Yomanimus

Making money in real-estate is all about timing. Despite the fact that many people lost not only their shirts but their homes in the mortgage meltdown, real-estate has historically been considered a safe investment. But if current trends continue, there may be more bust than boom. In fact, we may never see a mortgage market as booming as it was during during the early 2000’s. In addition to the flood of new homeowners, the housing boom saw an unprecedented number of speculators acquiring multiple properties, hoping to capitalize on ever-increasing housing prices. The combined effect of all this activity was a mortgage market of tremendous size – roughly $10 trillion in residential mortgages by late 2007, which equates to nearly a quarter of the total debt market in the US. But every boom eventually busts, and since ‘07 the mortgage market has shrunk into a shell of its former self.

It should here be noted that the shrinking mortgage market is not only, or even primarily a US problem. BBC News reported in November 2008 that it was likely that, “…net new mortgage lending – gross new home loans minus repayments and redemption – would fall below zero in 2009 and see only a modest recovery in 2010.” These remarks were made following 2007 where net new mortgage lending stood at £108bn. Similarly, the UK’s Independent reported the findings of a study by Nationwide predicting that, “…the UK mortgage market will contract by 80% this year [2009],” and also that, “…house prices will fall for another 12 months.” Nationwide group development director Tony Prestedge estimated the total value of the mortgage market to be £18bn in 2008, compared with £90bn in 2007. Both estimates reach the same chilling conclusion of a drastically shrinking market.

The effects on the US market have, of course, been more prominent in the news. While the recent lowering of interest rates has spurred some activity, HousingWire.com recently reported that the number of mortgage applications filed in the week ending September 25 declined 2.8%, “…on a seasonally adjusted basis”, citing the Mortgage Bankers Association’s survey that measures total gross applications in the US. The refinancing index is also said to have decreased (albeit only by 0.8%) while the purchase index fell 6.2%. Another weekly survey, Mortgage Maxx, reached similar conclusions. After adjusting to “account for multiple submissions by the same borrower”, Mortgage Maxx found that total applications declined by 7.3% in the same week.

Casey Serin

Trouble began brewing before this year, however. According to BuilderOnline.com, 1 in 3 mortgage applicants was turned down in 2008 (a 32% denial rate) the same year that total mortgage applications were down by a third from 2007 and at less than half of 2006 levels. Even such mortgage activity as took place was largely of the government-backed variety. According to BuilderOnline, “…loans backed by the Federal Housing Administration soared to 21 percent of all loans made last year [2008] from less than 5 percent in both 2005 and 2006.”

The fallout from the housing bust has even affected tiny countries thought to be irrelevant to a crisis originating in the US. Bulgaria, for instance, saw the size of its mortgage market shrink twenty times in the first two months of 2009, according to Novinite.com. Only BNG 18 M was invested during January and February, as opposed to the BGN 355 M that was invested during the same months in 2008.

WoodleyWonderworks

All in all, the housing bust and the recession that followed have made for tough times in the mortgage market. Because mortgage-backed securities were packaged and sold to investors all over the world, what began as a US problem is very much an international problem with international repercussions. The silver lining (if there is any) may be found in the aforementioned recent lowering of loan interest rates to below 5%. As Reuters reported on October 7 2009, new mortgage applications are at a four month high. As a “tentative early indicator of sales”, these numbers may hold promise for the mortgages Nevertheless, substantial growth remains to be seen.

Let’s face it – the typical real estate transaction is pretty boring. Few of us can get all that excited about yet another “three bedroom, one and a half bath” changing hands in the town or city we live in. The daily occurrence of these deals – and the ordinary properties involved – are simply too commonplace to react any other way. However, every once in a while a truly remarkable property comes on to the market or is developed for sale. Whether it’s a house that’s only nine and a half feet wide or one made entirely of glass, these bizarre properties provoke more than a passing glance. The following are some of the most noteworthy:

World’s Most Expensive Home

Plenty of us have complained about our high mortgages or rent, but no one louder than whomever winds up buying this place. The German website Spiegel Online International describes the house for sale at an eye-popping €6.3 million (roughly $9 million US) What is even more mind-blowing about this particular deal is the size of the home. Most people would expect a sweeping, palatial mansion that casts a majestic shadow on passersby for such a steep asking price, but alas, the property clocks in at a tiny 322 square feet. Spiegal offers some hints as to the astronomical value of the property, which sits on the German holiday island of Sylt:

“According to owner Heinrich Haase the building stands on 2,400 meters of land in the millionaire’s neighborhood of Kampen on the island, off Germany’s northern coast near the Danish border…”

The property is also said to be situated amidst natural sand dunes and offer an unrestricted view of the sea. Interest is rumored to be high in the historically expensive home, including amongst people “whose names you would know.”

The Bubble House

Now may be the most inopportune time to be cracking jokes about bubbles and houses, but that didn’t stop Pierre Cardin from snapping up this bad boy. OddityCentral.com chronicles the story of this strange property in photographed, high-resolution detail, describing its early history as follows:

As the story goes, Pierre Cardin was looking to buy a nice house on the Cote d’Azur, but was horrified by all the unoriginal designs that he had seen and that didn’t match his avant-garde fashion designs. That one day he stumbled upon a construction site, where an architect by the name of Antti Lovag was building a bubble-house for some industrialist who happened to have died. Cardin was thrilled to acquire the almost finished residence that finally satisfied his exigent taste.”

OddityCentral goes on to note that the bubble house was far from an instant hit upon its 1990 completion. In fact, some even referred to it derisively as the “crazy-house.” However, it is today a popular landmark, visited by thousands of tourists every year.

The Harlem Castle

Few types of real estate are as compelling as domineering, Gothic castles that cast their shadows down from on high. This is precisely what we find in the recent sale of Harlem’s Grey Gardens castle, deemed by New York Magazine to be “the steal of the year” at $1.5 million. NY Mag’s reporters who researched the story noted that they were

“…blown away by the gorgeous 8,250 square feet of interior space, the quirky architecture, the original stained-glass windows, the herringbone wood floors and the coffered ceilings, the history (it was built by a circus impresario and was later a funeral home), and most of all the $3.5 million price tag.”

The $2 million discount (75% off!) came about due to the extensive repairs that will have to be done by the new owner, ranging from rotted floors to cracking plaster to a “jungle” in the backyard. However, the consensus is that the new owners got a steal and that there is “no other property like it on the island of Manhattan”.

New York’s Skinniest House

(Marcin Wichary)

Many an unhappy home owner has lamented the lack of space in their homes. Belongings pile up, discomfort builds, and life at home becomes too cluttered for our liking. But few of us know “small” like the owner of the house covered in a recent Yahoo! News story:

“It’s 9.5 feet wide and 42 feet long (2.9 metres wide by 12.8 metres long) and is billed as the narrowest house in New York City. But there’s nothing small about its asking price: $2.7 million.”

These absurd dimensions make the Greenwich Village house in all likelihood even narrower than the one pictured above. Yahoo also notes that the current owner paid $1.6 million in 2001 for the property, which a real estate broker quoted for the story describes as “a place for someone who wants a little history.” It remains to be seen whether the new, higher price will be met (especially in this economy), but the eventual sale of this property is sure to attract attention one way or another.

The Glass House

(Christopher Peterson)

Everyone’s heard the line about how people who live in glass houses shouldn’t throw stones, but no one ever gets to say it to an actual glass house owner – that is, until this dwelling came along. Designed by American architect Phillip Johnson, the glass house was erected in New Canan, Connecticut in 1949 as Johnson’s own residence according to the house’s website. In addition to being declared a National Historic Landmark in 1997, the house passed to the National Trust For Historic Preservation upon Johnson’s 2005 death, and has been subsequently opened to visitors and tourists. The only non-glass materials used are brick for the floors and charcoal-painted steel for the exterior beams.

The $25 Million Bounced Closing Check

One thing all real estate deals have in common is the closing, where buyers and sellers (or their attorneys) meet up to consummate the final details and sign off on all remaining paperwork. Typically these are rather ordinary affairs containing little of interest to outside observers. In 2006, however, a closing unlike any other in history took place in New Jersey. TheRealEstateBloggers.com tells the story of Solomon Dwek, a real estate investor from Ocean Township who deposited a $25,000,000 check from a closing he had just wrapped up nearby. The check was deposited from a drive-through teller window (which was apparently Dwek’s usual method of depositing) and promptly bounced, creating a domino effect whereby $23 million in checks written against the money bounced thereafter. The story behind the bogus check remained shrouded in mystery for several years, stating only that the FBI was investigating. In 2009, however, TillerStillers reported that Dwek had been arrested for using the illicit funds to repay old loans, as well as trying to cash a second $25 million check at a different PNC branch.

UFO House

(robinart.com)

Conspiracy theorists will find much to explore in Chattanooga, Tennessee’s UFO house. In an investigative piece on the property, Gizmodo.com conducts a photographed overview, describing it as “one of the most bizarre abodes we’ve ever seen” and recalling that it boasts “a button activated stair case, curved bar area and customized bathtub, as well as various UFO paneled controls throughout that are simply priceless, or so you would think.”

Unfortunately for the Gizmodo crew, the home’s asking price of $100,000 puts it “about $99,999 out of our budget.” Perhaps these extraterrestrial home owners will be forced to beam down their price a bit in light of the economy.

$1.8 Billion NYC real estate investigation

As the above example illustrates, some of the craziest real estate deals involve not just the property itself, but the insane manner in which the deals are carried out. Another fascinating example is the $1.76 billion Riverside South project in NYC, on Manhattan’s West Side. According to the New York Post, the deal (which involved 77 acres of waterfront real estate destined for luxury condos and is said be the biggest in NYC history) saw a Chinese consortium “evade taxes by having the buyers, developers Extell and the Carlyle Group, pay a $17 million finder’s fee to a British Virgin Islands-based shell corporation.” As of September 19, 2009 there had already been one arrest in connection with the convoluted deal, which alleges that consortium members funnelled bonus money and other payments through illegal tax havens in foreign countries.

Charges brought against Barry Gross thus far include “grand larceny, falsifying business records and offering a false instrument for filing.” It remains to be seen how much more chaos unfolds from this strange and apparently deceptive deal.

Living beyond your means is a sure way to guarantee financial ruin. Today, millions are dealing with the fallout from artificially-inflated real estate values and accessible, unsecured credit. For those recently (or still) in this situation, a number of temporary solutions were once readily available – refinancing, taking out home equity lines, taking on additional credit cards – but, these quick fixes all had one thing in common: they only delayed the inevitable. But it’s one thing for an individual to act irresponsibly, and quite another for an entire state.

The State of California resembles a classic spendthrift; the world’s 8^th largest economy, was long characterized by its numerous economic opportunities, inviting business climate, and bustling real estate industries. But, the state was also regularly in deficit for the last several decades. This did not seem to matter. The state continued to borrow against future revenue, in order to finance its budget requirements – much like an individual would borrow against the speculative increase in their home’s value to pay for existing bills. The way they were able to do this, was by the sale of short-term notes for cash (similar to bonds).

The logic behind these actions was that growth was always expected: businesses were going to continue to grow, unemployment would be always be low, and income tax revenues were going to continue to increase. Most importantly, existing and new debt would always be recouped by future profits. If this sounds familiar, it probably is. For Californians that witnessed their home values skyrocketing between 2002-2006, taking out new loans for motorcycles and boats, or for kitchen remodels or expensive vacations almost made since, even if what you earned did not justify these costs. Your house was a passive (almost magical) source of money from which everything would one day be paid off, and everything would once again be right with the universe

What Happened?

Starting with the real estate market slumping in 2007, the situation quickly become grim for the state with the credit and financial markets meltdown in 2008. Shortly thereafter, the State’s credit rating was reduced. Due to a lack of confidence in the short-term notes, their sales have slowed down considerably. And, in the face of a devaluing dollar and massive trade deficits, the Obama administration denied the state’s request to federally-back the state notes, citing that states are responsible for solving their own budgetary problems.

California’s general fund has also experienced sharp declines in tax revenue. Income tax revenues have dropped considerably since 2007; 2009 receipts alone, are expected to be over $1B less than the pre-year prediction – which was already lower than normal. The state is also experiencing (on average) $200 Million less per month from Sales and Use Tax revenues from pre-year forecasts. Also, the State has the nation’s highest level of unemployment at 11.5% (68,900 jobs were lost in May 2009 alone) – which is also a 30-yr high for CA. This has exacerbated existing budget issues, with a higher-than-normal amount of unemployment payments being dispersed to a larger non-working population.

The condition of the state is analogous to an individual simultaneously experiencing a reduced income, either because of mandatory vacations, or hour cuts (or even becoming occasionally-employed), and an increase in their expenses (an adjustable rate mortgage, increased credit card APRs, etc). Not surprisingly, this has increasingly become the norm for many California citizens. The situation is at the intersection of circumstance and lackluster planning. Looking back at the last decade of California’s dynamic economy, we can now all see that things really seemed too good to be true, because, in fact, they were.

What This Means

Currently the state is facing a shortfall of over $27 billion, and this deficit is estimated to increase to $40 billion by the end of 2010.To put this in perspective, $27 billion is more than ¼ of the state’s general fund. Or rather, the state only has ¾ of the funds necessary to run at full capacity.

When the state legislature met in May to discuss wide-reaching budgetary cuts, it created a division among party lines: Republicans agreed to lower the income of state employees; Democrats strove to increase fees for select goods and services (cigarettes, oil wells). Governor Schwarzenegger, however, moved to generate revenue by borrowing from local governments. Because the parties involved at the state legislature were unable to come to a resolution, Governor Schwarzenegger has declared a Fiscal State of Emergency. What this means is that if a deficit is not solved within 45 days, the state legislature cannot act on other bills until this is resolved – in short, the state must figure out a way to substantially reduce this deficit, and/or find new money.

Unlike people, states can’t simply file for some type of bankruptcy protection. If the state were to default on its creditors, it will be in an exponentially worse situation. The state will lose a sizable source of regular revenue, in that investors would no longer want to invest here. Courting investors may not be the solution for the immediate crises, it will inevitably be required, should the state get back on track.

To make matters worse California’s labor market, does not show signs of having hit rock bottom. Forecasts by Beacon Economics, the UCLA Anderson School and Chapman University estimate that unemployment may near 13% by year’s end; and according to Esmael Adibi (Chapman), the recession, “…at the state level should end by mid-2010, when job creation will start.”

How the State is Coping:

Because of the grim diagnosis, the state will be forced to enact a number of the cuts in an effort to shrink the deficit. There will also be a number of new and increased taxes that will be levied on citizens, to help bare the cost. Some of the more noted cuts and taxes include:

- Mandatory furloughs for many state employees Feb 2009 – June 2010. This is estimated to save $1.3 Billion. (The partial government shutdown also will lead to a third furlough day for 235,000 state employees, bringing their total pay cut this year to about 14%).

- Additionally, layoffs, reductions and other efficiencies will be instituted in an effort to cut payroll by 10%. This is estimated to amount to as many as 60,000 state jobs.

- As of April 1, 2009 Sales tax was increased by 1%.

- As of July 2, 2009 the State began issuing IOUs for state tax refund payments.

- The Vehicle License Fee (VLF) rate increased from 0.65 percent to 1.15 percent from May 19, 2009, to June 30, 2011.

- More than $3 B in cuts to public education.

- Nearly $1 B in cuts to public health care.

Prospective Cuts:

- As many as 200 of California’s 279 State Parks may be closed.

- A suspension of Cal Grants and Cal Works – state programs that provide health and education services to low-income families.

The Takeaway:

The type of problems facing California lawmakers are reminiscent of those presently faced by millions of Americans and their households. Similarly, the state’s response is largely a reaction to market conditions; the same can be said about so many Americans, in that we only fix what is broken. Expense management is perhaps the most important lesson learned on one’s way to financial maturity, and unfortunately for so many it usually only comes from past failures. There are a number of lessons to be learned at the administrative level, and I think I speak for most Californians when I say that I hope our leaders are wise enough to find a solution that enables our getting out of this situation, but also makes it more difficult for the state to get in this type of a mess in the foreseeable future.

Here are Mint’s guides on budgeting, investing and managing credit to help you manage your finances.

Sources:

http://www.latimes.com/features/health/medicine/la-ed-budget8-2009jun08,0,7552895.story

http://www.huffingtonpost.com/2009/07/02/ca-assembly-speaker-schwa_n_224673.html

http://www.latimes.com/business/la-fi-california-jobless20-2009jun20,0,3863292.story

http://www.bizjournals.com/sacramento/stories/2009/06/29/daily29.html

Source: (prlewis)

Are you considering buying your first home? Earlier this year, the government decided to provide one of the biggest financial incentives in history to first time home buyers: up to $8,000. Not surprisingly, there are some strings attached, but nowhere near as many as existed for the previous version of the tax credit (commonly known as the 2008 or the $7,500 credit).

Here are the top seven things you need to know about the 2009 first time home buyer tax credit:

You must purchase a home before December 1, 2009.

Only homes purchased during 2009 and before December 1 qualify for the $8,000 credit.  It’s possible that Congress and the Obama administration may extend the time period for buying a home to take the credit, of course, but as of right now it disappears entirely on December 1. If you buy an existing home, the key date is when you close on the home.  If you are building a new home, you must physically move into the home prior to December 1.

You must purchase a home for the first time.

But the definition of “first-time” is an IRS-speak definition. Say, for example, you purchased a home 10 years ago and sold it five years ago. Then you went off to graduate school. Now you’re thinking about purchasing a home.  Believe it or not, for purposes of the credit, you’re a first time home buyer! As long as you haven’t owned a home within three years of the date you purchase a home, you can qualify for this credit.

If you make “too much,” you won’t get as much.

If you’re single and earn more than $75,000 or are married and, together with your spouse, have an income exceeding $150,000, you won’t qualify for the full credit.  However, if you make just a little more than these amounts (less than $95,000 and $170,000 respectively), you’ll still qualify for a partial credit.

The maximum credit is $8,000 – sort of.

The maximum credit is $8,000 or 10% of the purchase price, whichever is less. So a $60,000 home, for example, qualifies for only a $6,000 credit.

You don’t have to pay the money back.

Those who took advantage of the 2008 version of the first time home buyer tax credit must pay back the amount they receive over 15 years. However, the 2009 credit does not need to be repaid. Furthermore, the credit is a refundable credit. That’s the IRS’s way of saying that you receive the $8,000 regardless of your total income tax liability for the year. Even if you only made a few grand and your total tax liability was, say $500 for the year, your refund will increase by the full $8,000 credit.  Most other credits are not so generous and are limited to your total tax liability.

Well, you might have to pay the credit back.

There’s one key exception to the whole “You don’t have to pay it back” concept: if you sell your home within three years.  You might wonder how to avoid this payback requirement.  Fortunately, it’s easy: don’t sell your house for three years after you buy it. Flipping houses is so 2005 anyway, no

You can party like it’s nineteen ninety-nine.  Not really. But you can pretend it’s still 2008.

If you buy a home between January 1, 2009 and December 1, 2009, you are permitted to consider the home purchased as of December 31, 2008. By doing so, you can claim the credit now. Simply amend your 2008 tax return (by filing Form 1040X) and claim the credit upon closing. You don’t have to wait until April of 2010 to get your refund.

The first time home buyer tax credit doesn’t mean that it’s a no-brainer to buy a home. There are many other considerations. But $8,000 of tax-free income is a pretty big deal. Think about how long you have to work to net eight grand. If you qualify, this first time home buyer tax credit ought to at least get you thinking.

Michael has a post on his that has morphed into a giant Q & A on the first time home buyer tax credit.

Michael B. Rubin is the author of Beyond Paycheck to Paycheck and the blog of the same name. He is the President of Total Candor, a financial planning education company.

Conventional wisdom says that buying is preferable to renting. Instead of throwing money away on a home, you can invest in your future and have the sense of fulfillment that comes from owning a home. Turns out, conventional wisdom is wrong. Today, many long-term renters are in a much stronger financial position than many recent homebuyers, and the last thing these homeowners are feeling is contentment. But the combination of firesale prices on homes, the drop in mortgage rates, and government assistance in the form of the first time home buyer tax credit, may have you reconsidering the idea of buying your own home. Is now a good time?

The Good

Here are a few of the reasons why now is a better time to buy a home than it has been at any point in the past few years:

Tax Credits

In the stimulus plan signed by President Obama, there is a first-time home buyer tax credit of $8,000, provided that you stay in the home for 36 months. This isn’t a tax deduction like your mortgage interest, which reduces your taxable income – a tax credit actually reduces your total income taxes owed. In addition, some states, such as California, are offering tax credits for home buyers that will further reduce your tax liability. Keep in mind that the federal program ends on December 1st of this year, and while it could easily end up being extended, it isn’t a given.

Rates last week dipped to an all-time low when the Fed announced that it would continue buying additional mortgage backed securities. Even though they ticked back up slightly in the past few days, with full income documentation and good credit, you can easily get down to 4.5% on a conventional 30 year fixed if you have 20% down, and if you want to get into an FHA loan, you can more typically get around 5.0% with a down payment of only 3.5%. Be careful when shopping for rates online, and think twice before giving out personal information. It is far better to ask friends and family for a strong personal recommendation, and use the information that you see on sites such as bankrate.com to approximate where your rate should be. Keep in mind that everyone’s scenario is different and there are a lot of new rate adjustments for conventional loans that didn’t exist in prior years, so you can easily end up paying 1 point (or percentage of the loan amount) for a loan that might cost your friend zero points for the same rate on the same day with the same lender.

Because You Don’t Absolutely Need to Buy

The best time to shop for a home is when you don’t need to. You can be as aggressive as you want to on your offer, and time is on your side because prices aren’t going to go back up overnight. If you are patient, you can find a home that you love, and just make sure that you can comfortably afford it and have a long-term plan to keep the property.

The Bad

These are factors that should not be driving your motivation to purchase a home right now:

Timing the Market Bottom

The same advice that applies to the stock market applies to the housing market. Don’t try to time it. If you have played around with the stock market in the past year and tried to catch a falling knife in the hopes of maximizing your return, you can probably look at the scars on your financial statements and let it serve as a reminder not to time the bottom. The turnaround in prices is gradual, and you are not going to miss out on an instant, overnight spike in real estate prices, no matter how fast the bank-owned properties are selling locally.

The Illusion of the Discount

Perhaps a new development popped up three years ago and was so shiny and perfect that you would have taken a third job to afford it. Now, the model that you love has popped up for $400,000 and all of the recent sales were at $450,000. In a stable market, that is great, but if you live in a declining market, you have now become the new comparable sale that any listings in the development in the near future will be measured against. So, if you buy this place for $400,000, and your new neighbor decides to move, they now will likely be advised by their real estate agent to price their property at or below your price in order to sell quickly. The same holds true for purchasing bank-owned properties. Bank-owned sales may be somewhat less frequent and given slightly less weight in determining the next sales prices in your neighborhood. However, if you buy in a neighborhood with a relatively high level of short sales and foreclosures, that great deal you just got on the bank-owned property just set the bar lower for the whole neighborhood.

The Ugly

If you don’t know what you are doing or have enough of a cash reserve to justify the risk, this real estate market can eat you alive, especially if you are short-sighted.

Fix It and Flip It

Unless you are lightning fast, experienced at managing renovation projects and holding plenty of cash that you are comfortable risking, that late night real estate fix-and-flip infomercial that was recorded in 2003 should not be considered your ticket to financial freedom. Of course there are gurus who have been waiting for this opportunity, and you are driving around listening to Robert Kiyosaki on iTunes with your Bluetooth intact looking for the bargain of the century. Just do your research, and don’t think that any particular property is the last opportunity you will ever have to get a great deal.

Until you see your local median price leveled off or even slightly increasing for a few months consecutively, you are dependent on sweat equity, which in many cases is wiped out by a few homes in the neighborhood going into foreclosure and further reducing home prices. Again, this market has become hyperlocal, down to the subdivision. In Orange County for example, prices for stronger neighborhoods may be down only 10% in the last year while properties less than a mile away have been cut in half or more in extreme cases.

Are you really ready?

How much are you paying now for rent? You should look at a good principal and interest calculator or talk to your lender to get the whole picture, including monthly amounts for taxes, insurance, any applicable homeowners association dues, and any applicable mortgage insurance. This is important even if you plan on paying taxes and insurance on your own (rather than impounding them and making monthly payments to the lender) because you will want to make sure to budget monthly to set aside for these expenses. So, if you are paying $1,500 currently for rent, and the new home will be $2,500, put your budget to the test and see how well your finances run when you put the amount of the increased housing expense (in this case $1,000) into your savings account. Take it out right when you pay your rent, and don’t touch it. This is a great test of how much you can really comfortably afford, and of course has the nice side effect of padding your savings for a few months before you start shopping for a home.

Of course, if you have a long-term plan to be in the home, the fluctuations and potential decrease in value in the near term doesn’t need to get you down, as the only price that matters is the price you are able to sell for when you need or want to move.

For millions of homeowners, the past few months (or years) have been very confusing and frustrating as multiple government ‘fixes’ have turned out to be both inaccessible and, in many cases, downright imaginary. With estimates that one in five homes has a mortgage that is underwater, it is important to remember that there are plenty of options to pursue before you walk away from your home. From the FHA Hope Program to grand speeches by numerous politicians, we’re constantly being told that hope is on the way. But who do you talk to? When you call your lender, you get the run around, and you send documentation to get your loan modified, only to find that it sat on someone’s desk for three weeks. Will any of this change with Obama’s new plan that was announced yesterday? Here is who it helps, and what to do if you aren’t in the segment of the population that is eligible.

Who does this program help? First of all, you must be employed or receiving some type of income. If you are not receiving any income from any source, you will need to pursue a short sale or deed in lieu of foreclosure. This specific program helps people who have primary residence loans that are owned or backed by Fannie Mae and Freddie Mac up to $729,750 (although your loan servicing company could be anyone). Keep in mind that not all loans below this ceiling are Fannie or Freddie loans, and that this does not address another important issue – the piggyback, or 2nd mortgage. Of course, there is also a percentage of the population with loans higher than the threshold, but the authors of this package chose to help as many people as possible with the money allocated to staving off foreclosures, while the people who bought the multi-million dollar homes will need to pursue other courses of action.

If you do meet the initial criteria, your lender could potentially lower your rate as low as 2% in order to get you into the ideal range of 31% to 38% of your monthly income. Every scenario and rate will be unique as lenders weigh the cost of modifying the loan vs. foreclosing. The implementation of the program and the timing will vary among lenders and loan servicing companies, so you will have to be patient and will most likely start experiencing longer hold times, so just dial and put the phone on speaker and bake a cake while you are waiting.

The past year of course has seen an explosion of new loan modification and debt consolidation companies. The new industry shares some similarities with the mortgage business five years ago, when the lure of a fast buck drew plenty of good, honest people but even more people who took advantage of people to maximize commissions. You can almost imagine a scenario where the guy who made five percent commission on your loan and stuck you with a prepayment penalty on a loan that adjusted after one month is now on the other end of the phone offering to help you get your loan modified.

So, how do you find a reputable attorney and/or loan modification company to help you through the process. First, never go with the first person you talk to. There are companies that charge from $695 to $5,000 and higher to help you out, and it can be a daunting task to choose someone to help you out. You do not need to give each of the companies actual documentation, but you should be forthcoming about your exact scenario including loan amounts for both mortgages, approximate value of your home, and what your level of delinquency is. Once you have talked to three or four different companies, you should have a good feel for how they compare in terms of some of the following important criteria:

• What is the upfront fee?
• When is the next payment due, or is there a payment plan?
• What is the total fee?
• Is there an additional fee to have them handle a second mortgage concurrently?
• How long until you hear back from their initial review of your documentation?
• If the modification is not successful, how much of the fee is refundable and when?
• VERY IMPORTANT: How do they define a successful loan modification? Is the bare minimum that they guarantee enough of a savings to actually make the home affordable?

Once they complete an initial review of your documentation, they will move forward by sending your documentation to your lender. Some lenders are offering blanket proposals that are sent out en masse overnight to struggling homeowners, and they simply offer to recapitalize the past due interest, which adds the interest amount to your principal balance and actually increases your monthly payment. Basically, the lender is seeing if you will bite on that offer and start making payments again. There are definitely people out there who are doing good work for homeowners, and if you can’t get a personal referral, at least search for recommendations or warnings about the local person you are dealing with.

Moving forward, we can expect to see many new programs as Congress seeks to address the housing crisis from all angles. In particular, there is an important measure, the so-called ‘cramdown bill’ in the Senate (which was approved in a slightly different version by the House today) to give judges authority in certain bankruptcy hearings to order lenders to modify loan terms and balances on a primary residence rather than foreclosing. Additionally, we can expect to see packages that deal with the larger and more complex problem of second mortgages. Of course, it also remains to be seen how long these changes will take and on a macro scale, how much it will ultimately prevent foreclosures on a wide scale and bring relative stability to the housing market.

Source: Jeff Turner

One short day after signing the $787 billion economic stimulus plan on Tuesday, the Obama administration announced a $275 billion “Homeowner Affordability and Stability Plan (HASP)”. The executive summary, presented by Obama in Phoenix, AZ, highlights the three major problems that homeowners face today:

1. Inability to Re-Finance

Responsible homeowners have seen their property values fall and due to a weak credit market they are unable to re-finance at a lower interest rate. In Obama’s remarks, he stated that since 2006, home values have dropped an average of 25% nation-wide. This means that you could have done everything ‘right’, yet still be 25% or more in the hole in home equity.

2. Unemployment Leading to Increased Foreclosure Risk

Millions have lost their jobs and as many as 6 million more families are at risk of foreclosure, according to the Obama administration. To be exact, 2.6 million people lost their jobs in 2008, and an additional 598,000 lost their jobs in January of this year. Many of those who have not been able to claim a new job are now struggling to meeting their mortgage payments.

3. The Snowball Effect of Foreclosures

Foreclosures are hurting neighborhoods through a decline in property values. The administration estimates that with each foreclosed home, nearby properties drop as much as 9% in value. This contributes further to those doing everything right being deeper in the hole in terms of equity.

To address these 3 issues, Obama’s executive summary highlights a 3-part solution:

1. Affordability

Provide low-cost re-financing to 4 to 5 million responsible homeowners who have loans that are currently guaranteed by Freddie Mac or Fannie Mae. Allowing these homeowners to refinance would lower their monthly payments. The following example was given in the summary:

“Consider a family that took out a 30-year fixed rate mortgage of $207,000 with an interest rate of 6.50% on a house worth $260,000 at the time. Today, that family has about $200,000 remaining on their mortgage, but the value of that home has fallen 15 percent to $221,000 – making them ineligible for today’s low interest rates that now generally require the borrower to have 20 percent home equity. Under this refinancing plan, that family could refinance to a rate near 5.16% – reducing their annual payments by over $2,300.”

2. Stability

This would involve creating a $75 billion “Homeowner Stability Initiative” to help 3 to 4 million struggling homeowners who commit to make reasonable monthly mortgage payments. Details include:
- Incentives to reduce the borrower’s monthly mortgage payment to 38% of his or her income
- Providing $1,000 payments to borrowers that stay current on their loan, up to five years
- Providing “pay for success” incentives to mortgage providers for conforming loan modifications
- Creation of an insurance fund up to $10 billion to discourage lenders from foreclosing on borrowers
- Allowing judicial modifications for borrowers that are out of options
- Providing $1.5 Billion in relocation and other assistance to those displaced by foreclosure and $2 Billion in Neighborhood Stabilization Funds

3. Confidence in the Mortgage Market

This would come through supporting low mortgage by doubling the preferred stock back-stop funding for Fannie Mae and Freddie Mac to $200 billion each (from $100 billion), and continuing the purchase of mortgage-backed securities issued by them to promote market liquidity.

For further details, the White House Blog has released an extensive Q and A on the HASP.

How does HASP Effect you?

If you’re a homeowner, what does this plan do for you?

Are you confident that it will help you?

What else needs to be done in order to secure your confidence in the housing market?

For more of GE Miller’s writing, visit 20somethingfinance.com

Detroit

Detroit’s economy has been hit hard in the last six months, with the Big Three automotive producing companies on the brink of bankruptcy and failure, and in need of government assistance. Due to the manufacturing industry, many experts estimate that the unemployment rate of the Detroit metropolitan area is at a generation-high 21%. Not surprising when 14% of automotive industry workers have been laid off in the last year. As a result of this highly localized recession, there are over twelve thousand abandoned homes in the Detroit area.

source

Riverside County, California

The last two decades have seen a surge of growth for the Inland Empire (better known as Riverside County), which had a population of 2.6 million in 1990; in 2007, the population was estimated to be 4.1 million. This massive eastern exodus from the more urban Los Angeles and the high prices of Orange County had a number of implications for the region. First of all, the move eastward drove up the demand and development of housing in the area, which steadily increased throughout the past decade. Secondly, these houses were purchased by many people who wanted to buy bigger homes for the buck than they could get in LA and the OC, which of course led to an increase in speculative building and investing. It is estimated that in 2005, only 15% of area homeowners could actually afford their houses, with the remaining 85% living beyond their means or in adjustable rate mortgages that had not yet adjusted. The latter, once adjusted, would then prove to be unaffordable.

It is also important to note that this area was a known hub for building up Southern California’s rapid suburban sprawl – not only was this one of the state’s regions with the most expansion, but it was also an area that furnished many of the construction companies with cheap labor that made surrounding communities’ growth possible. By August of 2008 alone, the foreclosure rate for the county was over 4,700 houses, up over 174% from August 2007. By the end of 2008, the median price of a home in Riverside county dropped to $220k, the first time it had dipped under $300k since the 1990s. In some Riverside County neighborhoods, as many as 20% of all homes are have been foreclosed and now sit vacant.

source

Stockton, California

Currently, 90% of all sales in the greater Stockton region are either foreclosures or short sales. The median house price dropped to $237K by December 08, the lowest it has been since February 2003. It is estimated that housing prices in former boom markets are more than 40% off what they had been leading up to 2007.

source

Las Vegas

Las Vegas and its surrounding suburbs are home to the nation’s third highest foreclosure rate for a metropolitan area, with 1 in 44 at some stage of foreclosure. By end the end of 2008, median housing prices deflated by $20,000 to the lowest since 2005. Housing inventory would also skyrocket to 30,000 in Q3 2008, with the pace of housing sales having declined 34% from the year prior. This volume is equal to 14-16 months of inventory of homes for sale, well above the national average of six to seven months.

Just over a year ago, the Greater Las Vegas Board of Realtors calculated that 45% of the 22,000 single-family houses for sale at the time were actually vacant. Most all of these were houses abandoned by new area residents, or investment properties by the area’s thousands of speculators who were drawn to the region because of its recent track record of housing price increases. Squatters are increasingly seen occupying the abandoned properties.

source

North Los Angeles County, California

With the vision of urban sprawl connecting Los Angeles to Bakersfield and the plans for a train connecting the two, builders began winding through the hills to the north from LA. Today, in Antelope Valley, for example, it is not unusual for long-term rental property owners to have to deal with tenants who recently lost their own home to foreclosure and are having difficulty getting back on their feet. In some cases, tenants do everything from the typical stripping of copper wire to be sold to the more bizarre use of cabinets for firewood. Abandoned investment properties are on the rise.

source

Miami, Florida

Miami-Dade and neighboring Broward counties have experienced an extremely high rate of foreclosures over the past two years. It is estimated that 143,000 homes were voluntarily given back to the bank, or foreclosed upon. In Miami-Dade County alone, there are currently 38,000 new condos that are recently completed, or near-completed that are vacant and show no prospects of immediate sale. The MLS for the country shows over 25,000 condos for sale in the county, which equate to a 4.5 year inventory. This of course, does not include unfinished units.

Many experts suggest that the housing market in Miami will witness a further devaluation in 2009 of over 20% of the median housing price. The biggest reason for this is arguably the over-development of medium and high-end condo constructions in the area, many of which are second or vacation homes. It is an extreme case of the common sense knowledge that second homes and investment properties are the most likely to be abandoned in favor of the owners’ primary residence when times get tight.

source

Phoenix, Arizona

Arizona ranks 48th in New Job Creation. Developers spread to the west to Phoenix and as far out as Buckeye and foreclosures are currently at a record high, which has resulted in plummeting housing prices. This is a hard pill to swallow for many recent first-time buyers, who are witnessing a sharp increase in their monthly mortgage payments, against the background of a house with a drastically decreasing value.

Of the 6,150 houses sold in the Phoenix metropolitan area in September 2008, an astounding 78% of these were vacant when sold. There are currently 55,000 homes for sale in Phoenix, of which 40% have been abandoned and are presently vacant. Most of these are currently bank-owned properties and are being sold at liquidated prices. According to area investor and resident, Donna Butera, this massive departure and house abandonment in Phoenix has had other implications in the community. Understandably, home owners are deciding to walk from their mortgages if the home they just agreed to buy for $350,000 is now only worth $270,000. As a result of the frustration, homeowners are removing everything they can from the homes before they abandon them, selling appliances, cupboards and virtually everything else, including the kitchen sink. As a result, it is not unusual to drive down a street in what was once a nicer suburban neighborhood in Phoenix and now see a majority of windowless abandoned homes.

source

(source)

Despite the struggle, most responsible homeowners don’t think twice about whether they should make the mortgage payment each month. You’ve worked like crazy to stay on top of bills for years. You may have already fought your way back from bad credit and don’t want to let your credit score sink again. Whether you choose to fight and stay in your home for the long-haul, or you have given it your all and just can’t bear the crushing weight anymore, it’s important to know that there are better options than simply abandoning your home before you are late on the payments.

(source)

As the stigma associated with losing a home has subsided considerably in the past year, more people are creating their own economic stimulus package. Why refinance (if you have equity) or pay the guy who wrote your original mortgage to take a shot at a loan modification, when you can just take the “Free Housing For Six Months Package” and simply stop mailing payments to the lender? Many people are exacting their revenge on the lenders who put them into the time-bomb loans, and some are not only getting even with the bank financially through withholding payments but are gutting and destroying the home on the way out.

Should we seek first to be ethical in this situation despite what others are doing, or should we do what is best in the near-term (and perhaps even the long-term) for our own families first? This presents a real dilemma for us, because we have always placed so much value on fulfilling our obligations, yet more and more people feel like their lenders betrayed them first. So, having done your best, what can you do to feel like you have done your best ethically to stay in the home, while also making a tough decision that could make your financial turn-around come sooner?

We Are Current, But The Payments Are Killing Us

First, the quickest call is to find out if you can refinance (which you probably already tried) which will be made tougher by the loss of income. There are many debt consolidation and loan modification companies springing up, and you might recognize the voice of the guy on the other end of the phone – it’s the guy who put you into your negatively amortizing pay option hybrid wacky funzone ARM! That’s right, the former loan officer who loved you enough to give you a three year prepayment penalty that you couldn’t afford to get out of two years ago when you had equity and could still qualify for a new loan, if it weren’t for that $15,000 charge to get out of the old loan! If you aren’t getting anywhere with your lender, it is definitely possible to find reputable loan modification companies, but first look for a personal recommendation and compare pricing with a few different companies.

We Just Went Late On the Mortgage – Should We Catch Up?

There is at least some consolation in the decision-making process here, in the sense that you (unfortunately) have already taken a hit to your credit score, yet this now allows you to make some firm choices without clinging to your FICO score for dear life. At this point, or even if you just have a maxed-out credit card or a late payment on your car, your credit is too low to get any traditional financing, so don’t waste time trying to refinance or get loans or credit lines. At this point, find a local real estate agent who knows your neighborhood (the man or woman whose sign you are sick of seeing everywhere is a good place to start). If you owe more than the property is worth, it is very important that you choose a real estate agent who has experience with short sales.

There is nothing to lose at this point in putting your home on the market, and you should call your lender to get information from the loan reconciliation department and start pulling together your financials – most recent paystubs, bank statements, two years worth of tax returns and the most important piece, a well-written hardship letter that explains what has changed in your situation. The decision to catch up on a late payment or two is personal and obviously based on a lot of unique variables, but one thing to keep in mind is that borrowing money from friends or family to stay current may just delay the inevitable and most likely could cause strain on the relationship down the road. If it feels like it is impossible to catch up without continuing to borrow, you could potentially be moving in the next six months or sooner, and it is a good idea to keep in mind moving costs, deposit and first month’s rent and start planning to get back on your feet.

What is the Government Really Doing to Help?

(source)

On December 15th, a very extensive loan modification effort (which has been marked with some controversy) backed by the government goes into effect. If you are able to document the financial events that caused you to fall behind (essentially to prove that you didn’t stop paying the mortgage on purpose) and qualify for the modified loan payment, you have a strong shot at staying in your home.  Find out if your lender is part of the Hope Now Alliance and most importantly, no matter how bad your situation is, do not ignore your lender’s phone calls or letters, and stay in touch with them, because the sooner you begin working with them, the better your chances of finding some resolution that will allow you to recover much sooner than walking away. Remember, you can get back on your feet again no matter how far down you fall.