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Welcome to the AAOA Forum, where we discuss the the topics our members want to hear and want to talk about. We like to take an active roll in the online community to help our members learn and help educate landlords new and old. We encourage you to participate and join in our discussions. Thanks.
The Pitfalls of Property Exchanges
Financial, business risks stir concerns
by Tom Kelly, Inman News
While many potential homeowners — especially first-time buyers attempting 
to beat the Nov. 30 deadline and take advantage of the $8,000 federal tax credit — have re-entered the market and have made compelling offers to purchase Puget Sound homes, investors have been reluctant to capitalize on reverse tax-free exchanges.
Nine years ago, the federal government enhanced 1031 delayed exchanges that allow taxpayers to defer the capital gains tax on an investment property if they purchase a “replacement” investment property of equal or greater value within specific time frames.
The enhancement, Internal Revenue Procedure 2000-37, permits the title to the “replacement” property to be held by an independent third party (typically a facilitator or attorney) until the “old” property sale closes. In other words, you can buy before you sell and still defer the gain.
“I think the reason why reverse exchanges have not been terribly popular of late is that investors still need the cash to buy the property,” said Kelly Yates, an attorney who along with fellow attorney Dennis Helmick operate Exchange Facilitator Corp., which specializes in tax-deferred exchanges.
“Even though something might be an absolute deal and too good to be true, you need money to buy it. It’s difficult finding financing for exchange properties.”
This original concept of a 1031 delayed exchange, or Starker exchange, is named after T.J. Starker, an Oregon man who made a deal with Crown Zellerbach in 1967 to exchange some of his forested property for some suitable “like kind” future property. That agreement ended up in court. Starker’s battle was the basis for congressional approval of delayed exchanges.
“What we have been seeing more since the real estate market slowed down more than 18 months ago is conventional tax-free exchanges with a longer closing date,” Helmick said. “This gives the seller a longer period to execute the entire exchange.”
The clock does not start ticking on a tax-free exchange until the first property closes. Then, the seller has 45 days to identify a replacement “like-kind” property of equal or greater value and 180 days to close that second leg of the exchange.
In real estate, “like kind” can apply to a variety of situations and is quite flexible. A house may be traded for an apartment building, and vacant land traded for an office building, etc.
A house that is the owner’s primary residence cannot be traded for investment property. Nor do stocks, bonds, securities and similar equity investments qualify as “like kind.” Likewise, if you own land and build a structure on it with 1031 exchange funds, the IRS will probably not consider your investment an exchange.
One of the more complex parts of the original regulations explains that within the 45-day period following sale of the investment property, you can identify three or more parcels of property, regardless of value, that you may wish to buy for your new investment.
In other words, you can consider taking the equity from your first rental house and reinvesting it in three or more new pieces of real estate without paying taxes.
However, if the number of parcels on your list exceeds three, and their combined value is greater than 200 percent of the property sold, you are required to buy 95 percent of the total sales price of the replacement properties.
To totally defer capital gains tax, you must pass the IRS’ acid test by:
* Trading even or up in value.
* Trading even or up in equity.
* Not pocketing any cash from the first sale.
* Identifying the new (or old) property (or properties) within 45 days of the sale. (This typically means having a signed purchase and sale agreement.)
* Closing the transaction within 180 days.
“In this environment, investors are thinking twice about reverse exchanges because they don’t want to take on the financial risk and the business risk,” Helmick said. “They are wondering where their money would be better placed and if the property they bought for cash will retain its value or appreciate.
“It’s far more likely to see individuals tying up a property for as long as possible with as little as possible.”
Tom Kelly’s book “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com.
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Posted by Kim Ezzell on 11.02.2009. CLICK to Leave a Comment »
Filed under: AAOA Forum, Financing
Recession Officially Over – But Is It Good News for Landlords?
The Commerce Department’s Bureau of Economic Analysis released data Thursday on GDP in the third quarter – and it was good news.
According to the report, real GDP increased 3.5 percent at an annual rate in the third quarter, after declining in five of the preceding six quarters. The gain marked the largest quarterly advance since the third quarter of 2007.
According to the survey, the key areas of concern involve the large increases in federal debt and unemployment rates that are expected to remain very high through next year.
That’s bad news for landlords.
We have already seen how the high unemployment figures have driven up vacancy rates. With fewer qualified applicants, properties may sit vacant for a longer time, or landlords may have no choice but to lower rent or offer other incentives to keep properties filled.
Congress is acting to extend unemployment benefits once again, which at least provides existing tenants who lose a job some income source for rent payments.
All the while housing numbers are improving, recent reports show that the vast number of home sales is in the lower end of the market, to those using the first time buyer credits – previous renters who can now afford a home of their own.
Yet, according to NABE, inflation is expected to remain contained throughout 2010. “The good news is that this deep and long recession appears to be over, and with improving credit markets, the U.S. economy can return to solid growth next year without worry about rising inflation.”
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Posted by Kim Ezzell on 10.29.2009. CLICK to Leave a Comment »
Filed under: AAOA Forum, Financing
Are the Stock Markets Telling Us Something?
The report, released last week is another green shoot pushing upwards.
indexes, rose in July over the previous month, as 18 of the 20 metropolitan areas comprising the benchmark saw saw a boost to real estate values (see chart here.)The ten-city index is down 33.5% from its mid-2006 high, while the 20-city index has declined 32.6%. UMM and DMM Confirming the stats market shares built to be reflective of moves in home prices acted as they should.
These market tools are investments in their own right, but they are also trend confirming tools. Two new investments based on the Case Shiller indexes allow people to invest in the direction of home prices. MacroShares Major Metro Housing Up Trust (UMM) and Major Metro Housing Down Trust (DMM).
Last week, UMM had gained more than 3%, while DMM was down by about the same amount. Since their inception in June 2009, UMM has jumped by nearly 35%, while DMM is down nearly 25%. (see chart here.) Reflecting investor expectations for the U.S. housing market( home prices will continue to rise over the next five years).
If you look at the price action of the UMM vs the DMM, you can see investors think that homes will continue to rise. Looking at the Dow REIT index, you see similar strong moves to the upside. Personally, I think the markets are ahead of themselves but they are a strong confirmation that people are beginning to look past the bust and are betting on the future.
Early?
Yes. We have the commercial recasts and the option ARMs to get through. The markets enthusiasm is emotional, we raised the flag because we avoided a great depression, but now there is more reality to face. The good news, The Economist made an observation I loved. American is brilliant at fixing itself.
Howard Bell PFP CCRM is the founder/editor of
Your Property Path.com, featuring over 450 articles on property management, Your Property Path SF, trade talk for the San Francisco real estate industry, Your Property Path News Brief, snap news updates and real estate market info, and Your Property Path Amazon Store. Howard is a property manager in San Francisco and holds a certification in financial planning.See Howard Bell’s feature, Get Your Property Rented Faster.
American Apartment Owners Association offers discounts on products and services for landlords related to your real estate investment including REAL ESTATE FORMS, tenant debt collection, tenant background checks, insurance and financing. Find out more at joinaaoa.
To subscribe to our blog, click here.
Posted by Kim Ezzell on 10.22.2009. CLICK to Leave a Comment »
Filed under: AAOA Forum, Financing
Double-Digit Mortgage Rates on Horizon?
by Steve Bergsman
At a recent real estate conference, I found myself standing next to Richard Williams, a Century 21 Realtor from the Atlanta area, who had founded something called Clickit Inc., which provides flat-fee pricing for sales and
listings. I would say we chatted, but Williams is a born raconteur and I mostly just listened.After a while, a young man from New York joined us and in the course of the shifting conversation, the Big Apple dude wistfully noted he was renting an apartment but considering buying a condo. Williams turned his attention to the young fellow. “Now is the time to buy,” he exclaimed.
The reason for Williams’ emphasis on buying now? Was it because housing prices had gotten so low that good deals were everywhere? Actually, no. Williams strongly suggested to the New Yorker he should make his investment sometime this year as expectations are that interest rates were bound to rise and wouldn’t stop climbing until they hit double digits. That would make any future purchase considerably more expensive than it would today.
I, too, expect interest rates to start heading north again, but double digits seemed far out there — not in terms of a time line, but psychologically.
Williams rationalized that at some point in the near future, the economy was going to elevate very dramatically, which would raise the specter of inflation. If that happened, the Federal Reserve would push up interest rates to keep inflation under control.
I didn’t disagree with that scenario. However, I don’t believe the economy, when it does turn around, will take off like a rocket, so the government’s need to contain a budding inflationary climate would be moderate at best.
There are other factors to consider as well.
Interest rates have been kept low since the short recession at the turn of this century, and this was one of the causes of the housing bubble that lasted until 2007. Once the economy stabilizes, I figure the Fed might want to raise interest rates, thus slowly bringing them back to more sustainable levels, something like 3-4 percent.
Then there is the massive pumping of stimulus dollars into the economy.
Globally, the first major nation to experience economic recovery has been Australia, and there is already speculation interest rates will start to rise there. Now, tell me if this doesn’t sound familiar: as the Wall Street Journal reported, Australia’s recovery comes at a time “when huge amounts of government stimulus are still coursing through the Australian economy, raising fears of higher inflation in the years ahead if the central bank doesn’t start raising rates fairly soon.”
All those stimulus dollars have to come from somewhere. Sure, we could just print more money, but that would be hyperinflationary, so the federal government, instead, borrows it, which is less inflationary.
There are concerns about the budget deficit, which “looks like it is going to be huge,” notes Celia Chen, a senior director at Moody’s Economy.com. “If the budget deficit is too large, then the government is borrowing a lot and having to issue more Treasury bonds. That will cause the price of Treasuries to fall and if that happens, yields have to increase and interest rates will rise.”
No matter, how one slices and dices the economic prestidigitations, pressure continues to build on the government to raise interest rates, probably next year.
“There is no doubt that interest rates are going to have to go up,” says William Conerly, an economic consultant and author of “Businomics From the Headlines To Your Bottom Line: How To Profit in Any Economic Cycle.”
At some point the Federal Reserve is going to have to worry about inflation, Conerly adds. “Certainly not in 2009, but in 2010 the Fed will probably start pushing up short-term interest rates. If the economy gains some steam in the second half of this year, the long-term markets will push rates up even before the Fed tightens, so we’ll see Treasury yields rise even further between now and spring 2010.”
As of the third quarter, the spread between mortgages and the 10-year Treasury was wider than normal, which will narrow, but that won’t be enough to prevent the cost of borrowing from getting more expensive. Does that mean Richard Williams was on target in soothsaying interest rates and subsequently mortgage rates will be heading into the double-digit range, thus making home purchases considerably more expensive?
In summer 2009, mortgage rates had risen from below 5 percent earlier in the year to about 5.2 percent, and Conerly’s predictions are that the 30-year fixed mortgage rate will climb to 7.7 percent at the end of 2010.
Chen’s crystal ball shows a more conservative picture. “We have the fixed-rate climbing to 6.6 percent in 2010,” she says. “We expect mortgage rates to rise to 6.9 percent in mid-2011 and we don’t have those numbers going above 7 percent until the year 2012.”
Chen expects a reasonable economic rebound but inflation remaining at bay. Still, she recognizes there are some risks ahead. “Those predicting a higher mortgage rate are worried about too much credit on the market and the Fed having to keep inflation from creeping back,” she adds.
I bought my first home back in the 1970s. Apparently, sometime around then so did Conerly, because we both remember having to acquire homes at double-digit interest rates. Indeed, it wasn’t until 1985 that interest rates fell below double digits. The concern about interest rates rising past what to some is the seemingly astronomical 6 percent mark brings considerable levity to Conerly’s demeanor.
“I hear real estate brokers whining that interest rates, which have been at record lows, may go up to 6.5 percent,” he says. What these brokers don’t realize, he adds, “is that they are really living in the golden age of mortgage rates.”
Steve Bergsman is a freelance writer in Arizona and author of several books, including “After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade.”
Copyright 2009 Inman News
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Posted by Kim Ezzell on 10.19.2009. CLICK to Leave a Comment »
Filed under: AAOA Forum, Financing
FHA Bailout Imminent? Chief Says “No Way!”
by taxpayer dollars to buffer a flailing mortgage market.American Apartment Owners Associationoffers discounts on products and services for landlords related to your real estate investment including REAL ESTATE FORMS, tenant debt collection, tenant background checks, insurance and financing. Find out more at joinaaoa.
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Posted by Kim Ezzell on 10.12.2009. 1 Comment »
Filed under: AAOA Forum, Financing
Turbulence Seen For Reverse Mortgages
The reverse mortgage, which has proven very popular with the retirement-age crowd, has come under assault from two diverse groups: the government and scam artists. Now I’m not going to argue with anyone who tries to say the government and scam artists are two sides of the same coin. That seems a bit mean.
After all, the government attempts (or is supposed to attempt) to do what’s best for the consumer and the country, although sometimes the net effect of legislation appears to be as wounding to some people as theft through fraudulent practices.
In regard to reverse mortgages, the government is, indeed, trying to protect their availability through conservative fiscal practices. Unfortunately, it could end up neutering them instead.
A reverse mortgage, which is available only to those 62 and older, allows homeowners to use the equity that has built up in a residence. In effect, the homeowner gets a loan in the form of a lump sum or multiple payments. Repayment, with interest, is deferred until the owner dies, or goes into aged care, and the home is sold. Or, in a worst-case scenario, if the homeowner fails to pay property taxes or homeowners insurance.
After being introduced with the new decade, reverse mortgages didn’t really gain any traction in the marketplace until 2005, when just under 50,000 were written. Growth came quickly since then, with totals surpassing 100,000 in 2007. The Wall Street Journal predicts the total number of federally insured reverse mortgages could run as high as 150,000 this year.
Here’s the problem: About 99 percent of reverse mortgages are FHA-insured. In scrutinizing the reverse mortgage loan outlook for fiscal year 2010 (which began Oct. 1, 2009), the Federal Housing Administration and Office of Management and Budget felt the reverse mortgage market — which had previously always paid its own way — would run about 130,000 loans (a more conservative estimate).
And the expectation was that over the life of those loans there would be losses in the range of $800 million.
That, of course, would mean an additional subsidy to cover the expected loss or, in the thinking of the Congress, to adjust the program so that it doesn’t require any further dollars.
Two questions arise: Is an additional subsidy necessary? And what would it mean to the efficacy of the reverse mortgage?
“The FHA and OMB did some calculations on what they believe the volume of originations will be in the next fiscal year and what they expect the behavior of the loans to be — most importantly, what will happen to housing prices,” explains Jeff Lewis, chairman of Atlanta-based Generation Mortgage Co., the largest independent reverse mortgage originator in the country.
“Presumably, if housing prices are weak next year, that means loans got originated at too high a loan-to-value (ratio) and it would make the loans less creditworthy. We don’t know what they used as far as their assumptions, but it would appear their estimates are very draconian about housing prices.”
To make the loans more creditworthy, the U.S. House and Senate are considering reducing the amount of loan value that can be pulled from a reverse mortgage by 5 percent to 10 percent.
That could be a problem.
According to calculations from the National Reverse Mortgage Lenders Association, the Washington, D.C.-based trade group for the industry, a 10 percent reduction would mean that 21 percent of 130,000 households, or 27,000 households, would be forced to give up their homes as a result of that cut.
“I don’t think anyone wants to be responsible for telling 27,000 seniors that they have to leave their homes,” says Peter Bell, president of NRMLA. “That’s a powerful argument politically.”
Bell proposes an alternative: to increase the income the program generates by raising the mortgage insurance premium (MIP). One of the criticisms of reverse mortgages is the large, upfront MIP. NRMLA’s recommendation is to lower the upfront, but raise the ongoing payments by borrowers.
Currently, the borrower pays 2 percent of the home value upfront and then another 1/2 percent per year on the actual balance being drawn down. The NRMLA would prefer to reduce the upfront from 2 percent to 1 percent but increase the ongoing to a full 1 percent.
The other problem facing reverse mortgages is a reported increase in scams. Although the occurrence of scams are still relatively small in number, they seem to be coming from two sources: third parties, such as a title agent involved in the process, but more often than not the relatives of the seniors who participate in a reverse mortgage.
“We just do the loan and the third parties taking advantage of the borrowers are usually financial advisers or someone selling a financial product whom we are not affiliated (with) and don’t know,” says Lewis.
That’s still just a small problem. The bigger fraud comes from the familial network.
“The largest source of scams and thefts with people who have gotten a reverse mortgage are family members who steal from the grandparent or parent,” says Bell. “More often than not, the theft is tied to substance abuse by the child or grandchild.”
It seems, once the senior gets the dollars from a reverse mortgage a whole new set of problems arise. The new predator is someone whom you know very well.
Steve Bergsman is a freelance writer in Arizona and author of several books, including “After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade.”
Copyright 2009 Inman News
American Apartment Owners Associationoffers discounts on products and services for landlords related to your real estate investment including REAL ESTATE FORMS, tenant debt collection, tenant background checks, insurance and financing. Find out more at joinaaoa.
To subscribe to our blog, click here.
Posted by Kim Ezzell on 10.05.2009. CLICK to Leave a Comment »
Filed under: AAOA Forum, Financing
Case Shiller Real Estate Trends and More
by Howard Bell
This report released yesterday, confirms that the housing markets are in a firming process. Hardly a recovery at this point. We are still in the numbers are bad, but not as bad stage. Typical of the early and therefore fragile 
stages of a housing recovery.
Case Shiller reports that home prices have increased for the third month and that the decline in prices continues to shrink. No bottom yet and we can do this for quite a while before we see an end to this.
Never the less, this is good news and the 20 MSA composite index shows improvement. The year over year change of home price has declined 13.3%, less that the 15.4% decline last year. We may be seeing the emergence of a trend towards higher home prices.
In any market as complex as real estate there are always trends and counter trends. As the economy continues to unfold, some of these trends will be strengthened and others weakened. Why Its never a straight line and so hard to predict direction.
In Our Favor
Prevailing Positive Trends
We have an increasingly strong economy. As someone recently said, we have the turn signal on but haven’t yet turned the corner.
1. Real Estate: The real estate sector is looking better.
2. The stock market: Market action is actually bullish. The Dow has gone from a annual low of to 6440 to over 9500 today
3. Manufacturing: National figures show factory output has actually expanded. The ISM index is over 50 a positive number indicating manufacturing is growing and expanding.
4. TARP: The Obama administration is about to put a lot of money to correct some of the excesses still holding the financial system back from functioning properly. The toxic asset program is launching one year after Congress approved the $700 billion financial rescue legislation for Troubled Assets Relief Program
5. Treasury Department: Treasury has been working with private groups to build investment funds, combining public and private money to buy toxic paper still on the books. Ive read that Treasury is committing 2.5 billion is a dollar for dollar match for funds raised by private firms, eventually reaching 40 billion dollars in new investment money for bad paper.
6. REITs are raising money as we approach a real bottom in the commercial and mortgage sectors. New stock issues have raised between 15-20 billion dollars. The REIT indexes are up handsomely, in anticipation of bargain prices when the dust settles on commercial property now feeling the pain of a great recession.
Prevailing Counter Trends
1. Long Road Back: By historical standards this collapse is deep. The chart on my web site compares the red bubble of today to the last bubble of the 1980-1990s . It took almost 97 months for home prices to turn positive and this collapse is much larger
2. Homes Foreclosure: Realty Trac reports that there is still ample supply in the foreclosure pipeline. “record 138,224 properties entered the foreclosure process in August when they were subjected to notices of default or lis pendens, up 3 percent from July and a 16 percent increase from a year ago. The number of properties subjected to auction notices in August, 144,113, was also a new record, rising 4 percent from July and 53 percent from a year ago.”
3. Option ARMs: Option ARM mortgages will begin to readjust, slamming borrowers with higher monthly mortgage payments. Analysts say that could unleash the next big wave of foreclosures
4. Commercial Property: All of those developers and owners of office buildings and big apartment complexes that have bought or built in the last five years, will be looking to refinance their loans. Some commercial indexes show property off 50% nationally. The banks will be hard pressed to refinance and many properties will be significantly underwater. Why the REITs have raised money is in expectation of foreclosures as owners and developers walk away from loans they know now will never recoup the initial investment
5. Federal Tax Credit: The Federal tax credit and the phase out of treasury bond purchases will put some pressure on the housing markets.
6. Tighter Loan Standards: FHA has joined the banks in tightening up their standards. This coupled with the expectation of higher interest rates because the Treasury will phase out bond purchases. Its a test to see if the bond markets are healthy enough to stand on their own. Clearly its still a long road complete with speed bumps. I think the best take away now is that its a mixed bag…we have good news to talk about too.
Howard Bell PFP CCRM is the founder/editor of Your Property Path.com, featuring over 450 articles on property management, Your Property Path SF, trade talk for the San Francisco real estate industry, Your Property Path News Brief, snap news updates and real estate market info, and Your Property Path Amazon Store. Howard is a property manager in San Francisco and holds a certification in financial planning.
See Howard Bell’s feature, FHA Has New Rules.
American Apartment Owners Association offers discounts on products and services for landlords related to your real estate investment including REAL ESTATE FORMS, tenant debt collection, tenant background checks, insurance and financing. Find out more at joinaaoa.
To subscribe to our blog, click here.
Posted by Kim Ezzell on 10.01.2009. CLICK to Leave a Comment »
Filed under: AAOA Forum, Financing
Loan Shoppers: Their Own Worst Enemy?
Many clueless when it comes to mortgage disclosures
by Jack Guttentag, Inman News
For many years, the Federal Reserve and other federal agencies with responsibility for formulating required disclosures of financial information were tone deaf.
They decided on the information borrowers should have without ever asking borrowers what they wanted and without testing to see whether the information the agencies had selected for them was useful or even understood. For this they were much criticized, and rightly so.
But this has changed. In recent years, the Federal Reserve in particular has gotten religion, and their latest proposals to reform the Truth in Lending Act are replete with references to the results of consumer testing. Many of the Fed’s proposals are the direct result of listening to consumers.
In a recent article on Federal Reserve proposals for amending the Truth in Lending Act (TILA), I commented favorably on a proposal for early disclosures designed to encourage borrowers to shop alternative loan providers. Most of the mandated information that lenders now provide borrowers need not be placed in their hands until days after they have submitted an application, which in most cases is too late to help in shopping. Consumers rarely disengage from a lender once they have submitted an application.
The proposed new disclosures will be required at the point of application. This is a great idea, if it is properly implemented. Proper implementation means that the information lenders must submit at the point of application will help consumers select from among loan providers. Stated somewhat differently, the information must reveal differences between lenders that will cause borrowers to prefer one over another.
My previous article criticized the Fed’s proposed questions because they all applied to mortgage types or options, e.g., “Can my interest rate increase?” Since all lenders would answer them the same way, such questions would be useless to borrowers trying to select among different lenders. They would just add to the pile of useless paper.
After my article was published, Fed sources responded to my critique. They told me that their proposed disclosures were the direct result of giving consumers the information that the consumers questioned by the Fed said they wanted.
I was not surprised to hear that the consumers queried by the Fed requested information that would not help them. I have been fielding questions from borrowers for 12 years, and learned early on that the information they seek from me often is not the information they would have sought if they had understood their situation better.
What surprised me was that the Fed accepted it as their charge to give consumers the information the consumers said they wanted, even when it was clear that this information would not help borrowers shop alternative loan providers.
When a consumer asks me a question that I suspect is not relevant to his situation, I give back the information that, if my suspicions are right, causes him to reformulate the question. Helping people realize what the right questions are is a critical part of what we call “education.”
Truth in Lending should be educational, too. It should provide information that consumers will recognize as relevant to their situation when they see it, even though they did not realize its relevance when they participated in a Federal Reserve focus group and were asked what they wanted to know.
My critical article offered seven questions that would help borrowers select from among different lenders because they applied to important lender policies. One of them was, “Do you allow your loan officers to charge ‘overages’ — a price higher than the price the lender will accept?”
Of course, very few consumers on their own would mention overage policy as something they would like to know about, simply because they are not aware that such practices exist. My experience has been that once consumers become aware of overages, it jumps to the top of their concerns.
Requiring lenders to answer the question would create such awareness, which means that the disclosure would have educational value and would help borrowers in selecting loan providers. My other questions were of the same type.
In sum, the Fed seems to have swung from ignoring borrowers completely to slavishly giving them the information they say they want, even when that information is not going to help them.
Of course, if the Fed followed my practice and used its own judgment to select the information that would help borrowers, it would be criticized by others for being paternalistic, arrogant, and out of touch. There is a middle way, however: the Fed can select the information it believes will be useful, and then test it with consumers to see if it will work.
I am hopeful that the Fed will do this before issuing final rules. The Fed’s proposals are just that — “proposals” — and before they finalize them they promise to consider comments from all interested sources, including me.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
Copyright 2009 Jack Guttentag
See Jack Guttentag’s feature Avoiding Mortgage Rate Lock Problems.
American Apartment Owners Association offers discounts on products and services for landlords related to your real estate investment including REAL ESTATE FORMS, tenant debt collection, tenant background checks, insurance and financing. Find out more at joinaaoa.
To subscribe to our blog, click here.
Posted by Kim Ezzell on 09.28.2009. 1 Comment »
Filed under: AAOA Forum, Financing
FHA Has New Rules
by Howard Bell
The FHA has often been the lender of last resort.
It doesn’t have the same stringent lending requirements that other lenders have and it only required 3% down and light on junk fees as well.
If you didn’t have a 20% down then the FHA was likely on your short list of lenders. FHA as well as Freddie Mac and Fannie Mae had an unspoken political mandate to make home ownership affordable to those with less than perfect credit or resources.
This is a small part of why it all backfired, Congress did want the American Dream to trickle down and risk was taken in part because of a political mandate to democratize home ownership.
For the first time in 75 years FHA will tighten up its lending structure. They are the first time home buyers answer to a prayer until now. But now FHA is staring at five million mortgages and significant losses as home prices continue to go south. Unable to control their losses coupled with the expectation that home prices will continue to fall through at least the first half of 2010, they instituted more restrictive rules to limit risk.
New Rules
Better Risk Management
1. Lenders will have to show a net worth of one million dollars up from 250,000.
2. The down payment requirement has increased from 3% to 3.5% 3. Mortgage insurance premiums have increased 4. Banned the use of third party DPA’s. This amounts to almost 15% of outstanding loans in the FHA portfolio
Condos Beginning January 1, 2010
If you have a condo to refi with a FHA insured loan it just got tougher.
1. Ineligible properties include, time shares house boats and multi unit condos where:
a. Less than 50% of the units are owner occupied or sold to owners that do not intend to live in the unit.
b. No more than 15% of all units can be in arrears of HOA fees
c. Projects with 3 or less units may have only one encumbered with FHA insurance
d. For or more units can have up to 30% FHA insured, no more
e. No more than 10 percent of the units may be owned by one investor.This will apply to developers/builders that subsequently rent vacant and unsold units.
f. FHA insurance will be unavailable when properties are within 1,000 feet of a highway, freeway, or heavily traveled road; 3,000 feet of a railroad; one mile of an airport; or five miles of a military airfield
Market Impact on Condos
Certainly cant be a boost for Condo sales. This is a direct hit to evaluation, since less people will be able to finance. That translates into less sales and it will hurt the entire transaction chain from developers to real estate agents, , from condo insurance to lenders. More downward pressure, we did not need. But the FHA has been a key player buying up 23% of all new mortgages. Clearly with home prices expected to continue to retreat, FHA is cutting its exposure and trying to limit losses.
Congress is not looking for another taxpayer bail out.
Taxpayers might be a little tired of that.
Howard Bell PFP CCRM is the founder/editor of Your Property Path.com, featuring over 450 articles on property management, Your Property Path SF, trade talk for the San Francisco real estate industry, Your Property Path News Brief, snap news updates and real estate market info, and Your Property Path Amazon Store. Howard is a property manager in San Francisco and holds a certification in financial planning.
See Howard Bell’s feature, Get Your Property Rented Faster.
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Posted by Kim Ezzell on 09.24.2009. 3 Comments »
Filed under: AAOA Forum, Financing
Loan Mod May be Better Than Selling
by Bernice Ross, Inman News
DEAR BERNICE: I need some advice to know what to price my home at when we do sell. We got an appraisal on our property and it said we lost more than $100,000 in value. Is there any way to sell it for what we paid for it? My husband thinks if we refinance our home we could sell it for what we paid for it originally. Is that true? –Rachel D.
DEAR RACHEL: The price you paid for your property has no bearing on what it is worth right now. A good analogy is the stock market. If I paid $100 for IBM stock and today it’s selling at $60, I would have to settle for $60 a share if I wanted to sell today.
Refinancing won’t change this situation. If your appraisal came in low, lenders will refinance your property based upon the current appraised value only. The only way to sell the property for what you paid is to wait for the market to improve.
In July, the Obama administration asked the nation’s largest lenders to modify at least 500,000 loans by the end of 2009. If you are selling because you’re facing hardship, you may be able to obtain a loan modification from your lender. The first step is to document your hardship in the form of a hardship letter. (Click here to view some samples of hardship letters.)
Loan modifications can be a wonderful solution for a distressed property owner. Bankruptcy and foreclosure are usually the most damaging to your credit. Giving the lender the keys back to your property (called a “deed-in-lieu of foreclosure”) may be somewhat less damaging. Loan modifications are usually the least damaging of all these options.
In a loan modification, the lender may lower the interest rate to as little as 1 or 2 percent. This results in a dramatic drop in your payments making it easier for you to stay in your property. For example, if you have an adjustable-rate mortgage (ARM) and it readjusts to 9 or 10 percent, the lender may lower your existing mortgage rate to 3.5 percent for five years and then raise it to 6 percent for the balance of the loan.
In other cases they may allow you to pay off the loan over 35 or 40 years as opposed to 30 years. (This may be a bad idea for you because it generates huge amounts of additional interest for the lender.) On rare occasions, the lender may even consider a principal reduction.
The two key requirements the lender wants to see are that you plan on staying in the property and that you have sufficient income to keep making the payments. Some loan modification programs have a three-month trial period. If the borrower keeps up the payments during the trial period, the loan modification becomes permanent.
Sadly, the loan modification business has attracted a high percentage of rip-off artists. Do not go to any place advertised on television or radio. Most of those services are rip-offs.
The best place to start is with your lender. Ask for the loss mitigation department, not customer service. Before contacting the lender, it’s important to be prepared for the questions you may be asked. The best way to approach this is to obtain an online mortgage application and print it out. Complete each of the items on the application including all loan numbers, credit-card numbers, addresses of property owned, plus a list of all other assets.
You will also need bank account numbers, W-2 forms or other income tax documentation, and property tax data. If you are self-employed, you will also need a current profit and loss statement. To have a fuller understanding of the process, you can visit the FDIC site, which discusses loan modifications in more detail.
If you’re thinking about selling, interview three Realtors who have experience working with short sales. When agents tell you that they specialize in short sales or distressed properties, ask for referrals from past clients as well as the addresses of the properties they have closed most recently. If the agent cannot supply that information, keep searching for someone who can.
Before you make any decision, however, please check with your accountant or tax attorney to see how your decision will influence your tax situation. For example, if you refinanced or placed a second (or third) mortgage on the property, you may be subject to “imputed income.” In other words, if you refinanced your home to pay off your car and credit-card debt and the lender relieves you of the duty to pay that money back, the IRS views that as taxable (imputed) income. On $100,000, that could be more than $35,000 in federal taxes owed.
PLEASE, do not shortcut any of these steps. The consequence of doing so can be devastating. Good luck!
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of “Real Estate Dough: Your Recipe for Real Estate Success” and other books. You can reach her at Bernice@RealEstateCoach.com and find her on Twitter: @bross.
See another Bernice Ross feature, Don’t Break the Bank With Remodel.
Posted by Kim Ezzell on 09.07.2009. CLICK to Leave a Comment »
Filed under: AAOA Forum, Financing