Thursday, August 28, 2008

Millions of home sellers failed Econ 101?

We are going to keep this simple because millions of people must have failed Econ 101 or missed the month of supply/demand charts and it's influence on prices.

If you had a car dealership full of cars that weren't selling what do you do?Hey maybe have an enormous sale:

This is the current for sale inventory of existing single family homes in the U.S.:

from our friends at Calculated Risk.

Maybe the millions of sellers should pore a huge cup of coffee and wake up to today's market. But, who am I to judge that asking prices are too high? Maybe these sellers are aware of 5 million wealthy Asian and Arab buyers that are dying to move in and pay full sticker price. Sure and Santa Clause hangs out with the tooth fairy in the Cayman Islands during August summer break.

The way this standoff resolves itself is with declining prices to meet the available buyers or staying stuborn and waiting for the market to rise up to the current asking prices. Homes are selling every day... that are priced right. And now for a laugh from my favorite newspaper comic when I was a kid. Calvin and Hobbes.

Larger Version of comic.

Tuesday, August 26, 2008

Converting Your Primary to Investment Property: You may not qualify.

If it seems like mortgage rules are getting strict, that's because they are.When a homeowner buys a new home, he has 3 options of what to do with his current residence:

  1. Sell the home, paying off the mortgage in full
  2. Keep the home as a second/vacation home
  3. Convert the home to an investment property

The most common action plan is the first one -- sell the home and pay off the mortgage. However, with home prices poised to rebound, some savvy homeowners are trying to avoid "selling low".

Unfortunately -- as of August 1, 2008 -- waiting out the market won't be so easy.

Burned by foreclosures and wary of risk, Fannie Mae issued new conforming mortgage guidelines that specifically apply to home buyers planning to convert an existing primary residence into a second home or investment property.

Among the highlights of Fannie Mae's Changes:

Selling the primary residence
If the new home being purchased closes prior to the existing home's sale, both payments must be used to qualify the buyer for the new mortgage.

Converting to a second home
If the home has less than 30 percent equity in it, the home buyer must show 6 months of PITI reserves for both properties to qualify for the new mortgage.

Converting to an investment property
If the home has less than 30 percent equity, its rental income may not be used to help the buyer qualify for the new mortgage.

If it seems like mortgage rules are getting strict, that's because they are. And they're expected to get tougher, too. With each foreclosure and high-profile bank collapse, mortgage lenders tighten up their guidelines just a bit, freezing out the "fringe" borrower from access to mortgage money.

Mortgage rates may rise through 2009, or they may fall. We don't know. But what we do know is that borrowing money to buy a home will be tougher.

If you plan to buy a home in the next 12 months, consider moving up your timeframe or -- at least -- planning ahead. Guidelines for jumbo mortgage programs are likely to follow as Fannie/Freddie set the tone for the overall market. Understanding the mortgage rules and how they can change may be the difference between getting approved for a home loan, or getting turned down.

Friday, August 15, 2008

Housing and Recovery Act 2008

Various client's have discussed the housing bill signed into law two weeks ago. Below is a great summary. A few items will have a slight impact on housing. The biggest benefit is for borrowers that are in danger of foreclosing and first time home buyers. The FHA created a program which is a loan write down and shared equity participation with Uncle Sam for 50% of the future appreciation. My first economics teacher Dr.Lamb burned into our brains, that there is no such thing as a free lunch. Various elements of this bill bear that out. The bill is not sexy so I had to throw in a picture of Heidi Klum to liven things up. Enjoy your weekend.-Mr.Mortgage

Key provisions of the Act include:

New agency created to regulate Fannie Mae, Freddie Mac, and the Federal Home Loan Banks: The Act creates a new regulatory agency, called the Federal Housing Finance Agency, to oversee and regulate Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The agency is charged with the responsibility of monitoring the portfolio holdings of the entities it oversees and ensuring they maintain sufficient capital to operate healthy national housing finance markets.

FHA Program updated: Effective January 1, 2009, the FHA loan limit for conforming loans increases to as much as $625,500 in the most expensive U.S. markets. This affects both home equity conversion mortgages (reverse mortgages) and jumbo loans. Down payment requirements on FHA loans increase from 3 percent to 3.5 percent.

The Hope for Homeowners Program: The Act creates a new Federal Housing Authority (FHA) program designed to help borrowers in danger of losing their homes to foreclosure. Eligible homeowners may be able to pay off their original (foreclosing) lenders with a fixed-rate, 30-year-term mortgage for up to 90 percent of the appraised value of the property. Eligible homeowners are those who originated their loans before January 1, 2008, spend more than 31 percent of their monthly income on their mortgage, and are currently in danger of foreclosure. Borrowers would have to share future equity with the FHA. The program is completely voluntary; banks may elect not to participate. The program begins on October 1, 2008 and ends in September of 2011.

Temporary mortgage foreclosure protection for servicemembers: The Act provides mortgage foreclosure protection for members of the U.S. Armed Services by temporarily increasing (through December 31, 2008) the maximum loan guarantee for VA loans. The period a lender must wait before initiating foreclosure proceedings after a service member returns from service is extended from 90 days to 9 months. Increases in mortgage interest rates above 6 percent are suspended during the period of service and for one year after a service member ends service. This provision will sunset on January 1, 2011.

Temporary tax "credit" for first-time homebuyers: First-time homebuyers of a principal residence purchased after April 8, 2008 and before July 1, 2009 may take a refundable tax credit of 10 percent (up to a maximum of $7,500; $3,750 for married persons filing separate returns) of the purchase price of the property. The credit is phased out for individual taxpayers with adjusted gross incomes (AGIs) ranging from $75,000 to $95,000 ($150,000 to $170,000 if married filing jointly). However, taxpayers must repay the credit taken over 15 years in equal installments as a surcharge on their annual income tax return.

Temporary standard property tax deduction for non-itemizers: For 2008 only, taxpayers who do not itemize their deductions will be allowed to take a real property tax standard deduction (in addition to the standard deduction) of up to $1,000 if married filing jointly ($500 for all other filers).

Reduced homesale exclusion for nonqualified use: For sales and exchanges of a principal residence after December 31, 2008, the $250,000 ($500,000 if married filing jointly) homesale exclusion won't apply to the extent the gain is allocated to periods (not including any period before January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer's spouse.

Temporary increase in low-income housing credit: For 2008 and 2009 only, the Act provides a 20 cent increase in the low-income housing credit per-resident cap, and increases the small state minimum by 10 percent. The technical rules relating to the credit have also been simplified.

Expansion of the rehabilitation tax credit: The Act taxpayers to qualify for the full amount of the rehabilitation credit so long as less than 50 percent (up from 35 percent) of the rehabilitated building is leased to state and local governments or other tax-exempt entities.

Repeal of AMT limitations: on tax-exempt housing bonds, low-income housing credit, and rehabilitation tax credit. Generally effective after December 31, 2007, interest on tax-exempt housing bonds are not subject to the alternative minimum tax (AMT), and the low-income housing credit and rehabilitation tax credit can be used to offset AMT liability.

REIT modernization: The Act liberalizes the rules for real estate investment trusts (REITs) by clarifying that they can earn foreign currency income associated with real estate activities, increasing the permissible size of REIT investments in taxable REIT subsidiaries, modifying the REIT safe harbor for dealer sales, and extending the special rules for lodging facilities to health care facilities.

Election to accelerate recognition of historic AMT/R&D credits: The Act allows taxpayers to elect to accelerate the recognition of a portion of their historic AMT or research and development (R&D) credits in lieu of the bonus depreciation tax benefit allowed under the Economic Stimulus Act of 2008. The amount taxpayers can receive is calculated based on the amount invested in property that would otherwise qualify for said bonus depreciation. This amount is capped at the lesser of 6 percent of historic AMT and R&D credits or $30 million.

Wednesday, August 6, 2008

Huge Impact on 2nd homes and Investment Properties

New conforming mortgage guidelines threaten owners of second homes and investment propertiesConforming mortgage guidelines are the Home Loan Rule Book, delineating between applicants that approved for a mortgage and those that do not.

Effective today, the rule book just got a little bit tougher.

According to Fannie Mae, homeowners converting their primary residence into a second home or investment property will be subject to additional underwriting scrutiny. Fannie Mae is leery of lending to people that may be over-extended.

The complete underwriting update is available at the Fannie Mae Web site but some of the more important points are summarized below, divided into Second Home and Investment Property.

Second Home Guideline Changes

  • Without 30 percent equity in the second home, mortgage applicants must have 6 months worth of PITI reserves for both properties in their bank accounts.

  • With 30 percent equity, the PITI reserve can be reduced to 2 months.

Previously, there was no minimum reserve requirement.

Investment Property Guideline Changes

  • With 30 percent equity in an investment property, 75% of the monthly rental income can be applied toward the applicant's monthly household income.

  • Without 30 percent equity, rental income may not be applied to the applicant's monthly household income and 6 months PITI is required for both properties.

Previously, 75% of the rental income was allowable regardless of equity, and minimum reserve requirements were 2 months.

Even though just a small percentage of Americans own second homes or investment properties, the conforming mortgage guideline changes impacts homeowners everywhere.

Changing mortgage guidelines impact the supply and demand curve for housingThis is because more restrictive guidlines lead to two separate, but concurrent, outcomes:

  1. The demand for homes reduces because fewer buyers qualify for mortgages

  2. The supply of homes increases because fewer sellers can refinance into more affordable home loan

Less demand and more supply places downward pressure on home prices.

Now, remember that mortgage guidelines continuously evolve and what's accurate as August 1, 2008, may not be accurate six months down the road. In other words, confirm what you're reading about mortgages online with your loan officer before making any real estate-related decisions.