougher regulation. "I've been a supporter of their role in housing, but I've been pushing for some time to improve the regulation," he said in a telephone interview on Monday. As for the legislation in the early 1990s, he said he doesn't recall being involved in weakening it.
A spokesman for Fannie Mae declined to comment on the company's prior approach. "It's a different era [now] and there's a very different approach to our dealings with policy makers and regulators," he said.
Fannie and Freddie issue debt to the public in order to buy up home mortgages from banks. They hold some of those mortgages as investments and securitize the rest, adding a guarantee of repayment in the event homeowners default. By now, Fannie and Freddie own or guarantee about $5 trillion in mortgages, almost half of the U.S. total.
The two companies have been so successful because they combine the private sector's appetite for profit with the government's ability to borrow money. Even officials who gave them their unique structure 40 years ago didn't entirely appreciate how powerful -- and potentially dangerous -- the combination would prove to be.
"I don't think anyone had any inkling that they were doing anything but good," says Thomas Stanton, a Washington lawyer and longtime critic of the companies' massive growth. "People hadn't really worked out what would happen."
When it comes to their dealings with Fannie and Freddie, politicians often have had self-interested motives, in addition to the lofty public purposes they proclaimed.
Congress created Fannie as a government agency during the Great Depression, to encourage banks to lend. Fannie continued to function as a government-run agency during the 1940s and 1950s, even as it took steps toward privatization.
In 1968, President Lyndon Johnson decided to turn Fannie into a shareholder-owned company as part of a broader housing bill. Mr. Johnson proclaimed that the new Fannie Mae would "close an important gap in the existing network of financial institutions." In fact, administration officials acknowledged that the move actually was aimed at shifting Fannie's growing operations off the government's books.
Investors continued to assume that Fannie's debt carried the full faith and credit of the U.S. government, however. Congress did little to dispel that idea, bestowing a range of breaks on the companies, as well as other government ties.
Fannie's model proved so effective at aiding business for mortgage bankers that the savings-and-loan industry soon wanted one of its own. So in 1970, Congress created Freddie Mac. Nowadays, both serve the same customers -- mortgage lenders.
The companies' operations suited a lot of other people, too: home builders, real-estate agents, Wall Street investment houses and politicians. And, of course, the companies have helped millions of people buy homes, particularly in times of economic uncertainty.
Critics have popped up over the years, but they were always drowned out. In the early part of this decade, Alan Greenspan became the most powerful voice calling for a reining in of the companies.
At that time, though, the main worry about Fannie and Freddie was the interest-rate risks that arise from holding long-term mortgages and funding them with borrowing. This prompted the companies to use huge amounts of derivatives to hedge. And that worried a lot of people. It also led to the accounting scandals as Fannie and Freddie tried to smooth over the fluctuations in earnings created by those interest hedges. That added to the interest in strengthening their regulation, particularly among conservatives in the Bush administration.
Few critics focused then on the credit default risks. That's because of a widespread assumption that homeowners rarely default. Now that assumption is being undermined in the current weakening real-estate market.
Fannie and Freddie's survival is crucial not just for the U.S. mortgage market, but the entire financial system, because of the widespread reliance on their debt not only by legions of investors but also by banks around the world.
The failure of one of the companies would create a "world-wide panic," says Peter Wallison, a critic of the companies' structure and operations.
Monday, July 14, 2008
Treasury and FED Pleadge Aid For Ailing Mortgage Giants
Treasury and Fed Pledge Aid For Ailing Mortgage Giants
By JAMES R. HAGERTY, DEBORAH SOLOMON and SUDEEP REDDY
July 14, 2008; Page A1 Wall Street Journal
The U.S. Treasury and Federal Reserve, capping a weekend of high-stakes maneuvering, attempted to shore up confidence in Fannie Mae and Freddie Mac by announcing a plan that placed the federal government firmly behind the battered mortgage giants.
In a statement timed to precede the opening of Asian markets Monday, as well as a closely watched auction of debt by Freddie, the Treasury said it plans to seek approval from Congress for a temporary increase in a longstanding Treasury line of credit for the two companies.
The Treasury also said it would seek temporary authority so that it could buy equity in either company "if needed" to ensure they have "sufficient capital to continue to serve their mission" of providing a steady flow of money into home mortgages. The plan, which requires congressional approval, also calls for a provision to give the Federal Reserve a "consultative role" in the process of setting capital requirements and other "prudential standards" for Fannie and Freddie.
The Fed's Board of Governors met Sunday in Washington and voted to grant the New York Fed authority to lend to Fannie and Freddie "should such lending prove necessary," the central bank said in a statement. The move would effectively give the two companies access to the Fed's discount window if necessary, providing a backstop in case the firms were to face a short-term funding crisis down the road.
Whether the government should prop up troubled financial institutions has become a hot political issue in the wake of the takeover of investment firm Bear Stearns Cos. by J.P. Morgan Chase & Co. Critics characterized that government-engineered deal as a bailout.
This weekend's moves constitute an attempt by the federal government to ease the potential crisis at Fannie and Freddie without intervening directly. By promising bold action if needed, officials are hoping they can instill sufficient confidence in the two companies that such intervention ultimately will prove unnecessary.
Fannie and Freddie are the nation's dominant providers of funding for home mortgages. They buy loans made by banks, package most of them into securities, and sell many to investors all over the world. Together, they own or guarantee about $5.2 trillion of U.S. home mortgages, nearly half of all mortgages outstanding.
Unique Status
The unique status of the two companies puts the government in a delicate position. They were chartered by Congress to support the mortgage market, but they are owned by shareholders. Investors have long believed that the government implicitly backs them. That allowed the two companies to borrow at favorable rates, benefiting shareholders and supporting the housing market, but putting taxpayer money at risk.
Sunday's moves, by promising government funds to keep Fannie and Freddie operational, reinforce the notion that investors can count on the government to bail them out in a crisis. Until recently, that was an idea the Bush administration had tried hard to quash.
The government can ill afford to see a financial crisis at either firm. With home prices falling and mortgage defaults rising, Congress and the administration have come to depend even more on Fannie and Freddie. If either company ran into serious financial trouble -- a prospect that seemed real last week when their stocks fell nearly 50% -- it would deal a severe blow to the housing market and the sagging economy.
A senior Treasury official described the steps as intended to help "stabilize" the current situation. While Treasury does not think the financial situation of either firm has deteriorated since Friday, "as we've watched market developments, we decided it was time for policymakers to act," said one administration official.
The weekend move means that Fed Chairman Ben Bernanke, who has been steadily accumulating authority as the U.S. grapples with the financial crisis, will have even more power.
The Treasury envisions the Fed working with the mortgage giants' regulator to help prevent situations that could be a risk for the entire financial system. The move builds on Treasury's broader goal of remaking financial regulation to give the Fed broader influence over financial-market stability.
Federal regulators, politicians and investment banks spent two hectic days swapping information and seeking ways to calm markets. From Washington, Treasury Secretary Henry Paulson called the heads of some investment banks, trying to gauge the level of nervousness about Fannie and Freddie and to determine whether the banks would participate in Monday's $3 billion debt auction, according to people familiar with the matter. Timothy Geithner, president of the Federal Reserve Bank of New York, also has been reaching out to Wall Street firms over the weekend to discuss the latest events.
Fed, Treasury and company officials stayed in touch with top Capitol Hill lawmakers and their staffs throughout the weekend. Lawmakers continued their efforts to reassure financial markets about the government's support of both companies.
Fannie Mae Chief Executive Officer Daniel Mudd expressed gratitude for the government's actions. "Given the market turmoil, having options to access provisional sources of liquidity if needed will help to strengthen overall confidence in the market," he said.
If either company asks for it, it could have access to a line of credit or an equity investment by the U.S. government. Both the line of credit and the liquidity backstop would be temporary, but could be in place for up to 18 months. Treasury would not say how high the line of credit might go, or how much of an equity stake Treasury might purchase. The agency would not discuss whether the equity stake would carry any preferred terms for the government. Those decisions would be up to Mr. Paulson, the official said, and "will be governed by protecting the taxpayers and the government."
The two companies' lines of credit are currently capped at $2.25 billion each. The Treasury didn't say to what level they would be increased. The Fed's role is intended as a funding backstop for the firms only after they've borrowed under their credit line from Treasury. The central bank can lend under its own authority, without further congressional approval.
Raising the Treasury credit line, along with most other changes, would require congressional approval, although lawmakers appear ready to act quickly. Late Friday, the Senate passed a housing package that would create a new, stronger regulator for Fannie, Freddie and the 12 Federal Home Loan Banks. The House passed a similar bill in May, but the process since then has been stalled by complications.
The bill could pick up speed now. Lawmakers only need to resolve a few differences, and potentially to add the changes. House Financial Services Committee Chairman Barney Frank (D., Mass.) said he spoke with Mr. Paulson several times over the weekend and was "generally supportive" of the proposals. He said all sides would have to discuss the details of the plan, but he felt optimistic that a consensus could be reached quickly. "This could be on the president's desk next week," he said.
The Treasury official said Mr. Paulson has reached out to members of Congress and has had "good productive conversations....There's nothing to suggest that we will not be able to accomplish this."
The Sunday move was designed in part to head off fears about Monday's auction of Freddie Mac notes. While small, the planned sale had assumed an outsized importance as a test of investor confidence. Freddie should be able to find buyers for its three- and six-month notes, market analysts said. But there is a chance that some financial institutions and investors may demand higher-then-usual yields.
Similar Freddie and Fannie notes that are currently outstanding yield around 2.5%. If weak demand for Freddie's auction leads to sharply higher yields on the new notes, that could trigger a selloff across a wide range of debt issued by the companies, some analysts said. But most said such a scenario is unlikely.
There was some debate within the administration about the best way to handle the two companies. Some Republicans have long worried that taxpayers would eventually be on the hook for risks taken by the two companies on behalf of shareholders.
Tough Love
Some officials at the White House are believed to have preferred a tough-love approach. Under one option, according to people familiar with the outlines of policy discussions within the administration, the White House could try to install a new slate of presidentially appointed board members at the companies. The idea would be to impose more market discipline on the two companies, to curb their appetites for borrowing and investing, and to gradually shrink their enormous balance sheets.
Appointment of new presidential directors would be an abandonment -- at least for now -- of the Bush administration's often-stated ambition to distance the federal government from the companies. The new board members would be drawn from the ranks of financial-market heavyweights.
Fannie and Freddie shares both dropped about 45% last week and are down more than 80% over the past year. Investors are worried that the companies eventually will have to raise large amounts of capital to cope with growing losses stemming from mortgage defaults. Freddie has announced plans to raise $5.5 billion by selling common and preferred shares, but it is likely to wait for a calmer market. Fannie raised $7.4 billion in share offerings in April and May.
Like Fannie and Freddie, the 12 regional Federal Home Loan Banks, cooperatives that lend to commercial banks and thrifts, "also would have temporary access to expanded lines of credit," a Treasury official said.
A spokesman for Freddie said the company understands that any purchase of equity in Freddie by the Treasury "can only occur with the mutual agreement of both parties."
--Damian Paletta, John D. McKinnon, Serena Ng contributed to this article.
By JAMES R. HAGERTY, DEBORAH SOLOMON and SUDEEP REDDY
July 14, 2008; Page A1 Wall Street Journal
The U.S. Treasury and Federal Reserve, capping a weekend of high-stakes maneuvering, attempted to shore up confidence in Fannie Mae and Freddie Mac by announcing a plan that placed the federal government firmly behind the battered mortgage giants.
In a statement timed to precede the opening of Asian markets Monday, as well as a closely watched auction of debt by Freddie, the Treasury said it plans to seek approval from Congress for a temporary increase in a longstanding Treasury line of credit for the two companies.
The Treasury also said it would seek temporary authority so that it could buy equity in either company "if needed" to ensure they have "sufficient capital to continue to serve their mission" of providing a steady flow of money into home mortgages. The plan, which requires congressional approval, also calls for a provision to give the Federal Reserve a "consultative role" in the process of setting capital requirements and other "prudential standards" for Fannie and Freddie.
The Fed's Board of Governors met Sunday in Washington and voted to grant the New York Fed authority to lend to Fannie and Freddie "should such lending prove necessary," the central bank said in a statement. The move would effectively give the two companies access to the Fed's discount window if necessary, providing a backstop in case the firms were to face a short-term funding crisis down the road.
Whether the government should prop up troubled financial institutions has become a hot political issue in the wake of the takeover of investment firm Bear Stearns Cos. by J.P. Morgan Chase & Co. Critics characterized that government-engineered deal as a bailout.
This weekend's moves constitute an attempt by the federal government to ease the potential crisis at Fannie and Freddie without intervening directly. By promising bold action if needed, officials are hoping they can instill sufficient confidence in the two companies that such intervention ultimately will prove unnecessary.
Fannie and Freddie are the nation's dominant providers of funding for home mortgages. They buy loans made by banks, package most of them into securities, and sell many to investors all over the world. Together, they own or guarantee about $5.2 trillion of U.S. home mortgages, nearly half of all mortgages outstanding.
Unique Status
The unique status of the two companies puts the government in a delicate position. They were chartered by Congress to support the mortgage market, but they are owned by shareholders. Investors have long believed that the government implicitly backs them. That allowed the two companies to borrow at favorable rates, benefiting shareholders and supporting the housing market, but putting taxpayer money at risk.
Sunday's moves, by promising government funds to keep Fannie and Freddie operational, reinforce the notion that investors can count on the government to bail them out in a crisis. Until recently, that was an idea the Bush administration had tried hard to quash.
The government can ill afford to see a financial crisis at either firm. With home prices falling and mortgage defaults rising, Congress and the administration have come to depend even more on Fannie and Freddie. If either company ran into serious financial trouble -- a prospect that seemed real last week when their stocks fell nearly 50% -- it would deal a severe blow to the housing market and the sagging economy.
A senior Treasury official described the steps as intended to help "stabilize" the current situation. While Treasury does not think the financial situation of either firm has deteriorated since Friday, "as we've watched market developments, we decided it was time for policymakers to act," said one administration official.
The weekend move means that Fed Chairman Ben Bernanke, who has been steadily accumulating authority as the U.S. grapples with the financial crisis, will have even more power.
The Treasury envisions the Fed working with the mortgage giants' regulator to help prevent situations that could be a risk for the entire financial system. The move builds on Treasury's broader goal of remaking financial regulation to give the Fed broader influence over financial-market stability.
Federal regulators, politicians and investment banks spent two hectic days swapping information and seeking ways to calm markets. From Washington, Treasury Secretary Henry Paulson called the heads of some investment banks, trying to gauge the level of nervousness about Fannie and Freddie and to determine whether the banks would participate in Monday's $3 billion debt auction, according to people familiar with the matter. Timothy Geithner, president of the Federal Reserve Bank of New York, also has been reaching out to Wall Street firms over the weekend to discuss the latest events.
Fed, Treasury and company officials stayed in touch with top Capitol Hill lawmakers and their staffs throughout the weekend. Lawmakers continued their efforts to reassure financial markets about the government's support of both companies.
Fannie Mae Chief Executive Officer Daniel Mudd expressed gratitude for the government's actions. "Given the market turmoil, having options to access provisional sources of liquidity if needed will help to strengthen overall confidence in the market," he said.
If either company asks for it, it could have access to a line of credit or an equity investment by the U.S. government. Both the line of credit and the liquidity backstop would be temporary, but could be in place for up to 18 months. Treasury would not say how high the line of credit might go, or how much of an equity stake Treasury might purchase. The agency would not discuss whether the equity stake would carry any preferred terms for the government. Those decisions would be up to Mr. Paulson, the official said, and "will be governed by protecting the taxpayers and the government."
The two companies' lines of credit are currently capped at $2.25 billion each. The Treasury didn't say to what level they would be increased. The Fed's role is intended as a funding backstop for the firms only after they've borrowed under their credit line from Treasury. The central bank can lend under its own authority, without further congressional approval.
Raising the Treasury credit line, along with most other changes, would require congressional approval, although lawmakers appear ready to act quickly. Late Friday, the Senate passed a housing package that would create a new, stronger regulator for Fannie, Freddie and the 12 Federal Home Loan Banks. The House passed a similar bill in May, but the process since then has been stalled by complications.
The bill could pick up speed now. Lawmakers only need to resolve a few differences, and potentially to add the changes. House Financial Services Committee Chairman Barney Frank (D., Mass.) said he spoke with Mr. Paulson several times over the weekend and was "generally supportive" of the proposals. He said all sides would have to discuss the details of the plan, but he felt optimistic that a consensus could be reached quickly. "This could be on the president's desk next week," he said.
The Treasury official said Mr. Paulson has reached out to members of Congress and has had "good productive conversations....There's nothing to suggest that we will not be able to accomplish this."
The Sunday move was designed in part to head off fears about Monday's auction of Freddie Mac notes. While small, the planned sale had assumed an outsized importance as a test of investor confidence. Freddie should be able to find buyers for its three- and six-month notes, market analysts said. But there is a chance that some financial institutions and investors may demand higher-then-usual yields.
Similar Freddie and Fannie notes that are currently outstanding yield around 2.5%. If weak demand for Freddie's auction leads to sharply higher yields on the new notes, that could trigger a selloff across a wide range of debt issued by the companies, some analysts said. But most said such a scenario is unlikely.
There was some debate within the administration about the best way to handle the two companies. Some Republicans have long worried that taxpayers would eventually be on the hook for risks taken by the two companies on behalf of shareholders.
Tough Love
Some officials at the White House are believed to have preferred a tough-love approach. Under one option, according to people familiar with the outlines of policy discussions within the administration, the White House could try to install a new slate of presidentially appointed board members at the companies. The idea would be to impose more market discipline on the two companies, to curb their appetites for borrowing and investing, and to gradually shrink their enormous balance sheets.
Appointment of new presidential directors would be an abandonment -- at least for now -- of the Bush administration's often-stated ambition to distance the federal government from the companies. The new board members would be drawn from the ranks of financial-market heavyweights.
Fannie and Freddie shares both dropped about 45% last week and are down more than 80% over the past year. Investors are worried that the companies eventually will have to raise large amounts of capital to cope with growing losses stemming from mortgage defaults. Freddie has announced plans to raise $5.5 billion by selling common and preferred shares, but it is likely to wait for a calmer market. Fannie raised $7.4 billion in share offerings in April and May.
Like Fannie and Freddie, the 12 regional Federal Home Loan Banks, cooperatives that lend to commercial banks and thrifts, "also would have temporary access to expanded lines of credit," a Treasury official said.
A spokesman for Freddie said the company understands that any purchase of equity in Freddie by the Treasury "can only occur with the mutual agreement of both parties."
--Damian Paletta, John D. McKinnon, Serena Ng contributed to this article.
Tuesday, July 08, 2008
Denver Leads the Country in Rental Income Increase!
July 5, 2008, 1:07 pm
Rents Climb Despite ‘Shadow Market’
WSJ’s Nick Timiraos writes:
Landlords continue to see a strong rental market undercut by a “shadow market” — the glut of unsold homes on the market as rentals. But the housing downturn continues to provide landlords with solid rent increases nonetheless, as more homeowners become renters and as existing renters defer homeownership.
Rents climbed by 1.1% last quarter, slightly off the 1.3% growth in the same quarter last year, according to figures to be released Saturday by Reis Inc., a New York real estate research firm. Apartment vacancies held constant at 5.9% from the previous quarter.
Rent growth remains ahead of where it should be given the economic downturn and slowing wage growth. “That’s giving landlords more power than we’d normally expect to see in the cycle,” says Sam Chandan, chief economist at Reis. At the recession earlier this decade, he notes, “we had declines in rent certainly not on the order of what we’re seeing now.”
Four of 79 markets tracked by Reis showed negative rent growth, all in parts of the country hardest hit by big home prices declines: Miami; Palm Beach, Fla.; Ventura County, Calif., and Detroit. (See charts below)
Rents increased in some strong housing markets, including Seattle and Boston, where tightened mortgage lending terms continue to discourage homeowners. The energy sector helped boost rents in markets across the West, including Denver, which led the nation with 1.9% rental growth. Houston, Oklahoma City and Tulsa, Okla., also posted above-average rental increases.
Reis’s Mr. Chandan suggests that the data show “very preliminary” signs of stabilization in the hardest-hit housing markets in Florida. Vacancies fell in overbuilt housing markets including California’s Inland Empire and Fort Lauderdale, Fla., and California’s Inland Empire, which also posted an above-average rental growth. Rents gained a robust 1.5% in Orlando, Fla.
One big question that remains: When will the shadow market disappear? Analysts say that the most overbuilt housing markets will continue to see homes and condos converted to rentals through 2009. “Given the extent of overbuilding that’s a fairly speedy correction,” says Mr. Chandan.
Others point to the lack of rental demand due to renters who double or triple up or move in with their parents. Lawrence Yun, chief economist for the National Association of Realtors, says that the practice should abate in the short-term, in part because “it’s not sustainable to keep adding roommates.”
Strongest Rent Growth
1 Denver 1.9%
2 Wichita, Kan. 1.9%
3 Syracuse, N.Y. 1.9%
4 Seattle 1.9%
5 Dayton, Ohio 1.7%
6 Tulsa, Okla. 1.7%
7 Louisville, Ky. 1.7%
8 Little Rock, Ark. 1.6%
9 Hartford, Conn. 1.6%
10 Boston 1.6%
Weakest Rent Growth
1 Palm Beach, Fla. -0.40%
2 Miami -0.2
3 Detroit -0.1
4 Ventura County, Calf. -0.1
5 Fort Lauderdale, Fla. 0
6 Tucson, Ariz. 0.2
7 Portland, Ore. 0.3
8 Phoenix 0.3
9 Columbia, S.C. 0.5
10 Northern New Jersey 0.5
Source: Reis Inc.
Rents Climb Despite ‘Shadow Market’
WSJ’s Nick Timiraos writes:
Landlords continue to see a strong rental market undercut by a “shadow market” — the glut of unsold homes on the market as rentals. But the housing downturn continues to provide landlords with solid rent increases nonetheless, as more homeowners become renters and as existing renters defer homeownership.
Rents climbed by 1.1% last quarter, slightly off the 1.3% growth in the same quarter last year, according to figures to be released Saturday by Reis Inc., a New York real estate research firm. Apartment vacancies held constant at 5.9% from the previous quarter.
Rent growth remains ahead of where it should be given the economic downturn and slowing wage growth. “That’s giving landlords more power than we’d normally expect to see in the cycle,” says Sam Chandan, chief economist at Reis. At the recession earlier this decade, he notes, “we had declines in rent certainly not on the order of what we’re seeing now.”
Four of 79 markets tracked by Reis showed negative rent growth, all in parts of the country hardest hit by big home prices declines: Miami; Palm Beach, Fla.; Ventura County, Calif., and Detroit. (See charts below)
Rents increased in some strong housing markets, including Seattle and Boston, where tightened mortgage lending terms continue to discourage homeowners. The energy sector helped boost rents in markets across the West, including Denver, which led the nation with 1.9% rental growth. Houston, Oklahoma City and Tulsa, Okla., also posted above-average rental increases.
Reis’s Mr. Chandan suggests that the data show “very preliminary” signs of stabilization in the hardest-hit housing markets in Florida. Vacancies fell in overbuilt housing markets including California’s Inland Empire and Fort Lauderdale, Fla., and California’s Inland Empire, which also posted an above-average rental growth. Rents gained a robust 1.5% in Orlando, Fla.
One big question that remains: When will the shadow market disappear? Analysts say that the most overbuilt housing markets will continue to see homes and condos converted to rentals through 2009. “Given the extent of overbuilding that’s a fairly speedy correction,” says Mr. Chandan.
Others point to the lack of rental demand due to renters who double or triple up or move in with their parents. Lawrence Yun, chief economist for the National Association of Realtors, says that the practice should abate in the short-term, in part because “it’s not sustainable to keep adding roommates.”
Strongest Rent Growth
1 Denver 1.9%
2 Wichita, Kan. 1.9%
3 Syracuse, N.Y. 1.9%
4 Seattle 1.9%
5 Dayton, Ohio 1.7%
6 Tulsa, Okla. 1.7%
7 Louisville, Ky. 1.7%
8 Little Rock, Ark. 1.6%
9 Hartford, Conn. 1.6%
10 Boston 1.6%
Weakest Rent Growth
1 Palm Beach, Fla. -0.40%
2 Miami -0.2
3 Detroit -0.1
4 Ventura County, Calf. -0.1
5 Fort Lauderdale, Fla. 0
6 Tucson, Ariz. 0.2
7 Portland, Ore. 0.3
8 Phoenix 0.3
9 Columbia, S.C. 0.5
10 Northern New Jersey 0.5
Source: Reis Inc.
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