Interest Rates May Hinder Affordabilty Among Home Buyers

Interest rates may soon start chipping into record affordability among home buyers

By Dennis Wyatt, Manteca Bulletin

 

When experts try to do a post-mortem on the torturous housing collapse caused by liar loans and super unconventional lending practices that triggered massive amounts of foreclosures, last month in all likelihood will be when the bottom was hit for the lower end of the market.

Mind you, that’s not the overall bottom whether you determine it by median or average selling price but the bottom of the lower tier of housing which is the most affordable.

It is when the 85 percent of Manteca’s median closing price of resale homes sold for $219,310. It is a price point that – depending on which measure you use – is close to 50 percent of Manteca’s households that would constitute the first-time buyer pool can now afford to buy a home in Manteca based on gross income alone. (Obviously debt load and such can reduce the ability of a first-time buyer to qualify.) That is significantly higher than just four years ago when the percentage of Manteca residents who were first-time buyers that could quality for a home without resorting to liar loans and artificially low introductory rates was in the single digits.

It is also a price that made even homes needing $20,000 worth of work on the lower end of the spectrum appealing to investors. Even after buying the home and making repairs, market rents give them a positive cash flow from the first time a tenant moves in.

And if you think everyone out there is putting cash down, consider this: There are a number of savvy investors who bought homes for cash in previous months who are getting virtually 100 percent loans from banks they do business with to buy another rental while using the fact they outright own 100 percent of another home free and clear. There are a number of people doing just that – even small-time investors – who have shifted big bucks sitting in savings accounts where they were earning minimal return into the biggest real estate bargains of the 21st century in a housing market earmarked to go places.

How long will it last? Good question.

There’s almost universal agreement that the big slide in prices is over due to how the investors are reacting. That doesn’tmean prices won’t still drop some on the bottom end or that there isn’t a significant amount of air to still go out of prices in other segments of the market.

Now the burning issue is how much will waiting cost you.

A $150,000 home dropping another $7,500 can reduce the monthly payment another $45. But it rates go up a half percent from today’s 6.25 percent without a drop in price it will cost $40 a month to buy the same home.

As it stands now, a rise in interest rates will start eliminating people once again from home buying.

And if you don’t think higher interest rates aren’t in the works, then you are a lot more confident that most about this country’s ability to control the rate of inflation and get its trade deficit off of a $2 billion daily bleed.

Liar Loans

 

 

This article is from the Mercury News. For more information go to my website at:

 

www.jlealsellshomes.com

 

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Article Launched: 08/18/2008 02:25:01 PM PDT

In the mortgage industry, they are called “liar loans” — mortgages approved without requiring proof of the borrower’s income or assets. The worst of them earn the nickname “ninja loans,” short for “no income, no job, and (no) assets.”

The nation’s struggling housing market, already awash in subprime foreclosures, is now getting hit with a second wave of losses as homeowners with liar loans default in record numbers. In some parts of the country, the loans are threatening to drag out the mortgage crisis for another two years.

“Those loans are going to perform very badly,” said Thomas Lawler, a Virginia housing economist. “They’re heavily concentrated in states where home prices are plummeting” such as California, Florida, Nevada and Arizona.

Many homeowners with liar loans are stuck. They can’t refinance because housing prices in those markets have nose-dived, and lenders are now demanding full documentation of income and assets.

Losses on liar loans could total $100 billion, according to Moody’s Economy.com. That’s on top of the $400 billion in expected losses from subprime loans.

Fannie Mae and Freddie Mac, the nation’s largest buyers and backers of mortgages, lost a combined $3.1 billion between April and June. Half of their credit losses came from sour liar loans, which are officially called Alternative-A loans (Alt-A for short) because they are seen as a step below A-credit, or prime, borrowers.

Many of the lenders that specialized in such loans are now defunct — banks such as American Home Mortgage, Bear Stearns and IndyMac Bank. More lenders may follow.

The mortgage bankers and brokers who survived were more cautious, but acknowledge they too were swept up in the housing hysteria to some extent.

“Everybody drank the Kool-Aid” said David Zugheri, co-founder of Texas-based lender First Houston Mortgage. They knew if they didn’t give the borrower the loan they wanted, the borrower “could go down the street and get that loan somewhere else.”

The loans were also immensely profitable for the mortgage industry because they carried higher fees and higher interest rates. A broker who signed up a borrower for a liar loan could reap as much as $15,000 in fees for a $300,000 loan. Traditional lending is far less lucrative, netting brokers around $2,000 to $4,000 in fees for a fixed-rate loan.

During the housing boom, liar loans were especially popular among investors seeking to flip properties quickly. They were also commonly paired with “interest only” features that allowed borrowers to pay just the interest on the debt and none of the principal for the first several years.

Even riskier were “pick-a-payment” or option ARM loans — adjustable-rate mortgages that gave borrowers the choice to defer some of their interest payments and add them to the principal.

While some borrowers were aware of their risky features and used them to gamble on their home’s value or pull out money for vacations, others like Salvatore Fucile insist they were victims of predatory lending.

Fucile, who is 82, and his wife, Clara, wound up in an option ARM from IndyMac after consolidating two mortgages on their suburban Philadelphia home. Fucile was attracted by the low monthly payments, but says the mortgage broker who signed him up for the loan didn’t tell him the principal balance could increase. It has risen about $24,000 to $276,000.

“He put me in a bad position,” said Fucile, who fears he will be forced into foreclosure. “He misled me.”

IndyMac was taken over by the Federal Deposit Insurance Corp. last month.

FDIC spokesman David Barr declined to discuss the Fuciles’ case, but said the agency has temporarily frozen all IndyMac foreclosures and is working on a broad plan to modify mortgages held by the Pasadena, Calif-based bank.

The low monthly payments of liar loans helped many home buyers afford to purchase in areas of the country where prices were skyrocketing. But they also helped drive up prices by allowing people to buy more than they could truly afford. Case in point: about 40 percent of loans made in California and Nevada in 2005 and 2006 were either interest-only or option ARMs, according to First American CoreLogic.

“It was pretty evident that the only thing that was supporting these loans was higher home prices” said Tom LaMalfa, managing director at Wholesale Access, a Columbia, Md.-based mortgage research firm.

Now that prices have fallen, almost 13 percent of borrowers with liar loans were at least two months behind on their payments in May, nearly four times higher than a year earlier, according to First American CoreLogic.

Countrywide Financial Corp., now part of Bank of America Corp., was one of the top providers of liar loans. The company is now is paying the price. More than 12 percent of Countrywide’s $25.4 billion in pick-a-payment loans are in default, and 83 percent had little or no documentation, according to a Securities and Exchange Commission filing last week.

Critics say Fannie Mae and Freddie Mac, which bought or guaranteed liar loans from lenders including Countrywide and IndyMac, should have stuck with traditional 30-year, fixed-rate mortgages.

“I personally think that they ventured beyond their mission,” said Richard Smith, a mortgage broker in Chattanooga, Tenn. Because of their decision to back shakier loans, he said, “the home-buying public is going to have to pay.”

Fannie and Freddie entered the market for risky loans just as they emerged from accounting scandals. At the time, Wall Street giants such as Bear Stearns and Lehman Brothers Holdings Inc. were backing a growing share of ever-riskier loans, and both government-sponsored companies felt pressure to compete.

Freddie Mac wanted “to stay competitive in the market and take steps to preserve market share,” spokesman Michael Cosgrove said.

Fannie Mae increased its purchases of liar mortgages “at the requests of many of our customers,” according to spokesman Brian Faith.

Both companies also were able to use subprime and liar-loan investments to meet government-set affordable housing goals.

Now Fannie, Freddie and other mortgage investors are reviewing defaulted loans to see if lenders committed fraud. If they find enough evidence, they could force lenders to assume responsibility for losses.

But it’s unclear how much money they might recover, especially from lenders that have gone under or been seized by the government.

HELP FOR HOME BUYERS

By SHELLY BANJO
August 16, 2008

When it comes to housing, it’s a buyer’s market — especially for first-time home buyers eligible for new tax breaks.

The American Housing Rescue and Foreclosure Prevention Act of 2008, passed by Congress at the end of July with hopes of shoring up the ailing housing market, also includes an important tax break. First-time home buyers who purchase a home after April 8, 2008, and before July 1, 2009, are eligible for a $7,500 tax credit (or, if the home costs less than $75,000, a credit equal to 10% of the purchase price).

This credit, however, comes with a catch. You’ll have to pay it back.

Here’s the good part: The credit reduces your tax liability on a dollar-for-dollar basis and can even boost your refund. If you owe $10,000 in taxes, you can take the credit and pay just $2,500. Or if you owe $5,000 in taxes and have paid it over the year, you can take the credit and receive all your money back with an additional $2,500.

But unlike other federal tax credits, the new credit must be paid back to the government over a period of 15 years.

Income Limits

“It’s the equivalent of an interest-free loan from the government,” says Bob Trinz, senior tax analyst at the tax and accounting business of Thomson Reuters.

To qualify for the credit, you (and if married, your spouse) must not have owned a principal residence during the three-year period before you buy the home. In general, the credit is available in full only if your adjusted gross income doesn’t exceed $75,000 ($150,000 if you file a joint return).

The credit phases out over the $150,000 to $170,000 adjusted gross income range for joint filers ($75,000 to $95,000 for individual filers).

If you claim a $7,500 credit, you’ll have to start paying it back as an extra tax amount on your federal returns at the rate of $500 per year, beginning with the tax return for the second year after you buy the new home. That is, if you buy a home this year and claim the credit, you’ll have to start paying back the money when you file your 2010 return in 2011.

For more details and examples of how the new law works, visit the Web site of Congress’s Joint Committee on Taxation at www.jct.gov and look for publication JCX-63-08 on the home page. For additional information on tax breaks from the Internal Revenue Service, see Publication 530 at irs.gov.

IRA Withdrawals

Another option for first-time home buyers is to take out money from your traditional individual retirement account (IRA) or from your Roth IRA.

Typically, if you take money out of a traditional IRA before age 59½, you pay a 10% early withdrawal penalty. But you can avoid that penalty if neither you nor your spouse has owned a home in the previous two years. You can receive distributions from your traditional IRA to pay up to $10,000 of first-time home buyer expenses, but “because you still have to pay taxes on the withdrawal…it’s not a particularly attractive way to fund a down payment on a home,” says Kaye Thomas, a tax lawyer and tax-guide publisher in Lisle, Ill.

With a Roth IRA, a withdrawal from contributions is always tax and penalty free. If you have held your Roth IRA for five years, and plan to use the money to finance your first home, you can

WHAT IS A SHORT SALE?

Lately I have been asked what is a short sale?  I hope this article helps to explain what a short sale actually is.  For more information please visit my website at: www.jlealsellshomes.

 

WHAT IS A SHORT SALE?

 

A short sale is typically done during the foreclosure process, after a Notice of Default” has been filed. A short sale will stop the Trustee Sale which concludes the foreclosure process.

At this point, you may be thinking to yourself, “Why in the world would a bank agree to a short sale?” The answer is fairly simple:

Banks are in the business of lending money and not owning real estate. If a home is in foreclosure because the borrower is in default, that’s called a non-performing loan. Federal Reserve guidelines state that the bank must put aside two to eight times the amount of the non-performing loan to cover the bad debt. If this money is sitting in reserve, it obviously can’t be loaned out to new customers to make the bank more money. As a matter of fact, there are strict federal guidelines as to how many bad loans a bank can even have on their books at any given time. If a certain percentage of their outstanding loans are considered bad debt, they can be fined, sanctioned and even federally regulated.  So you see, they are quite eager to get rid of a property before they have to take it all the way to a Trustee Sale and possibly take it back as an REO (which by the way stands for Real Estate Owned.)  Not to mention the fact that the foreclosure process is long and expensive for the lender involved.

A short sale is accomplished by sending the lender a “Short Sale Package” which includes many documents supporting the fact that the borrower can no longer pay their mortgage and must sell the property at a loss to the lender, and the only other alternative is foreclosure.  Things included in the short sale package include: financial statements, pay stubs, medical bills, divorce decree, etc.  Also included will be a detailed letter from the homeowner, called the “Hardship Letter,” explaining why they can’t make their mortgage payments anymore.  The most important part of the package will be… an offer!  True, the lender will most likely not even look at a short sale package if it does not have an actual written offer from an interested buyer.

A short sale is an often complicated process, and can be lengthy, sometimes taking upwards of 3-4 months to get the whole thing done, especially if the real estate agent doesn’t know what they’re doing. Therefore, much of the success or failure in accomplishing a short sale depends on the real estate agent involved.  I specialize in foreclosures and short sales and have many unique methods for getting short sales approved quickly.  I also work with a large number of homebuyers and investors who are ready to make offers on properties immediately.

I know that being in the middle of the foreclosure process can be very stressful and frightening, and that understanding the process and what your options are can shed some light on the situation and help you feel better about it.  My goal is to truly help people get out of this terrible predicament and move on with their lives.

Getting Bigger & More Expensive

Getting bigger & more expensive
Housing starts strengthen for second straight month

Dennis Wyatt
Managing Editor, Manteca BulletinIt might not be enough to declare a trend or even a turnaround, but new housing starts in Manteca for the second straight month were up a dismal spring along with the size and cost.There were 37 single-family home permits issued by the city with an average construction value of $170,513. The new homes also represent the biggest in terms of average square footage in 10 months. The average home was 2,728 square feet.

Manteca new homebuilders started 38 new houses in June.

That was almost double the best month previously this year, which was 20 in May. It is still a far cry from previous Junes when as many as 70 new homes were started.

The average home in July also is costing $170,513 to build. That is before land, site development costs, infrastructure such as sewer and water lines, permit fees and developer profit are factored into the equation.

The weakest July for new home starts in eight years contrasts with efforts by developers to move forward new projects that could add as many as 5,889 homes to Manteca.

If the current pace continues, single family home construction starts will reach 256 this year in Manteca. It will make it the slowest year since 1999 plus would make it almost 62 percent of last year’s 416 starts.

If starts reach 282, it would be equivalent to about a third of the sewer allocations allotted to new homes in Manteca under the 3.9 percent growth cap put in place in 1988. The growth cap allows 890 sewer allocations for 2008.

But perhaps more telling of what builders are dealing with in a bottom-line price-driven market is the size and cost of new homes.

The square footage for an average new home start in Manteca is 2,156 square feet. The smaller homes reflect a lower cost to build the actual house minus land costs, site costs, fees, and developer costs. It has dropped to $151,050 for an average new home down from $160,979 in 2007 when 416 homes were started and from $165,087 in 2006 when 516 homes were built.

The size and price of new home starts rebounded for the second straight month in July, up $33,897 and 968 square feet from May.

The new housing slump has prompted some to wonder why developers are moving forward with nine projects that need annexation to the City of Manteca that includes plans for 5,889 more homes.

That is in addition to already approved projects that are far from being built out including Tesoro and Valley Park in South Manteca as well as Del Webb at Woodbridge plus Union Ranch East in North Manteca. It also doesn’t include approved projects that haven’t broken ground yet including the 760 homes and 310 apartment units approved for the Villa Ticino West project on the southwest corner of Airport Way and Louise Avenue.

Manteca developers – local, regional and national – have all been through housing slumps before and understand it is a cyclical business. They also have cited other reasons to be confident about housing demand eventually coming back even stronger in the long run than before including Manteca’s position as being in the virtual center of the region the state expects to lead California’s growth for the next 20 years – the Northern San Joaquin Valley counties of San Joaquin, Stanislaus, and Merced.

They also look west of the Altamont Pass and see the economy picking up steam in the Bay Area in key sectors, which has historically served as a precursor to an eventual stampede of buyers heading east to find homes they can afford.

The lead time to actually get a major project to the point it can break ground in Manteca once a proposal is submitted to the city is anywhere from two to five years depending upon whether the land is already within the city limits, according to developers. That pretty much reflects reality in the rest of the state as the California Environmental Quality Act has significantly slowed down the process over the past two decades.

Banks that underwrite developers’ upfront costs such as site development that includes streets and such have been preparing to start funding more work this summer and fall.

That would mean the builders would be to the point to start building homes by June 2009.

Builders are readjusting to market realities.

Three new sets of home plans being processed by three different builders have all but wiped out traces of homes 3,400 square feet or larger.

Three developers – Woodside Homes and Standard Pacific in Tesoro northeast of Van Ryn Road and Woodside Avenue as well as Florsheim Homes on Woodward Avenue west of Airport Way – have a set of new master plans for new homes in their projects currently in review.