In the long run, it's falling home prices that will get the economy moving again.
By JUNE FLETCHER
from the Wall Street Journal
On Tuesday, the government announced an $800 billion plan to stimulate the economy by buying $600 billion worth of mortgage-backed assets and $200 billion in consumer-debt securities. The intent is to make it easier for consumers to buy cars, pay for college tuition and get credit cards. Mortgage interest rates fell about a half-percentage point on the news. (See "Fed Aid Sets Off a Rush to Refinance")
Will the effort finally get the economy moving again? Frankly, I doubt it.
Lower mortgage rates can help people buy housing, but only if they feel secure enough in their jobs, and confident enough in their financial future to take the plunge. Given that consumers are drowning in debt -- especially housing debt -- fearful of layoffs, and waiting for housing prices to hit bottom, it's unlikely that they'll react to this initiative with a spending spree.
Consumers don't react to debt like companies, though the government is behaving like they do. Giving companies better access to credit allows them to meet payrolls while they adjust their production and expenses in response to tighter economic condition. But families who can't pay their bills can't lay off a spouse and kids. For them, debt grows from burdensome to monstrous as interest charges accumulate. Eventually, the load becomes overwhelming.
Testifying before the Senate on July 28, Harvard law professor Elizabeth Warren noted that the situation for the middle class has worsened during this decade. She explained that, adjusted for inflation, median household income fell $1,175 from 2000 to 2007, while expenses increased $4,655, pushed primarily by higher costs for mortgages, gas, health insurance and food, in that order. Families with children have borne an additional $3,180 in expenses for day care, after-school care and college tuition. To help cope with these rising costs, families turned to home equity lines of credit and refinancing -- effectively sucking the equity out of their homes -- as well as credit card debt. Nearly 44% of American households now carry a balance on their credit cards, she testified; to retire it, a family earning the median income of $48,201 would have to turn over every paycheck for nearly three months.
Foreclosure or bankruptcy will take a toll on a certain portion of these families, even though, as Ms. Warren points out in her book "The Two-Income Trap" (Basic Books: 2003), that's something most people desperately try to avoid. After studying 2,200 families that had filed for bankruptcy, she found that families that fail financially are most likely to be ones with children, who are struggling to buy and maintain homes in decent school districts, not flippers or status-seekers out to make a quick buck. For every family that officially declares bankruptcy, she writes, there are seven more whose debt loads suggest that they ought to file. But they don't, given the stigma that financial failure still holds in society.
Many Americans are so indebted that a job loss, illness or divorce inevitably pushes them over the financial precipice These days, I'm inundated with pleas for help from readers who were coping with their bills until they were blindsided by bad luck, like the Utah real estate agent who was hit with both diabetes and a falling home-sale market that destroyed her business, or the California man who got behind on mortgage payments after a heart attack, or the Massachusetts woman who lost a high-paying job and took on a lower-paying one that forces her to choose between going without food and heat and paying her mortgage. These readers aren't trying to game the system; they're trying to find ways to hold on to their homes, and failing that, their dignity.
While emergency relief measures and loan modifications may help the hardest cases, there's clearly not enough money in the federal budget to help everyone. Temporary stimulus measures like mortgage rate cuts and easier access to credit are limited, too, since they only work when people feel rich enough to buy something. Ultimately, it will take more permanent solutions, like the proposal recently unveiled by President-elect Barack Obama to boost job growth, to restore confidence enough to get the economy moving again.
In the meantime, expect some relief in the form of more affordable home prices, which continue to fall even with massive government intervention: In the third quarter, they declined a record 16.6% from a year earlier, according to the latest home price index by Standard & Poor's/Case-Shiller. As painful as this deflation is to those who are forced to sell, in the long run, lower home prices will help family budgets to come into balance, and personal debt levels to become more manageable. That will help the economy far more than trying to entice tapped-out consumers to buy bigger houses and more stuff.
Write to June Fletcher at fletcher.june@gmail.com
http://online.wsj.com/article/SB122770741433659553.html?mod=djempersonal
[The local real estate community tends to reject this common sense approach, saying that lower interest rates are indeed the answer to the problem. Some of these other Realtors need to get slapped back to reality... interest rates were too low for too long, and were combined with easy money and non-existent lending standards Those circumstances are exactly how we ended up in this mess. Here at the SCV Home Team we take a realist position. It doesn't make us that popular with some of our fellow associates, or with some of the sellers of real property. As we have said before, reality bites. We recognize reality, and go forward. So for the buyers in this market... opportunity awaits!! Home prices have fallen quite a bit and there are some terrific deals to be made! Give us a call at 661-290-3750 and let's be a buyer in this market!]
Monday, December 01, 2008
Friday, November 21, 2008
Only One Person Knows a Home's Value: Its Buyer
House-Price Index Readings Can Be Inflated, Built on Shaky Foundations and Far From the Right Neighborhood
The Wall Street Journal Online
By CARL BIALIK
http://online.wsj.com/article/SB122722235538745845.html?mod=djempersonal
The good news is your home may be worth more than the rock-bottom price that your neighbors' houses fetched. The bad news: No one but you might think so.
The one point of widespread agreement in the real-estate industry is that there is no single accurate index of home prices. They are all over the map, cover different sets of homes and may exclude parts of the country or be unduly influenced by the mix of homes sold in a given month.
A sold sign is displayed in the yard of a house in Clarksville, Tenn., in October.
As the home market surged earlier this decade, the two leading indicators of home prices diverged. One didn't count homes sold with exotic or subprime mortgages, which fueled much of the bubble. These same properties are often the ones going on the auction block today at severe discounts, pulling the other home-price index down -- some say to unrealistic lows.
To address these discrepancies, indexes are going increasingly local. Other, less-well-known measures of home prices -- some of them available only to paying customers -- are adjusting to exclude homes sold by banks.
Sales of foreclosures and other distressed properties accounted for 35% to 40% of transactions in the third quarter, the National Association of Realtors said this week. The discount on such properties, often sold by banks that need to clear inventory quickly, can be 30% to 40% compared with similar properties sold by the resident, according to Damien Weldon, a vice president of credit-risk products and analytics at First American CoreLogic. The company's Loan Performance division is producing a new index without these discounted sales, a distinction that was "not important a few years ago, but now it's very important," Mr. Weldon says.
Behind the Home-Price Indexes
The numbers from home-price indexes are widely watched. The Federal Reserve uses them to measure the value of housing stock. Banks use them to determine whether mortgages are underwater and to estimate the value of homes they will have to sell after foreclosure.
But the indexes may be leading everyone astray. Just as respondents to election surveys are meant to stand in for the broader electorate, the homes being sold need to represent all homes. The problem is, producers of these price measures aren't sure that sale prices reflect the values of houses not on the market.
"People put all their eggs in the sales-price basket," says Andrew Leventis, a senior economist with the Federal Housing Finance Agency, which produces a home-price index.
"Whether the transaction pool is reflective of the entire housing stock -- nobody addresses that problem," adds Karl Case, professor of economics at Wellesley College and co-creator of the Case-Shiller Index, a competitor to the federal government's measure.
The Case-Shiller index includes properties that had subprime loans attached.
"That's the stuff that went down most substantially, and that's probably the stuff that went up most substantially," Prof. Case says.
The federal index, though, doesn't include such properties, instead accounting only for properties with financing from mortgage giants Fannie Mae or Freddie Mac. For that reason, many prefer Case-Shiller.
"I believe S&P Case-Shiller for the areas it covers," says Thomas Lawler, a housing economist in Leesburg, Va.
Case-Shiller has shown a steeper decline in markets with many distressed sales. The second-quarter year-over-year declines in San Francisco, Phoenix and Las Vegas ranged from 23% to 28%, according to Case-Shiller. But the federal gauge recorded declines of only 5.8%, 11% and 18%, respectively.
Not everyone thinks the Case-Shiller index is useful. Richard A. Smith, chief executive of real-estate broker Realogy Corp., says the index omits 13 states. "Case-Shiller as a broad index is inaccurate," Mr. Smith says.
David Blitzer, chairman of the index committee at Standard & Poor's, which publishes Case-Shiller, responds that "the sampling and data collection is as good as it can be."
"One's got to be wrong," Mr. Smith said of the dueling Case-Shiller and federal indexes. "Nobody will know until the book is written."
Yet there is no surefire way to know which index got closer to the truth. Each year since 2000, the Census Bureau has asked homeowners to report the value of their home, but "it doesn't necessarily jibe with assessment records or anything like that," says Jeanne Woodward, a Census Bureau statistician.
Another potential check on values is home appraisals. But Dr. Leventis said there are two possible sources of upward bias. One is that people often choose to get their homes appraised when they figure the value has risen sharply and they can convert some of that to cash with a refinancing. Another is that appraisals tend to overstate the value of homes, perhaps because homeowners seek the most-favorable assessment.
"I really don't see a benchmark" against which to check these home-price indexes, says Lawrence Yun, chief economist of the National Association of Realtors.
His group releases its own numbers, most recently showing prices declining by 9% in the third quarter compared with a year earlier. But that measure, unlike the others, doesn't take into account a home's sales record. So instead of comparing each property's sale price to its prior sale price, the realtors group compares the price of homes sold this month with that of homes sold last month -- even if the mix of homes has changed sharply. Mr. Yun defends the measure as "very simple to understand."
Most of the numbers that get headlines are based on metropolitan areas. Yet the housing-market picture can vary dramatically within the same region. Lynn, Mass., a suburb northeast of Boston, saw prices drop 10% in the second quarter compared with a year earlier, according to Wellesley's Prof. Case. Yet in the same period prices in Cambridge, just west of the city, rose 13%.
Integrated Asset Services, or IAS, sells estimates by neighborhood. "We are a lot more granular" than Case-Shiller and the federal index, Chief Executive David McCarthy said.
Within Middlesex County, which includes Cambridge, one neighborhood was up 12% compared with a year earlier in September, while two others were down 1% and 2%, respectively.
Fiserv Inc. uses the Case-Shiller local numbers to sell estimates for a single property.
The risk when going local is that data become sparse and a few anomalous sales may throw things off -- particularly in markets where most of the sales are distressed. IAS makes estimates based on as few as 50 to 75 transactions.
None of this nuance is captured in headlines about the latest home-price-index release, Prof. Case complains. Still, he is hopeful that home-price indexes will improve. "This new criticism that these indexes are showing different things is going to lead to a lot of research," he says.
[This article points out the problem of using national or state or even county index values. In our market area, the SCV Home Team does a much more accurate analysis of home value.]
The Wall Street Journal Online
By CARL BIALIK
http://online.wsj.com/article/SB122722235538745845.html?mod=djempersonal
The good news is your home may be worth more than the rock-bottom price that your neighbors' houses fetched. The bad news: No one but you might think so.
The one point of widespread agreement in the real-estate industry is that there is no single accurate index of home prices. They are all over the map, cover different sets of homes and may exclude parts of the country or be unduly influenced by the mix of homes sold in a given month.
A sold sign is displayed in the yard of a house in Clarksville, Tenn., in October.
As the home market surged earlier this decade, the two leading indicators of home prices diverged. One didn't count homes sold with exotic or subprime mortgages, which fueled much of the bubble. These same properties are often the ones going on the auction block today at severe discounts, pulling the other home-price index down -- some say to unrealistic lows.
To address these discrepancies, indexes are going increasingly local. Other, less-well-known measures of home prices -- some of them available only to paying customers -- are adjusting to exclude homes sold by banks.
Sales of foreclosures and other distressed properties accounted for 35% to 40% of transactions in the third quarter, the National Association of Realtors said this week. The discount on such properties, often sold by banks that need to clear inventory quickly, can be 30% to 40% compared with similar properties sold by the resident, according to Damien Weldon, a vice president of credit-risk products and analytics at First American CoreLogic. The company's Loan Performance division is producing a new index without these discounted sales, a distinction that was "not important a few years ago, but now it's very important," Mr. Weldon says.
Behind the Home-Price Indexes
The numbers from home-price indexes are widely watched. The Federal Reserve uses them to measure the value of housing stock. Banks use them to determine whether mortgages are underwater and to estimate the value of homes they will have to sell after foreclosure.
But the indexes may be leading everyone astray. Just as respondents to election surveys are meant to stand in for the broader electorate, the homes being sold need to represent all homes. The problem is, producers of these price measures aren't sure that sale prices reflect the values of houses not on the market.
"People put all their eggs in the sales-price basket," says Andrew Leventis, a senior economist with the Federal Housing Finance Agency, which produces a home-price index.
"Whether the transaction pool is reflective of the entire housing stock -- nobody addresses that problem," adds Karl Case, professor of economics at Wellesley College and co-creator of the Case-Shiller Index, a competitor to the federal government's measure.
The Case-Shiller index includes properties that had subprime loans attached.
"That's the stuff that went down most substantially, and that's probably the stuff that went up most substantially," Prof. Case says.
The federal index, though, doesn't include such properties, instead accounting only for properties with financing from mortgage giants Fannie Mae or Freddie Mac. For that reason, many prefer Case-Shiller.
"I believe S&P Case-Shiller for the areas it covers," says Thomas Lawler, a housing economist in Leesburg, Va.
Case-Shiller has shown a steeper decline in markets with many distressed sales. The second-quarter year-over-year declines in San Francisco, Phoenix and Las Vegas ranged from 23% to 28%, according to Case-Shiller. But the federal gauge recorded declines of only 5.8%, 11% and 18%, respectively.
Not everyone thinks the Case-Shiller index is useful. Richard A. Smith, chief executive of real-estate broker Realogy Corp., says the index omits 13 states. "Case-Shiller as a broad index is inaccurate," Mr. Smith says.
David Blitzer, chairman of the index committee at Standard & Poor's, which publishes Case-Shiller, responds that "the sampling and data collection is as good as it can be."
"One's got to be wrong," Mr. Smith said of the dueling Case-Shiller and federal indexes. "Nobody will know until the book is written."
Yet there is no surefire way to know which index got closer to the truth. Each year since 2000, the Census Bureau has asked homeowners to report the value of their home, but "it doesn't necessarily jibe with assessment records or anything like that," says Jeanne Woodward, a Census Bureau statistician.
Another potential check on values is home appraisals. But Dr. Leventis said there are two possible sources of upward bias. One is that people often choose to get their homes appraised when they figure the value has risen sharply and they can convert some of that to cash with a refinancing. Another is that appraisals tend to overstate the value of homes, perhaps because homeowners seek the most-favorable assessment.
"I really don't see a benchmark" against which to check these home-price indexes, says Lawrence Yun, chief economist of the National Association of Realtors.
His group releases its own numbers, most recently showing prices declining by 9% in the third quarter compared with a year earlier. But that measure, unlike the others, doesn't take into account a home's sales record. So instead of comparing each property's sale price to its prior sale price, the realtors group compares the price of homes sold this month with that of homes sold last month -- even if the mix of homes has changed sharply. Mr. Yun defends the measure as "very simple to understand."
Most of the numbers that get headlines are based on metropolitan areas. Yet the housing-market picture can vary dramatically within the same region. Lynn, Mass., a suburb northeast of Boston, saw prices drop 10% in the second quarter compared with a year earlier, according to Wellesley's Prof. Case. Yet in the same period prices in Cambridge, just west of the city, rose 13%.
Integrated Asset Services, or IAS, sells estimates by neighborhood. "We are a lot more granular" than Case-Shiller and the federal index, Chief Executive David McCarthy said.
Within Middlesex County, which includes Cambridge, one neighborhood was up 12% compared with a year earlier in September, while two others were down 1% and 2%, respectively.
Fiserv Inc. uses the Case-Shiller local numbers to sell estimates for a single property.
The risk when going local is that data become sparse and a few anomalous sales may throw things off -- particularly in markets where most of the sales are distressed. IAS makes estimates based on as few as 50 to 75 transactions.
None of this nuance is captured in headlines about the latest home-price-index release, Prof. Case complains. Still, he is hopeful that home-price indexes will improve. "This new criticism that these indexes are showing different things is going to lead to a lot of research," he says.
[This article points out the problem of using national or state or even county index values. In our market area, the SCV Home Team does a much more accurate analysis of home value.]
Tuesday, November 11, 2008
“New” 2009 conforming loan limit unchanged from $417,000; high-cost areas now max out at $625,500
“New” 2009 conforming loan limit unchanged from $417,000; high-cost areas now max out at $625,500
LOS ANGELES (Nov. 7) –The Federal Housing Finance Agency (FHFA) today announced that the “new” conforming loan limit for 2009 will remain at $417,000 for most areas in the U.S., unchanged since 2006. Loan limits for high-cost areas, including California, are capped at $625,500, down from the previous $729,750 limit. Loan limits for many areas of the state do not reach this lower threshold and are dramatically reduced from 2008.
"Although price declines mean that the total number of homes eligible for conforming financing has increased, we’re disappointed that the $729,750 limit stipulated in the Economic Stimulus Act of 2008 signed in February was not made permanent,” said C.A.R. President William E. Brown. “The reduction in the loan limit to $625,500 will negatively impact both the interest rates and the availability of funds for jumbo mortgages.
“We hope Congress will make the $729,750 limit permanent before the end of the year as one of the provisions in an economic stimulus package,” he said.
The conforming loan limit determines the maximum size of a mortgage that Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac can buy or guarantee. Non-conforming or jumbo loans typically carry a higher mortgage interest rate than a conforming loan, increasing the monthly payment and negatively impacting affordability for households in California.
In California, the new conforming loan limits for metropolitan areas range from $474,950 in the Sacramento-Arden-Arcade-Roseville metropolitan area, covering El Dorado, Placer, Sacramento and Yolo counties; to $625,500 in the Los Angeles-Long Beach-Santa Ana metropolitan area.
LOS ANGELES (Nov. 7) –The Federal Housing Finance Agency (FHFA) today announced that the “new” conforming loan limit for 2009 will remain at $417,000 for most areas in the U.S., unchanged since 2006. Loan limits for high-cost areas, including California, are capped at $625,500, down from the previous $729,750 limit. Loan limits for many areas of the state do not reach this lower threshold and are dramatically reduced from 2008.
"Although price declines mean that the total number of homes eligible for conforming financing has increased, we’re disappointed that the $729,750 limit stipulated in the Economic Stimulus Act of 2008 signed in February was not made permanent,” said C.A.R. President William E. Brown. “The reduction in the loan limit to $625,500 will negatively impact both the interest rates and the availability of funds for jumbo mortgages.
“We hope Congress will make the $729,750 limit permanent before the end of the year as one of the provisions in an economic stimulus package,” he said.
The conforming loan limit determines the maximum size of a mortgage that Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac can buy or guarantee. Non-conforming or jumbo loans typically carry a higher mortgage interest rate than a conforming loan, increasing the monthly payment and negatively impacting affordability for households in California.
In California, the new conforming loan limits for metropolitan areas range from $474,950 in the Sacramento-Arden-Arcade-Roseville metropolitan area, covering El Dorado, Placer, Sacramento and Yolo counties; to $625,500 in the Los Angeles-Long Beach-Santa Ana metropolitan area.
Another Big Bank Moves to Assist Homeowners and Itself
Citigroup has joined Morgan Stanley Chase, the Federal Deposit Insurance Corporation (FDIC,) and a few other large banks in initiating an aggressive program to mitigate foreclosures of single family homes.
The bank said on Monday that it is putting a moratorium on both initiating new foreclosures and on completing the legal process against homeowners who are currently moving toward foreclosure.
The moratorium will be available to homeowners if they meet several criteria; they must want to stay in their home, be willing to work in good faith with the bank to resolve their problems, and have the income to afford payments on a restructured mortgage.
The program will be available initially to borrowers whose mortgage loans are owned by Citigroup but the bank said it is working on expanding the program to include loans that it services for other investors.
The bank will also move proactively over the next six months to contact about one-half million homeowners, about one-third of the banks own borrowers, who are current on their mortgage payments now but are at risk of falling behind in the near future.
Citigroup will attempt to restructure mortgage loans by reducing the principal of the loan, extending the amortization period, and/or adjusting interest rates. Some 600 bank employees will be involved in the restructuring effort.
The new program is not based on altruism. The bank has suffered greatly from the subprime crisis, losing a staggering amount of money in each of the last four quarters, much more than any of its principal rivals. Citi's stock is trading only slightly above its 52-week low, closing Monday at $11.05. During the spring of 2006 the stock was trading in the $55 range.
Like FDIC, Wells Fargo, Morgan Stanley Chase and even Wachovia which is soon to be absorbed by Wells Fargo have finally realized that working with borrowers to prevent foreclosures, while expensive in the short term, is ultimately less costly than taking, managing, and marketing the foreclosed homes.
The geographic focus of Citi's efforts will be, at least at first, on those areas where unemployment and foreclosure rates are high. This will include Florida, Arizona, California, Michigan, Indiana, and Ohio.
The Associated Press reported that more than 4 million American homeowners with a mortgage were at least one payment behind on their loans at the end of June, and 500,000 were in some phase of foreclosure.
[posted by Mortgage News Daily on 11/11/08]
The bank said on Monday that it is putting a moratorium on both initiating new foreclosures and on completing the legal process against homeowners who are currently moving toward foreclosure.
The moratorium will be available to homeowners if they meet several criteria; they must want to stay in their home, be willing to work in good faith with the bank to resolve their problems, and have the income to afford payments on a restructured mortgage.
The program will be available initially to borrowers whose mortgage loans are owned by Citigroup but the bank said it is working on expanding the program to include loans that it services for other investors.
The bank will also move proactively over the next six months to contact about one-half million homeowners, about one-third of the banks own borrowers, who are current on their mortgage payments now but are at risk of falling behind in the near future.
Citigroup will attempt to restructure mortgage loans by reducing the principal of the loan, extending the amortization period, and/or adjusting interest rates. Some 600 bank employees will be involved in the restructuring effort.
The new program is not based on altruism. The bank has suffered greatly from the subprime crisis, losing a staggering amount of money in each of the last four quarters, much more than any of its principal rivals. Citi's stock is trading only slightly above its 52-week low, closing Monday at $11.05. During the spring of 2006 the stock was trading in the $55 range.
Like FDIC, Wells Fargo, Morgan Stanley Chase and even Wachovia which is soon to be absorbed by Wells Fargo have finally realized that working with borrowers to prevent foreclosures, while expensive in the short term, is ultimately less costly than taking, managing, and marketing the foreclosed homes.
The geographic focus of Citi's efforts will be, at least at first, on those areas where unemployment and foreclosure rates are high. This will include Florida, Arizona, California, Michigan, Indiana, and Ohio.
The Associated Press reported that more than 4 million American homeowners with a mortgage were at least one payment behind on their loans at the end of June, and 500,000 were in some phase of foreclosure.
[posted by Mortgage News Daily on 11/11/08]
Monday, November 03, 2008
Should You Buy or Lease?
By Mark K. Solheim
To hear the critics wail, you'd think leasing a car is as bad for your finances as smoking cigarettes is for your health. Does that mean you're a closet wastrel if you've ever been tempted by ads that trumpet affordable monthly payments for a new car? Or, worse, that you are hurtling down the highway to financial ruin if you've already given in?
Relax. Leasing is not a mortal sin of money management. For some drivers, in fact, it makes sound fiscal sense. Leasing's not for everyone, but there's no reason to scorn the 15% of our fellow travelers who choose leasing over buying.
A Closer Look
Leasing often gets a bum rap because the lingo can make your head spin. It's difficult to compare one lease with another, not to mention to compare leasing with buying. And it can be tough to get a handle on leasing because the decision to lease or buy often depends on your mindset. "A lot of people are freaked out by having to turn in their car at the end of the lease," says Phil Reed, author of Edmunds.com's Strategies for Smart Car Buyers. "What they fail to realize is that they got the first years of a brand-new car's life."
One of the biggest criticisms of leasing is that in a buck-for-buck comparison of leasing and buying, leasers usually shell out more money. That's because, after the loan payments are done, buyers get to keep the vehicle (pay cash and you come out further ahead). If your modus operandi is to buy a car and run it till it sputters and dies, leasing isn't right for you. But you're a good candidate, Reed says, if you've decided that you're always going to have a car payment ? as many drivers do, now that six- and even seven-year loans are gaining popularity. It's a good bet that you can drive more car for less money if you lease. You'll never actually own the car, but who really owns a car when the bank holds the title until the loan is paid off?
A few other advantages: A lease usually ends about the same time as the warranty, so you probably won't pay for any repairs. You won't have to worry about whether you'll get a fair deal on a trade-in. In most states, you pay sales tax only on the monthly payments rather than on the full value of the car. Plus, many of today's leases include gap insurance to cover the difference between the lease payoff and an insurance settlement if the car is totaled or stolen.
Yes, there are early-termination fees if you change your mind. But if you finance a car and bail out before the loan is paid off, you could easily owe more on the loan than the car is worth. And it's true that you pay extra for exceeding the 10,000- to 15,000-mile yearly limit typically written into a contract. But buyers who rack up high mileage also pay a penalty: lower trade-in value.
Design Your Own Lease
If you choose a manufacturer-subsidized lease, you'll probably be locked in to the terms. But if the car you want isn't being pushed by the carmaker, there's plenty of room for bargaining. Either way, contact several dealers to see who's willing to cut you the best deal. Reed of Edmunds.com recommends a term of three years because that's often the turning point in a car's life (when the warranty expires, for instance, or you may need new tires).
Ask the dealer to compare leasing offers on the car from the manufacturer's financing arm as well as a few banks. That may produce a lower "money factor" (basically the interest rate) or higher residual, either of which translates into lower payments.
Next, target the capitalized cost which is leasing lingo for the price of the car written into the lease. Gross cap cost includes the price of the vehicle, fees, extended service plans, gap-insurance premiums and any other add-ons. Adjusted cap cost is the gross cap cost minus reductions for trade-in, down payment, and rebates. That adjusted cost is the amount you actually finance. Don't pay sticker unless you have to. Both Kelley Blue Book (www.kbb.com) and www.Edmunds.com list actual transaction prices to give you an idea of what others are paying.
If you expect to drive more than the number of miles included in the standard contract, try to negotiate a higher limit. Or you may be able to buy extra miles up front for an extra 10 or 15 cents per mile, versus the usual 15- to 30-cent-per-mile penalty charged at the end of the lease.
You usually have the option of buying the car at the end of the lease instead of turning it in. The purchase amount, typically the residual value, is written into the lease. Buying may not be a good idea, though, if the residual was set artificially high.
Not up for haggling? Kiplinger's has teamed with CarBargains, a buying service from the nonprofit Consumers' Checkbook organization. Its LeaseWise service will negotiate with five local dealers for you. The cost is $335. Visit www.kiplinger.com/links/carbargains or call 800-475-7283.
All contents copyright 2007 The Kiplinger Washington Editors, Inc.
To hear the critics wail, you'd think leasing a car is as bad for your finances as smoking cigarettes is for your health. Does that mean you're a closet wastrel if you've ever been tempted by ads that trumpet affordable monthly payments for a new car? Or, worse, that you are hurtling down the highway to financial ruin if you've already given in?
Relax. Leasing is not a mortal sin of money management. For some drivers, in fact, it makes sound fiscal sense. Leasing's not for everyone, but there's no reason to scorn the 15% of our fellow travelers who choose leasing over buying.
A Closer Look
Leasing often gets a bum rap because the lingo can make your head spin. It's difficult to compare one lease with another, not to mention to compare leasing with buying. And it can be tough to get a handle on leasing because the decision to lease or buy often depends on your mindset. "A lot of people are freaked out by having to turn in their car at the end of the lease," says Phil Reed, author of Edmunds.com's Strategies for Smart Car Buyers. "What they fail to realize is that they got the first years of a brand-new car's life."
One of the biggest criticisms of leasing is that in a buck-for-buck comparison of leasing and buying, leasers usually shell out more money. That's because, after the loan payments are done, buyers get to keep the vehicle (pay cash and you come out further ahead). If your modus operandi is to buy a car and run it till it sputters and dies, leasing isn't right for you. But you're a good candidate, Reed says, if you've decided that you're always going to have a car payment ? as many drivers do, now that six- and even seven-year loans are gaining popularity. It's a good bet that you can drive more car for less money if you lease. You'll never actually own the car, but who really owns a car when the bank holds the title until the loan is paid off?
A few other advantages: A lease usually ends about the same time as the warranty, so you probably won't pay for any repairs. You won't have to worry about whether you'll get a fair deal on a trade-in. In most states, you pay sales tax only on the monthly payments rather than on the full value of the car. Plus, many of today's leases include gap insurance to cover the difference between the lease payoff and an insurance settlement if the car is totaled or stolen.
Yes, there are early-termination fees if you change your mind. But if you finance a car and bail out before the loan is paid off, you could easily owe more on the loan than the car is worth. And it's true that you pay extra for exceeding the 10,000- to 15,000-mile yearly limit typically written into a contract. But buyers who rack up high mileage also pay a penalty: lower trade-in value.
Design Your Own Lease
If you choose a manufacturer-subsidized lease, you'll probably be locked in to the terms. But if the car you want isn't being pushed by the carmaker, there's plenty of room for bargaining. Either way, contact several dealers to see who's willing to cut you the best deal. Reed of Edmunds.com recommends a term of three years because that's often the turning point in a car's life (when the warranty expires, for instance, or you may need new tires).
Ask the dealer to compare leasing offers on the car from the manufacturer's financing arm as well as a few banks. That may produce a lower "money factor" (basically the interest rate) or higher residual, either of which translates into lower payments.
Next, target the capitalized cost which is leasing lingo for the price of the car written into the lease. Gross cap cost includes the price of the vehicle, fees, extended service plans, gap-insurance premiums and any other add-ons. Adjusted cap cost is the gross cap cost minus reductions for trade-in, down payment, and rebates. That adjusted cost is the amount you actually finance. Don't pay sticker unless you have to. Both Kelley Blue Book (www.kbb.com) and www.Edmunds.com list actual transaction prices to give you an idea of what others are paying.
If you expect to drive more than the number of miles included in the standard contract, try to negotiate a higher limit. Or you may be able to buy extra miles up front for an extra 10 or 15 cents per mile, versus the usual 15- to 30-cent-per-mile penalty charged at the end of the lease.
You usually have the option of buying the car at the end of the lease instead of turning it in. The purchase amount, typically the residual value, is written into the lease. Buying may not be a good idea, though, if the residual was set artificially high.
Not up for haggling? Kiplinger's has teamed with CarBargains, a buying service from the nonprofit Consumers' Checkbook organization. Its LeaseWise service will negotiate with five local dealers for you. The cost is $335. Visit www.kiplinger.com/links/carbargains or call 800-475-7283.
All contents copyright 2007 The Kiplinger Washington Editors, Inc.
Wednesday, October 22, 2008
Realtors Present Four Point Stimulus Proposal
The National Association of Realtors® (NAR) stayed right on message as it proposed a four-point plan for Congress to enact to resuscitate the housing market and including yet another plea to keep banks out of the real estate business.
The plan, revealed in a statement made late last week and in the NAR President's Podcast released on October 21, calls for a special "lame-duck" session of Congress and asks that it consider the following, what it calls "consumer-driven" provisions to boost the economy and soothe the nerves of jittery homebuyers.
1. Eliminate the provision contained in last summer's housing rescue bill that requires first-time homebuyers to repay the $7,500 tax credit they receive under the plan and expand that credit to apply to all buyers of a primary residence.
2. Urge the government to use a portion of the allotted $700 billion that was provided to purchase mortgage-backed securities from banks to provide price stabilization for housing. The Treasury department should be required to:
3. Extend credit down to Main Street, making credit more available to consumers and small businesses;
* Extend credit down to Main Street, making credit more available to consumers and small businesses;
* Expedite the process for short sales;
* Expedite the resolution of banks' real estate owned (REOs) properties.
4. Make permanent the prohibition against banks entering real estate brokerage and management, further protecting consumers and the economy.
In the podcast NAR President Richard F. Gaylord called the proposal "a boldstep on the policy front," and urged NAR members to talk with members of Congress while they are home in their districts over the election hiatus about the proposal and how important its provisions are to consumers.
In the earlier statement Gaylor said, "Housing has always lifted the economy out of downturns, and it is imperative to get the housing market moving forward as quickly as possible." It is vital to the economy that Congress take specific actions to boost the confidence of potential homebuyers in the housing market and make it easier for qualified buyers to get safe and affordable mortgage loans. We are asking Congress to act right away."
Gaylord said NAR, as the leading advocate for homeownership and private property rights, believes it is important for Congress to address the concerns and fears of America's families, much in the way it has addressed Wall Street turbulence. "Housing is and has always been a good, long-term investment and a family's primary step towards accumulating wealth."
Gaylord said that NAR will strongly pursue those proposals and is calling on Congress to return to enact housing stimulus legislation in a lame-duck session after the national elections in November.
[Published 10/22/08 by Mortgage News Daily]
The plan, revealed in a statement made late last week and in the NAR President's Podcast released on October 21, calls for a special "lame-duck" session of Congress and asks that it consider the following, what it calls "consumer-driven" provisions to boost the economy and soothe the nerves of jittery homebuyers.
1. Eliminate the provision contained in last summer's housing rescue bill that requires first-time homebuyers to repay the $7,500 tax credit they receive under the plan and expand that credit to apply to all buyers of a primary residence.
2. Urge the government to use a portion of the allotted $700 billion that was provided to purchase mortgage-backed securities from banks to provide price stabilization for housing. The Treasury department should be required to:
3. Extend credit down to Main Street, making credit more available to consumers and small businesses;
* Extend credit down to Main Street, making credit more available to consumers and small businesses;
* Expedite the process for short sales;
* Expedite the resolution of banks' real estate owned (REOs) properties.
4. Make permanent the prohibition against banks entering real estate brokerage and management, further protecting consumers and the economy.
In the podcast NAR President Richard F. Gaylord called the proposal "a boldstep on the policy front," and urged NAR members to talk with members of Congress while they are home in their districts over the election hiatus about the proposal and how important its provisions are to consumers.
In the earlier statement Gaylor said, "Housing has always lifted the economy out of downturns, and it is imperative to get the housing market moving forward as quickly as possible." It is vital to the economy that Congress take specific actions to boost the confidence of potential homebuyers in the housing market and make it easier for qualified buyers to get safe and affordable mortgage loans. We are asking Congress to act right away."
Gaylord said NAR, as the leading advocate for homeownership and private property rights, believes it is important for Congress to address the concerns and fears of America's families, much in the way it has addressed Wall Street turbulence. "Housing is and has always been a good, long-term investment and a family's primary step towards accumulating wealth."
Gaylord said that NAR will strongly pursue those proposals and is calling on Congress to return to enact housing stimulus legislation in a lame-duck session after the national elections in November.
[Published 10/22/08 by Mortgage News Daily]
Tuesday, October 14, 2008
The Solution: Turn on the Printing Presses!
The financial markets are still volatile and people are still uncertain at best, or fearful at worst, for the future. Stratfor.com has a bit of commentary about the governments of America's and Europe's various attempts at solving the financial mess.
"Yet the Europeans and the Americans both had to intervene in some way, and now they face exactly the same problem: having decided to make the pig fly, there remains the small matter of how to build a flying pig. The problem is administrative. It is all very well to say that the government will buy paper or stock in companies, or that it will guarantee loans between banks. The problem is that no institutions exist to do this. There are no offices filled with officials empowered to do any of these things, no rules on how these things are to be done, no bank accounts on which to draw — not even a decision on who has to sign the checks. The faster they try to set up these institutions, the more inefficient, error-prone and even corrupt they will turn out to be. We can assure you that some bright lads are already thinking dreamily of ways to scam the system, and the faster it is set up, the fewer controls there will be."
Now that the governments have decided to force the banks to take money in exchange for preferred stock positions, the Dow industrial average yesterday flew up over 900 points (apparently pigs can fly!).
We will be monitoring developments closely, as always.
"Yet the Europeans and the Americans both had to intervene in some way, and now they face exactly the same problem: having decided to make the pig fly, there remains the small matter of how to build a flying pig. The problem is administrative. It is all very well to say that the government will buy paper or stock in companies, or that it will guarantee loans between banks. The problem is that no institutions exist to do this. There are no offices filled with officials empowered to do any of these things, no rules on how these things are to be done, no bank accounts on which to draw — not even a decision on who has to sign the checks. The faster they try to set up these institutions, the more inefficient, error-prone and even corrupt they will turn out to be. We can assure you that some bright lads are already thinking dreamily of ways to scam the system, and the faster it is set up, the fewer controls there will be."
Now that the governments have decided to force the banks to take money in exchange for preferred stock positions, the Dow industrial average yesterday flew up over 900 points (apparently pigs can fly!).
We will be monitoring developments closely, as always.
Friday, October 10, 2008
How Busy Are We???
Sorry that I haven't posted my perspective on current events and the housing market lately.
Here's a quick note that I just sent to a friend and client:
I have been busier than a one-armed paper hanger lately. Have three offers out there and waiting to hear back on them... and they are all great offers too! Currently prepping two other offers for submission today. Right now am working with buyers buyers buyers. Not so much listings. The ebb and flow of this biz...
Betwix you and me, I think prices are going to be all over the board for a while, but locally there is a negotiation parity between sellers and buyers. There is a six month inventory based on number of listings to sales rate ratio. Very balanced... and my last three offers have been with multiple offer situations.
[Regarding the news...]
The world is not ending.
It will take a while for all of the extraordinary government intervention to work through the system and for confidence to re-build, but both will happen. That's not to say that there will not be some wild shocks to the system down the road, but I think that we are either past or nearly past the critical period of danger of systematic collapse.
[Some] people will lose jobs and houses. Christmas will be leaner than any in our children's memory. But we will get past this.
Tip o' the Day: Keep your wits about you as others are losing theirs.
[By the way... we are never too busy for you and your referrals of friends, neighbors, and associates! Please call Ray and the SCV Home Team at 661-290-3750.]
Here's a quick note that I just sent to a friend and client:
I have been busier than a one-armed paper hanger lately. Have three offers out there and waiting to hear back on them... and they are all great offers too! Currently prepping two other offers for submission today. Right now am working with buyers buyers buyers. Not so much listings. The ebb and flow of this biz...
Betwix you and me, I think prices are going to be all over the board for a while, but locally there is a negotiation parity between sellers and buyers. There is a six month inventory based on number of listings to sales rate ratio. Very balanced... and my last three offers have been with multiple offer situations.
[Regarding the news...]
The world is not ending.
It will take a while for all of the extraordinary government intervention to work through the system and for confidence to re-build, but both will happen. That's not to say that there will not be some wild shocks to the system down the road, but I think that we are either past or nearly past the critical period of danger of systematic collapse.
[Some] people will lose jobs and houses. Christmas will be leaner than any in our children's memory. But we will get past this.
Tip o' the Day: Keep your wits about you as others are losing theirs.
[By the way... we are never too busy for you and your referrals of friends, neighbors, and associates! Please call Ray and the SCV Home Team at 661-290-3750.]
Wednesday, October 08, 2008
SCV Home Sales Rise in August Y2Y
Single-family home sales increased 7.0 percent during August throughout the Santa Clarita Valley, the Southland Regional Association of Realtors reported.
The 199 closed escrows were 13 sales higher than a year ago, but down 16.0 percent from this July when 237 homes sold.
While buyers generally are focusing more on single-family home opportunities, condominium sales increased 31.7 percent to 83 closed escrows during August.
"Lower prices were the most important factor driving increased sales activity, simply because buyers realize that they now have a chance of buying a home that was out of reach just a short time ago," said Doreen Chastain-Shine, president of the Association's Santa Clarita Valley Division. "The increase also could be related to the positive effects of being able to obtain a larger loan at a lower cost."
Chastain-Shine was referring to the fact that the July and August were the first months that saw the conforming loan limit at its new level of $729,000, which means loans up to that amount can be obtained at a lower interest rate than ever before.
The median price of homes sold during August decreased 19.6 percent to $450,000. That was $1 10,000 below the $560,000 median price of August 2007 and $9,000 higher than the $441,000 median posted this July.
The condo median during August came in at $269,500, down 25.6 percent from a year ago and off 5.4 percent from this July.
‘The real estate market will not find some level of normalcy until Washington resolves the current financial crisis, thus making more money available for home loans, and the limited supply of bank-owned properties on the local market work their way through the system," said Jim Link, the Association's chief executive officer. [The other way, of course, is to let the market find its own level through agreement of buyers and sellers on price. However, credit availability is a critical variable in the marketplace. The financial markets are so clogged by distrust and bad paper, that some measure of governmental intervention will be needed to restore a functioning market. The SCV Home Team hopes the macro-economic experts can come up with as little intervention as possible yet still correct the excesses. It's a tall order in this, a general election year.]
"Many of the foreclosure properties, which are not nearly as numerous as in other parts of the state, already are on their way to being sold," Link said. "We expect resale prices to flatten out soon and firm up between now and Spring." [We hope!]
That relatively brief window of opportunity is when buyers will have the greatest opportunity to buy a home at a favorable price.
Activity throughout the Santa Clarita Valley picked up during August, a fact supported by the Association's statistics reporting pending escrows - a measure of future resale activity.
Pending escrows increased 89.3 percent during August compared to a year ago, suggesting that a growing number of people are getting off the fence and into the market.
There were 1,684 active listings throughout the Santa Clarita Valley at the end of August. That was down 825 listings for a drop of 32.9 percent compared to a year ago. Active listings also declined 5.3 percent from the July total.
At the current pace of sales the inventory represents a 6.0-month supply - right at the top of what industry leaders call a balanced market where neither the buyer nor the seller have a clear cut advantage in negotiations.
[Become a client of Ray Kutylo and the SCV Home Team for up-to-date analysis of market conditions.]
The 199 closed escrows were 13 sales higher than a year ago, but down 16.0 percent from this July when 237 homes sold.
While buyers generally are focusing more on single-family home opportunities, condominium sales increased 31.7 percent to 83 closed escrows during August.
"Lower prices were the most important factor driving increased sales activity, simply because buyers realize that they now have a chance of buying a home that was out of reach just a short time ago," said Doreen Chastain-Shine, president of the Association's Santa Clarita Valley Division. "The increase also could be related to the positive effects of being able to obtain a larger loan at a lower cost."
Chastain-Shine was referring to the fact that the July and August were the first months that saw the conforming loan limit at its new level of $729,000, which means loans up to that amount can be obtained at a lower interest rate than ever before.
The median price of homes sold during August decreased 19.6 percent to $450,000. That was $1 10,000 below the $560,000 median price of August 2007 and $9,000 higher than the $441,000 median posted this July.
The condo median during August came in at $269,500, down 25.6 percent from a year ago and off 5.4 percent from this July.
‘The real estate market will not find some level of normalcy until Washington resolves the current financial crisis, thus making more money available for home loans, and the limited supply of bank-owned properties on the local market work their way through the system," said Jim Link, the Association's chief executive officer. [The other way, of course, is to let the market find its own level through agreement of buyers and sellers on price. However, credit availability is a critical variable in the marketplace. The financial markets are so clogged by distrust and bad paper, that some measure of governmental intervention will be needed to restore a functioning market. The SCV Home Team hopes the macro-economic experts can come up with as little intervention as possible yet still correct the excesses. It's a tall order in this, a general election year.]
"Many of the foreclosure properties, which are not nearly as numerous as in other parts of the state, already are on their way to being sold," Link said. "We expect resale prices to flatten out soon and firm up between now and Spring." [We hope!]
That relatively brief window of opportunity is when buyers will have the greatest opportunity to buy a home at a favorable price.
Activity throughout the Santa Clarita Valley picked up during August, a fact supported by the Association's statistics reporting pending escrows - a measure of future resale activity.
Pending escrows increased 89.3 percent during August compared to a year ago, suggesting that a growing number of people are getting off the fence and into the market.
There were 1,684 active listings throughout the Santa Clarita Valley at the end of August. That was down 825 listings for a drop of 32.9 percent compared to a year ago. Active listings also declined 5.3 percent from the July total.
At the current pace of sales the inventory represents a 6.0-month supply - right at the top of what industry leaders call a balanced market where neither the buyer nor the seller have a clear cut advantage in negotiations.
[Become a client of Ray Kutylo and the SCV Home Team for up-to-date analysis of market conditions.]
Friday, October 03, 2008
Today's 'Daily Reckoning' Commentary
[The House of Representatives has voted to pass the Bailout Bill, and the President has signed it into law. The Real Blog has had some regular commentary about the state of the economy and the housing market over the last few years as my loyal readers well know. With the passage of the much-touted but little-understood Bailout Bill today, we take a step back and let another Blog, The Daily Reckoning, take a few shots at the wisdom of a Congress and Administration turning on the printing presses with a month to go before a national election. Want to know what $700 Billion Dollars will buy? Read on...]
Here at The Daily Reckoning...we stand back...aghast...agog...paralyzed by the whole spectacle... from the lunatic assumptions of the credit bubble...to the solemn farce now taking place in the U.S. Congress.
Yes, dear reader, we are suffering from senselessness overload...the absurdities are coming too fast for us now; we can’t keep up. We fear we are going into an irony-induced coma.
Could any scriptwriter have come up with such a preposterous story? Could any director have found such a clownish cast of characters?
It was only a few months ago that all the leading men and women of this drama claimed to believe in free enterprise so fervently they were willing to spend hundreds of billions of dollars forcing it on others. It was free enterprise that separated us from the barbarians and made the country rich, they said. But now, they’re turning many of these free enterprises over to the bureaucrats to run...and desperately trying to make sure that the others don’t go broke. It’s capitalism without the creative destruction. Capitalism with seatbelts, helmets, and airbags. Capitalism without bankruptcy. It’s like taking the crucifixion out of Christianity. What’s left is as empty and foolish as a Congressman’s head.
And then, it was only a few months ago that they were telling us that there was nothing to worry about...the subprime problem was contained...property prices had hit bottom...everything was fine. Really.
Then, two weeks ago, Ben Bernanke and Hank Paulson appeared before Congress and warned that if Congress didn’t put up $700 billion of taxpayers’ money pronto, the whole world economy could meltdown. Ben Bernanke, former head of the economics department at Princeton, and now head of the world’s biggest banking cartel – the Fed – told the
politicians:
“If we don’t do this, we may not have an economy on Monday.”
Of course, this alarm turned out to be as silly as his previous assurances. Monday came. The economy still functioned. And Congress got to work – Christmas treeing the bailout bill.
A colleague sends this handy inventory of a few of the gaudy balls so far, (as they appear in the actual bill):
Sec. 101. Extension of alternative minimum tax relief for nonrefundable personal credits. Sec. 102. Extension of increased alternative minimum tax exemption amount. Sec. 201. Deduction for State and local sales taxes. Sec. 202. Deduction of qualified tuition and related expenses. Sec. 203. Deduction for certain expenses of elementary and secondary school teachers. Sec. 204. Additional standard deduction for real property taxes for nonitemizers. Sec. 205. Tax-free distributions from individual retirement plans for charitable purposes. Sec. 304. Extension of look-thru rule for related controlled foreign corporations. Sec. 305. Extension of 15-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant improvements; 15-year straight-line cost recovery for certain improvements to retail space. Sec. 307. Basis adjustment to stock of S corporations making charitable contributions of property. Sec. 308. Increase in limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands. Sec. 309. Extension of economic development credit for American Samoa. Sec. 310. Extension of mine rescue team training credit. Sec. 311. Extension of election to expense advanced mine safety equipment. Sec. 312. Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. Sec. 314. Indian employment credit. Sec. 315. Accelerated depreciation for business property on Indian reservations. Sec. 316. Railroad track maintenance. Sec. 317. Seven-year cost recovery period for motorsports racing track facility. Sec. 318. Expensing of environmental remediation costs. Sec. 319. Extension of work opportunity tax credit for Hurricane Katrina employees. Sec. 320. Extension of increased rehabilitation credit for structures in the Gulf Opportunity Zone. Sec. 321. Enhanced deduction for qualified computer contributions. Sec. 322. Tax incentives for investment in the District of Columbia. Sec. 323. Enhanced charitable deductions for contributions of food inventory. Sec. 324. Extension of enhanced charitable deduction for contributions of book inventory. Sec. 325. Extension and modification of duty suspension on wool products; wool research fund; wool duty refunds.
Sec. 401. Permanent authority for undercover operations. (as related to tax provisions) Sec. 402. Permanent authority for disclosure of information relating to terrorist activities. (as related to tax provisions) Sec. 501. $8,500 income threshold used to calculate refundable portion of child tax credit. Sec. 502. Provisions related to film and television productions. Sec. 503. Exemption from excise tax for certain wooden arrows designed for use by children. Sec. 504. Income averaging for amounts received in connection with the Exxon Valdez litigation. Sec. 505. Certain farming business machinery and equipment treated as 5-year property. Sec. 506. Modification of penalty on understatement of taxpayer’s liability by tax return preparer. Subtitle B—Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 Sec. 601. Secure rural schools and community self-determination program. Sec. 602. Transfer to abandoned mine reclamation fund. Sec. 702. Temporary tax relief for areas damaged by 2008 Midwestern severe storms, tornados, and flooding. Sec. 704. Temporary tax-exempt bond financing and low-income housing tax relief for areas. Sec. 709. Waiver of certain mortgage revenue bond requirements following federally declared disasters. Sec. 710. Special depreciation allowance for qualified disaster property. Sec. 711. Increased expensing for qualified disaster assistance property.
Bernanke and company didn’t want to wait for the lighting ceremony and the back patting. Nowhere in the U.S. Constitution does it give the Fed the power to put each and every taxpayer on the line for about $2,000. But who cares about that? The Fed, on its own initiative, began passing out the cash. $49 billion on last Wednesday alone went to the banks. That same day, the Fed lent $146 billion to investment firms. By the time people went home for the weekend, $410 billion had passed from the Fed to private firms. The money was lent, says the Bloomberg report, at about 2.25% interest. By our calculation, that’s about half the rate of inflation...and precisely 1.4% less than the government’s cost of money, based on 10-year T-note yields.
Two weeks ago, Bernanke was asked by Barney Frank how much money he had available for this kind of rescue operation. He said he had $800 billion. Last week, he was lending it out at an average daily rate of $44 billion. Let’s see, at that rate, the Fed is probably about 5 days from going broke itself.
This should be interesting...when the Fed needs a bailout!
The Daily Reckoning is a free, daily e-mail service
brought to you by the authors of the NY Times Business Bestseller "Financial Reckoning Day", "Demise Of Dollar",
and "Empire Of Debt".
To learn more or subscribe, see:
http://www.dailyreckoning.com
Here at The Daily Reckoning...we stand back...aghast...agog...paralyzed by the whole spectacle... from the lunatic assumptions of the credit bubble...to the solemn farce now taking place in the U.S. Congress.
Yes, dear reader, we are suffering from senselessness overload...the absurdities are coming too fast for us now; we can’t keep up. We fear we are going into an irony-induced coma.
Could any scriptwriter have come up with such a preposterous story? Could any director have found such a clownish cast of characters?
It was only a few months ago that all the leading men and women of this drama claimed to believe in free enterprise so fervently they were willing to spend hundreds of billions of dollars forcing it on others. It was free enterprise that separated us from the barbarians and made the country rich, they said. But now, they’re turning many of these free enterprises over to the bureaucrats to run...and desperately trying to make sure that the others don’t go broke. It’s capitalism without the creative destruction. Capitalism with seatbelts, helmets, and airbags. Capitalism without bankruptcy. It’s like taking the crucifixion out of Christianity. What’s left is as empty and foolish as a Congressman’s head.
And then, it was only a few months ago that they were telling us that there was nothing to worry about...the subprime problem was contained...property prices had hit bottom...everything was fine. Really.
Then, two weeks ago, Ben Bernanke and Hank Paulson appeared before Congress and warned that if Congress didn’t put up $700 billion of taxpayers’ money pronto, the whole world economy could meltdown. Ben Bernanke, former head of the economics department at Princeton, and now head of the world’s biggest banking cartel – the Fed – told the
politicians:
“If we don’t do this, we may not have an economy on Monday.”
Of course, this alarm turned out to be as silly as his previous assurances. Monday came. The economy still functioned. And Congress got to work – Christmas treeing the bailout bill.
A colleague sends this handy inventory of a few of the gaudy balls so far, (as they appear in the actual bill):
Sec. 101. Extension of alternative minimum tax relief for nonrefundable personal credits. Sec. 102. Extension of increased alternative minimum tax exemption amount. Sec. 201. Deduction for State and local sales taxes. Sec. 202. Deduction of qualified tuition and related expenses. Sec. 203. Deduction for certain expenses of elementary and secondary school teachers. Sec. 204. Additional standard deduction for real property taxes for nonitemizers. Sec. 205. Tax-free distributions from individual retirement plans for charitable purposes. Sec. 304. Extension of look-thru rule for related controlled foreign corporations. Sec. 305. Extension of 15-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant improvements; 15-year straight-line cost recovery for certain improvements to retail space. Sec. 307. Basis adjustment to stock of S corporations making charitable contributions of property. Sec. 308. Increase in limit on cover over of rum excise tax to Puerto Rico and the Virgin Islands. Sec. 309. Extension of economic development credit for American Samoa. Sec. 310. Extension of mine rescue team training credit. Sec. 311. Extension of election to expense advanced mine safety equipment. Sec. 312. Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. Sec. 314. Indian employment credit. Sec. 315. Accelerated depreciation for business property on Indian reservations. Sec. 316. Railroad track maintenance. Sec. 317. Seven-year cost recovery period for motorsports racing track facility. Sec. 318. Expensing of environmental remediation costs. Sec. 319. Extension of work opportunity tax credit for Hurricane Katrina employees. Sec. 320. Extension of increased rehabilitation credit for structures in the Gulf Opportunity Zone. Sec. 321. Enhanced deduction for qualified computer contributions. Sec. 322. Tax incentives for investment in the District of Columbia. Sec. 323. Enhanced charitable deductions for contributions of food inventory. Sec. 324. Extension of enhanced charitable deduction for contributions of book inventory. Sec. 325. Extension and modification of duty suspension on wool products; wool research fund; wool duty refunds.
Sec. 401. Permanent authority for undercover operations. (as related to tax provisions) Sec. 402. Permanent authority for disclosure of information relating to terrorist activities. (as related to tax provisions) Sec. 501. $8,500 income threshold used to calculate refundable portion of child tax credit. Sec. 502. Provisions related to film and television productions. Sec. 503. Exemption from excise tax for certain wooden arrows designed for use by children. Sec. 504. Income averaging for amounts received in connection with the Exxon Valdez litigation. Sec. 505. Certain farming business machinery and equipment treated as 5-year property. Sec. 506. Modification of penalty on understatement of taxpayer’s liability by tax return preparer. Subtitle B—Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 Sec. 601. Secure rural schools and community self-determination program. Sec. 602. Transfer to abandoned mine reclamation fund. Sec. 702. Temporary tax relief for areas damaged by 2008 Midwestern severe storms, tornados, and flooding. Sec. 704. Temporary tax-exempt bond financing and low-income housing tax relief for areas. Sec. 709. Waiver of certain mortgage revenue bond requirements following federally declared disasters. Sec. 710. Special depreciation allowance for qualified disaster property. Sec. 711. Increased expensing for qualified disaster assistance property.
Bernanke and company didn’t want to wait for the lighting ceremony and the back patting. Nowhere in the U.S. Constitution does it give the Fed the power to put each and every taxpayer on the line for about $2,000. But who cares about that? The Fed, on its own initiative, began passing out the cash. $49 billion on last Wednesday alone went to the banks. That same day, the Fed lent $146 billion to investment firms. By the time people went home for the weekend, $410 billion had passed from the Fed to private firms. The money was lent, says the Bloomberg report, at about 2.25% interest. By our calculation, that’s about half the rate of inflation...and precisely 1.4% less than the government’s cost of money, based on 10-year T-note yields.
Two weeks ago, Bernanke was asked by Barney Frank how much money he had available for this kind of rescue operation. He said he had $800 billion. Last week, he was lending it out at an average daily rate of $44 billion. Let’s see, at that rate, the Fed is probably about 5 days from going broke itself.
This should be interesting...when the Fed needs a bailout!
The Daily Reckoning is a free, daily e-mail service
brought to you by the authors of the NY Times Business Bestseller "Financial Reckoning Day", "Demise Of Dollar",
and "Empire Of Debt".
To learn more or subscribe, see:
http://www.dailyreckoning.com
What the Credit Crisis Means to Your Mortgage
[The Real Blog is always looking for articles that can help our friends and clients understand what is happening in the larger economy and housing market, and it applies to their particular situation. The following article outlines recent events, and how you can best position yourself as a potential buyer, seller, or homeowner.]
If there was any doubt left that the troubled US financial and credit markets are in full crisis mode, the historic events of September easily erased it. You've seen the headlines. You've heard the stories, but what does it all mean to you and your mortgage? This month, YOU Magazine will take a closer look at a September to remember and what it means to you - no jargon, no politics, just the facts.
What a Difference a Month Makes
September was a historic month in the financial markets. What started a year earlier as the subprime mortgage collapse had morphed into the perfect financial storm that wiped out some of the biggest financial firms on Wall Street. There was a general and genuine concern that the financial system was coming apart and could virtually shut down.
First, the Feds took over Fannie Mae and Freddie Mac, two government-sponsored mortgage giants that own or guarantee about five trillion dollars in home loans, or nearly half of the total US mortgage market.
Then Lehman Brothers, a prominent securities firm founded in 1850, filed for bankruptcy.
Bank of America, which earlier this year acquired Countrywide, acquired Merrill Lynch, another prominent financial firm.
The Feds were then forced to bail out insurance giant American International Group (AIG), the largest insurance company in America, which needed some $70 billion just to stay afloat.
By the end of the month, JP Morgan Chase, which bought out Bears Sterns in June, would also acquire Washington Mutual and, in a similar move, Citigroup would acquire Wachovia.
In the end, amidst the worst September in the financial markets since 2001, each of these prominent companies had failed to secure investor confidence as liquidity concerns forced their stock prices to levels that ultimately led to their demise, despite a major effort by the government and other central banks around the world to offer unprecedented financial support.
Throughout the month of September, the Federal Reserve not only injected billions into the financial market, the US Treasury was forced to guarantee nearly $2 trillion in money market mutual fund assets. The European Central Bank, Swiss National Bank, and Bank of England also pitched in a combined $90 billion in cash infusions.
Banks and Wall Street firms had essentially stopped loaning money to one another in recent weeks. That choked off the money being made available on Main Street in the form of mortgage loans, business loans, and other consumer borrowing.
To avoid further downward pressure on stock prices, the Securities and Exchange Commission banned naked short-selling and temporarily banned short-selling 799 financial companies for 10 days. Fannie Mae and Freddie Mac increased their purchases of illiquid assets, including mortgage-backed securities, that have been clogging up our financial system and further tightening the availability of credit.
Finally, to avoid an all-out credit freeze, a plan to create legislation for an unprecedented bailout of our financial system was put in place by representatives from the Federal Reserve, the US Treasury, the Bush Administration, Congress, and even the Presidential candidates – a controversial $700 billion plan that, had it passed, would have cost tax-payers for years to come.
The plan, however, came up 13 votes short of the 218 votes necessary for passage. The House vote shocked financial markets, which expected the house to approve the plan – a decision that sent the Dow Jones industrial average down more than 700 points, the largest intra-day drop in history.
At the time of the writing of this article, a new plan has already been announced in the Senate.
Create Your Own Plan
As promised, we will not delve into the politics of any of these decisions by the government to bailout said corporations or the financial and credit markets – or the merits of any new plan that might be put in place. What's done is done. We won't discuss who's to blame or what should or shouldn't be done about it. Whether it's right or wrong, moral or immoral, these actions or their implications are beyond the scope of this article.
Instead, we suggest that you put together your own financial plan to address your future. Just like your fingerprint, your financial situation, needs, and goals are unique and cannot be addressed or even encompassed by a single, one-size-fits-all solution. Whether you're looking to buy, sell, or refinance your home, you need to meet with a mortgage professional you trust right away to create a plan that best fits your individual needs as it relates to the opportunities available in today's turbulent market. What follows are merely suggested discussion topics you might want to consider depending on your individual needs.
Buying or Selling a Home
If you're looking to take advantage of lower home prices and historically low interest rates, credit is still widely available for borrowers who qualify. Qualifying for mortgages today simply means being prepared to provide documentation that supports your application. If you do have credit issues, you might want to consider government loans offered by the FHA, USDA, and VA.
If you're a first-time home buyer (someone who hasn't owned a home in the last 3 years), ask your mortgage professional about the new $7,500 tax credit. This incentive could be a valuable tool in helping you reach your homeownership dreams in today's buyer's market. There is one catch, however. This incentive is temporary, and expires in 2009, so don't wait.
It's important to note that Congress recently passed other legislation banning certain down-payment assistance programs (DAPs), so ask your mortgage professional about VA and USDA loans that, insured by the government, allow for 100% financing to qualified borrowers. There's currently a bill in the House to overturn the ban on DAPs, but congress is pretty busy right now and may not get to it before the end of the year. Some argue, this bill may never pass, so again, don't count on the government's help when you're planning your future.
For sellers it's important to understand these options as well. There are a lot of potential buyers looking to buy a home who may need creative financing options to get the deal closed. Make sure you're working with an experienced real estate agent and a mortgage professional who know how to market your property and make it stand out from the pack. In many instances, you won't have to lower your home price again to create an attractive package for home buyers.
Refinancing
September was one of the most volatile months in the financial markets in years. In one session, the Dow lost 504 points, which was the worst single-day drop since 2001. The Dow then had a two-day session advance of 779 points, the biggest since March 2000. Then, when the government's initial rescue plan was voted down, the Dow lost more than 700 points, the largest single-day decrease in history!
Mortgage interest rates, which are based on the performance of mortgage-back securities (see YOU Magazine April 2008), were so volatile in September that the market experienced price movements within days that used to take weeks or months to occur. In fact, mortgage rates reached six-month lows in September, bounced back in following weeks, only to fall again immediately after the government's rescue plan was voted down.
This volatility is a great advantage for many homeowners looking to refinance, as rates are still near historic lows. If you're connected with a mortgage professional who has access to and understands how changes in MBS pricing can affect mortgage rates on a daily basis, you may be able to secure a lower long-term rate as these short-term movements occur, depending on your situation. (See YOU Magazine July 2008 for an explanation of why bad news for stocks can be good news for mortgage rates).
Loan Modifications
Last month, YOU Magazine discussed loan modifications for homeowners struggling to make payments and/or avoid foreclosure. Print out that article and take it to your mortgage professional to discuss what options are best for your individual needs. If you've fallen behind with your payments or are currently in foreclosure, you may be able to benefit from an increased willingness of banks and lenders to work with you and help you keep your home.
ARMS
If you have an Adjustable Rate Mortgage (ARM) that is due to reset in the next 3 to 12 months, you need to know how any adjustments will affect your monthly mortgage payment. (See YOU Magazine August 2007 to learn how to understand the terms of your ARM.)
Remember, the Federal Reserve has held the line on rates for the last two meetings of the Federal Open Market Committee (FOMC), after 7 straight cuts to the Fed Funds rate in previous months' meetings. And while the Fed has no direct affect on long-term mortgage rates, their actions can directly affect rates for ARMs and certain credit cards and home equity lines of credit (HELOCs) that are tied to the prime rate – especially if the Fed begins a new financial policy of rate increases to address the growing concerns of our struggling economy. (See YOU Magazine April 2008 for more info on how the Fed affects mortgage rates).
In September, the volatility in the financial markets was not limited to the US. We live in a global economic environment, and financial markets throughout the world are more connected than ever.
Last month, we saw evidence of this in the London Interbank Offered Rate (LIBOR). Set by the British banks, this rate is considered one of the most important rates globally – especially in the US, where about 6 million ARMs, including almost all subprime ARMs and 41% of prime ARMS, are linked to the LIBOR. This rate, which experienced the largest one-day increase in 7 years last month, is beyond the reach of the Federal Reserve and its financial policies. If rates stay elevated, gains may follow in the 3- to 12-month Libor indexes, which are used to calculate US mortgage resets. This volatility was seen again as the initial Rescue Bill failed in the House.
In other words, create your own plan of success. Don't wait to be bailed out or rescued by the government or anyone else. If you have an ARM, take 10 minutes to discuss your options with a mortgage professional you trust. Changes in your credit in the last few years could help you secure a fixed-rate mortgage and avoid the volatility that surely awaits us as we face what could be one of the toughest financial meltdowns that most Americans have ever seen.
[The Real Blog Thanks Eric Mitchell of Metrocities Mortgage for forwarding this article to us! Eric, on of our trusted lenders, can be reached at 888-696-1344.
If there was any doubt left that the troubled US financial and credit markets are in full crisis mode, the historic events of September easily erased it. You've seen the headlines. You've heard the stories, but what does it all mean to you and your mortgage? This month, YOU Magazine will take a closer look at a September to remember and what it means to you - no jargon, no politics, just the facts.
What a Difference a Month Makes
September was a historic month in the financial markets. What started a year earlier as the subprime mortgage collapse had morphed into the perfect financial storm that wiped out some of the biggest financial firms on Wall Street. There was a general and genuine concern that the financial system was coming apart and could virtually shut down.
First, the Feds took over Fannie Mae and Freddie Mac, two government-sponsored mortgage giants that own or guarantee about five trillion dollars in home loans, or nearly half of the total US mortgage market.
Then Lehman Brothers, a prominent securities firm founded in 1850, filed for bankruptcy.
Bank of America, which earlier this year acquired Countrywide, acquired Merrill Lynch, another prominent financial firm.
The Feds were then forced to bail out insurance giant American International Group (AIG), the largest insurance company in America, which needed some $70 billion just to stay afloat.
By the end of the month, JP Morgan Chase, which bought out Bears Sterns in June, would also acquire Washington Mutual and, in a similar move, Citigroup would acquire Wachovia.
In the end, amidst the worst September in the financial markets since 2001, each of these prominent companies had failed to secure investor confidence as liquidity concerns forced their stock prices to levels that ultimately led to their demise, despite a major effort by the government and other central banks around the world to offer unprecedented financial support.
Throughout the month of September, the Federal Reserve not only injected billions into the financial market, the US Treasury was forced to guarantee nearly $2 trillion in money market mutual fund assets. The European Central Bank, Swiss National Bank, and Bank of England also pitched in a combined $90 billion in cash infusions.
Banks and Wall Street firms had essentially stopped loaning money to one another in recent weeks. That choked off the money being made available on Main Street in the form of mortgage loans, business loans, and other consumer borrowing.
To avoid further downward pressure on stock prices, the Securities and Exchange Commission banned naked short-selling and temporarily banned short-selling 799 financial companies for 10 days. Fannie Mae and Freddie Mac increased their purchases of illiquid assets, including mortgage-backed securities, that have been clogging up our financial system and further tightening the availability of credit.
Finally, to avoid an all-out credit freeze, a plan to create legislation for an unprecedented bailout of our financial system was put in place by representatives from the Federal Reserve, the US Treasury, the Bush Administration, Congress, and even the Presidential candidates – a controversial $700 billion plan that, had it passed, would have cost tax-payers for years to come.
The plan, however, came up 13 votes short of the 218 votes necessary for passage. The House vote shocked financial markets, which expected the house to approve the plan – a decision that sent the Dow Jones industrial average down more than 700 points, the largest intra-day drop in history.
At the time of the writing of this article, a new plan has already been announced in the Senate.
Create Your Own Plan
As promised, we will not delve into the politics of any of these decisions by the government to bailout said corporations or the financial and credit markets – or the merits of any new plan that might be put in place. What's done is done. We won't discuss who's to blame or what should or shouldn't be done about it. Whether it's right or wrong, moral or immoral, these actions or their implications are beyond the scope of this article.
Instead, we suggest that you put together your own financial plan to address your future. Just like your fingerprint, your financial situation, needs, and goals are unique and cannot be addressed or even encompassed by a single, one-size-fits-all solution. Whether you're looking to buy, sell, or refinance your home, you need to meet with a mortgage professional you trust right away to create a plan that best fits your individual needs as it relates to the opportunities available in today's turbulent market. What follows are merely suggested discussion topics you might want to consider depending on your individual needs.
Buying or Selling a Home
If you're looking to take advantage of lower home prices and historically low interest rates, credit is still widely available for borrowers who qualify. Qualifying for mortgages today simply means being prepared to provide documentation that supports your application. If you do have credit issues, you might want to consider government loans offered by the FHA, USDA, and VA.
If you're a first-time home buyer (someone who hasn't owned a home in the last 3 years), ask your mortgage professional about the new $7,500 tax credit. This incentive could be a valuable tool in helping you reach your homeownership dreams in today's buyer's market. There is one catch, however. This incentive is temporary, and expires in 2009, so don't wait.
It's important to note that Congress recently passed other legislation banning certain down-payment assistance programs (DAPs), so ask your mortgage professional about VA and USDA loans that, insured by the government, allow for 100% financing to qualified borrowers. There's currently a bill in the House to overturn the ban on DAPs, but congress is pretty busy right now and may not get to it before the end of the year. Some argue, this bill may never pass, so again, don't count on the government's help when you're planning your future.
For sellers it's important to understand these options as well. There are a lot of potential buyers looking to buy a home who may need creative financing options to get the deal closed. Make sure you're working with an experienced real estate agent and a mortgage professional who know how to market your property and make it stand out from the pack. In many instances, you won't have to lower your home price again to create an attractive package for home buyers.
Refinancing
September was one of the most volatile months in the financial markets in years. In one session, the Dow lost 504 points, which was the worst single-day drop since 2001. The Dow then had a two-day session advance of 779 points, the biggest since March 2000. Then, when the government's initial rescue plan was voted down, the Dow lost more than 700 points, the largest single-day decrease in history!
Mortgage interest rates, which are based on the performance of mortgage-back securities (see YOU Magazine April 2008), were so volatile in September that the market experienced price movements within days that used to take weeks or months to occur. In fact, mortgage rates reached six-month lows in September, bounced back in following weeks, only to fall again immediately after the government's rescue plan was voted down.
This volatility is a great advantage for many homeowners looking to refinance, as rates are still near historic lows. If you're connected with a mortgage professional who has access to and understands how changes in MBS pricing can affect mortgage rates on a daily basis, you may be able to secure a lower long-term rate as these short-term movements occur, depending on your situation. (See YOU Magazine July 2008 for an explanation of why bad news for stocks can be good news for mortgage rates).
Loan Modifications
Last month, YOU Magazine discussed loan modifications for homeowners struggling to make payments and/or avoid foreclosure. Print out that article and take it to your mortgage professional to discuss what options are best for your individual needs. If you've fallen behind with your payments or are currently in foreclosure, you may be able to benefit from an increased willingness of banks and lenders to work with you and help you keep your home.
ARMS
If you have an Adjustable Rate Mortgage (ARM) that is due to reset in the next 3 to 12 months, you need to know how any adjustments will affect your monthly mortgage payment. (See YOU Magazine August 2007 to learn how to understand the terms of your ARM.)
Remember, the Federal Reserve has held the line on rates for the last two meetings of the Federal Open Market Committee (FOMC), after 7 straight cuts to the Fed Funds rate in previous months' meetings. And while the Fed has no direct affect on long-term mortgage rates, their actions can directly affect rates for ARMs and certain credit cards and home equity lines of credit (HELOCs) that are tied to the prime rate – especially if the Fed begins a new financial policy of rate increases to address the growing concerns of our struggling economy. (See YOU Magazine April 2008 for more info on how the Fed affects mortgage rates).
In September, the volatility in the financial markets was not limited to the US. We live in a global economic environment, and financial markets throughout the world are more connected than ever.
Last month, we saw evidence of this in the London Interbank Offered Rate (LIBOR). Set by the British banks, this rate is considered one of the most important rates globally – especially in the US, where about 6 million ARMs, including almost all subprime ARMs and 41% of prime ARMS, are linked to the LIBOR. This rate, which experienced the largest one-day increase in 7 years last month, is beyond the reach of the Federal Reserve and its financial policies. If rates stay elevated, gains may follow in the 3- to 12-month Libor indexes, which are used to calculate US mortgage resets. This volatility was seen again as the initial Rescue Bill failed in the House.
In other words, create your own plan of success. Don't wait to be bailed out or rescued by the government or anyone else. If you have an ARM, take 10 minutes to discuss your options with a mortgage professional you trust. Changes in your credit in the last few years could help you secure a fixed-rate mortgage and avoid the volatility that surely awaits us as we face what could be one of the toughest financial meltdowns that most Americans have ever seen.
[The Real Blog Thanks Eric Mitchell of Metrocities Mortgage for forwarding this article to us! Eric, on of our trusted lenders, can be reached at 888-696-1344.
Ghosts of the Great Depression
[The Real Blog reads a lot from diverse sources. One source is The Daily Reckoning, a blog of contrarian economic views. While definitely not mainstream, or perhaps because it is not mainstream, Bill Bonner of TDR has had quite a few direct hits on the state and direction of the economy. While we do not think that the economy is headed to a depression, the issues are serious and one month before a very important national election may not be the ideal time to formulate far-reaching economic policy in the US Congress. ~~ Ray Kutylo of The Real Blog.]
GHOSTS OF THE GREAT DEPRESSION
by Bill Bonner
“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate ... It will purge the rottenness out of the system...values will be adjusted, and enterprising people will pick up the wrecks from less competent people...”
That is the advice from a ghost – U.S. Treasury Secretary Andrew Mellon. But this is 2008, not 1928...the climate has changed. This week began with heavy weather – and then got worse. Over on the continent, Fortis was going under. And in British waters, the government had a rescue helicopter hovering over Bradford and Bingley. The Baltic Freight Index ran aground on the coast of Brazil, after the Chinese refused to kowtow to Vale’s new price demands for its iron ore. Shipping costs went down by 25% last week – 10% on Friday alone. Apparently, the Chinese turned off their heavy factories before the Olympics; now, they can’t seem to find the switch to get them going again. Then, by Friday, the railroads were in crash mode too. Housing prices are falling faster than ever in the United States. In Britain, the average house is falling by 93 pounds per day; the average wage is only 65 pounds per day.
We do not usually give advice to governments. To be fully transparent about it, none has ever asked. It is enough to try to advise Daily Reckoning readers. If we were to save the entire world’s financial system, at least we would want something in exchange...say, a signed photo of our president with a thank you note. Still, in the spirit of public service we undertake to unclog the following drain:
Taking into account even the most “severe assumptions” on default rates, Barron’s columnist Jonathan Laing calculated that Paulson’s bailout plan would have given the feds positive carry [the difference between the cost of borrowing money and what you earn from it] of at least 7% or 8%. He figured that the government would have ended up with a $75 billion profit in two years.
But even with the hope of profit before it, the House of Representatives rejected the plan...and then, the hurricane winds blew even harder. The world’s stock markets had their worse day ever. The choice is clear, warned a flange of kibitzers, either a bailout bill or a Great Depression. Most likely, today, Congress will vote for the former and get something close to the latter.
By Wednesday, scores of commentators had been to the cemetery. Most were channeling Franklin Roosevelt. He “understood that his first job was to restore confidence,” wrote David Brooks in the New York Times. Over in the Financial Times, Martin Wolf even quotes Roosevelt’s puerile remark that “the only thing we have to fear is fear itself”. What about 25% unemployment, one is tempted to ask?
“[W]e might have done nothing. That would have been utter ruin. Instead we met the situation with proposals...of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic... Some of the reactionary economists urged that we should allow the liquidation to take its course until we have found bottom... We determined that we would not follow the advice of the bitter-end liquidationists...”
That quotation comes neither from Paulson nor Bernankes, but from another ghost. Herbert Hoover has gotten the reputation for being a “do nothing” president. Would it were so. When the Herbert Hoover passed the baton to Roosevelt, his can-do meddling had already helped turn a financial crisis into a Great Depression. You see, ghosts are often morons too.
Poor Andrew Mellon was shouldered aside in the early ’30s. Then, Hoover got to work. His first improvement is known to us by two knuckleheads who turned it into law – Misters Smoot and Hawley. The idea was to protect U.S. business by imposing higher tariffs on foreign trade. A group of 1,000 economists, bankers and other notables realized that blocking trade at the onset of an economic slump would be suicide. They urged him to veto the bill. But Hoover believed in tariffs as he believed in almost all other forms of government interference. He signed the bill with approval.
He called on the Fed to provide “an ample supply of credit at low rates of interest,” and initiated a program of public works – including the Hoover Dam, a massive lump of concrete that blocks the Colorado River. He threatened federal regulation of the New York Stock Exchange and attacked short selling.
Hoover’s chief concern seemed to be to hold up the price of labor. He cut off immigration, in an effort to keep out wage competition. Then, he got the business community to pledge that it would not reduce wages. Since the cost of labor was then too high for the closely shaved profit margins, businesses could not hire. Unemployment rose.
Roosevelt was a better politician, which is to say – he was more shameless. He attacked Hoover for spending too much money – won the presidency – and then spent more. He began so many agencies and projects – from the AAA (Agriculture Adjustment Act) to the CCC (Civilian Conservation Corps) to the SSA (Social Security Act) – he practically ran out of alphabet. He also imposed wage and price controls, as well as limits to executive salaries.
What was the result of all these good intentions? Instead of a panic and quick recovery – a la 1921 – the U.S. economy went into a long, hard on-again, off-again depression that put a quarter of the workforce out of a job. It might have lasted until the ’50s had it not been for the biggest public works program of all time came along – WWII.
And now the ghosts of the Great Depression haunt the Capitol, while today’s Smoots and Hawleys vote on a new plan. They’ve pledged a new bailout program by the end of the week. When last we looked world markets were turning up their faces, hopefully...like a girl expecting a kiss. What they’re more likely to get is a good fright.
Enjoy your weekend,
Bill Bonner
The Daily Reckoning
Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.
Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here:
Mobs, Messiahs and Markets http://www.agorafinancialpublications.com/Mobs.html
To learn more or subscribe, see:
http://www.dailyreckoning.com
GHOSTS OF THE GREAT DEPRESSION
by Bill Bonner
“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate ... It will purge the rottenness out of the system...values will be adjusted, and enterprising people will pick up the wrecks from less competent people...”
That is the advice from a ghost – U.S. Treasury Secretary Andrew Mellon. But this is 2008, not 1928...the climate has changed. This week began with heavy weather – and then got worse. Over on the continent, Fortis was going under. And in British waters, the government had a rescue helicopter hovering over Bradford and Bingley. The Baltic Freight Index ran aground on the coast of Brazil, after the Chinese refused to kowtow to Vale’s new price demands for its iron ore. Shipping costs went down by 25% last week – 10% on Friday alone. Apparently, the Chinese turned off their heavy factories before the Olympics; now, they can’t seem to find the switch to get them going again. Then, by Friday, the railroads were in crash mode too. Housing prices are falling faster than ever in the United States. In Britain, the average house is falling by 93 pounds per day; the average wage is only 65 pounds per day.
We do not usually give advice to governments. To be fully transparent about it, none has ever asked. It is enough to try to advise Daily Reckoning readers. If we were to save the entire world’s financial system, at least we would want something in exchange...say, a signed photo of our president with a thank you note. Still, in the spirit of public service we undertake to unclog the following drain:
Taking into account even the most “severe assumptions” on default rates, Barron’s columnist Jonathan Laing calculated that Paulson’s bailout plan would have given the feds positive carry [the difference between the cost of borrowing money and what you earn from it] of at least 7% or 8%. He figured that the government would have ended up with a $75 billion profit in two years.
But even with the hope of profit before it, the House of Representatives rejected the plan...and then, the hurricane winds blew even harder. The world’s stock markets had their worse day ever. The choice is clear, warned a flange of kibitzers, either a bailout bill or a Great Depression. Most likely, today, Congress will vote for the former and get something close to the latter.
By Wednesday, scores of commentators had been to the cemetery. Most were channeling Franklin Roosevelt. He “understood that his first job was to restore confidence,” wrote David Brooks in the New York Times. Over in the Financial Times, Martin Wolf even quotes Roosevelt’s puerile remark that “the only thing we have to fear is fear itself”. What about 25% unemployment, one is tempted to ask?
“[W]e might have done nothing. That would have been utter ruin. Instead we met the situation with proposals...of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic... Some of the reactionary economists urged that we should allow the liquidation to take its course until we have found bottom... We determined that we would not follow the advice of the bitter-end liquidationists...”
That quotation comes neither from Paulson nor Bernankes, but from another ghost. Herbert Hoover has gotten the reputation for being a “do nothing” president. Would it were so. When the Herbert Hoover passed the baton to Roosevelt, his can-do meddling had already helped turn a financial crisis into a Great Depression. You see, ghosts are often morons too.
Poor Andrew Mellon was shouldered aside in the early ’30s. Then, Hoover got to work. His first improvement is known to us by two knuckleheads who turned it into law – Misters Smoot and Hawley. The idea was to protect U.S. business by imposing higher tariffs on foreign trade. A group of 1,000 economists, bankers and other notables realized that blocking trade at the onset of an economic slump would be suicide. They urged him to veto the bill. But Hoover believed in tariffs as he believed in almost all other forms of government interference. He signed the bill with approval.
He called on the Fed to provide “an ample supply of credit at low rates of interest,” and initiated a program of public works – including the Hoover Dam, a massive lump of concrete that blocks the Colorado River. He threatened federal regulation of the New York Stock Exchange and attacked short selling.
Hoover’s chief concern seemed to be to hold up the price of labor. He cut off immigration, in an effort to keep out wage competition. Then, he got the business community to pledge that it would not reduce wages. Since the cost of labor was then too high for the closely shaved profit margins, businesses could not hire. Unemployment rose.
Roosevelt was a better politician, which is to say – he was more shameless. He attacked Hoover for spending too much money – won the presidency – and then spent more. He began so many agencies and projects – from the AAA (Agriculture Adjustment Act) to the CCC (Civilian Conservation Corps) to the SSA (Social Security Act) – he practically ran out of alphabet. He also imposed wage and price controls, as well as limits to executive salaries.
What was the result of all these good intentions? Instead of a panic and quick recovery – a la 1921 – the U.S. economy went into a long, hard on-again, off-again depression that put a quarter of the workforce out of a job. It might have lasted until the ’50s had it not been for the biggest public works program of all time came along – WWII.
And now the ghosts of the Great Depression haunt the Capitol, while today’s Smoots and Hawleys vote on a new plan. They’ve pledged a new bailout program by the end of the week. When last we looked world markets were turning up their faces, hopefully...like a girl expecting a kiss. What they’re more likely to get is a good fright.
Enjoy your weekend,
Bill Bonner
The Daily Reckoning
Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.
Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here:
Mobs, Messiahs and Markets http://www.agorafinancialpublications.com/Mobs.html
To learn more or subscribe, see:
http://www.dailyreckoning.com
Thursday, October 02, 2008
What they said about Fannie and Freddie...
from The Wall Street Journal, October 2, 2008
www.wsjonline.com
House Financial Services Committee hearing, Sept. 10, 2003:
Rep. Barney Frank (D., Mass.): I worry, frankly, that there's a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. . . .
Rep. Maxine Waters (D., Calif.), speaking to Housing and Urban Development Secretary Mel Martinez:
Secretary Martinez, if it ain't broke, why do you want to fix it? Have the GSEs [government-sponsored enterprises] ever missed their housing goals?
* * *
House Financial Services Committee hearing, Sept. 25, 2003:
Rep. Frank: I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing. . . .
* * *
House Financial Services Committee hearing, Sept. 25, 2003:
Rep. Gregory Meeks, (D., N.Y.): . . . I am just pissed off at Ofheo [Office of Federal Housing Enterprise Oversight] because if it wasn't for you I don't think that we would be here in the first place.
And Freddie Mac, who on its own, you know, came out front and indicated it is wrong, and now the problem that we have and that we are faced with is maybe some individuals who wanted to do away with GSEs in the first place, you have given them an excuse to try to have this forum so that we can talk about it and maybe change the direction and the mission of what the GSEs had, which they have done a tremendous job. . .
Ofheo Director Armando Falcon Jr.: Congressman, Ofheo did not improperly apply accounting rules; Freddie Mac did. Ofheo did not try to manage earnings improperly; Freddie Mac did. So this isn't about the agency's engagement in improper conduct, it is about Freddie Mac. Let me just correct the record on that. . . . I have been asking for these additional authorities for four years now. I have been asking for additional resources, the independent appropriations assessment powers.
Congresspeople don't want to remember. This is not a matter of the agency engaging in any misconduct. . . .
Rep. Waters: However, I have sat through nearly a dozen hearings where, frankly, we were trying to fix something that wasn't broke. Housing is the economic engine of our economy, and in no community does this engine need to work more than in mine. With last week's hurricane and the drain on the economy from the war in Iraq, we should do no harm to these GSEs. We should be enhancing regulation, not making fundamental change.
Mr. Chairman, we do not have a crisis at Freddie Mac, and in particular at Fannie Mae, under the outstanding leadership of Mr. Frank Raines. Everything in the 1992 act has worked just fine. In fact, the GSEs have exceeded their housing goals. . . .
Rep. Frank: Let me ask [George] Gould and [Franklin] Raines on behalf of Freddie Mac and Fannie Mae, do you feel that over the past years you have been substantially under-regulated?
Mr. Raines?
Mr. Raines: No, sir.
Mr. Frank: Mr. Gould?
Mr. Gould: No, sir. . . .
Mr. Frank: OK. Then I am not entirely sure why we are here. . . .
Rep. Frank: I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.
* * *
Senate Banking Committee, Oct. 16, 2003:
Sen. Charles Schumer (D., N.Y.): And my worry is that we're using the recent safety and soundness concerns, particularly with Freddie, and with a poor regulator, as a straw man to curtail Fannie and Freddie's mission. And I don't think there is any doubt that there are some in the administration who don't believe in Fannie and Freddie altogether, say let the private sector do it. That would be sort of an ideological position.
Mr. Raines: But more importantly, banks are in a far more risky business than we are.
* * *
Senate Banking Committee, Feb. 24-25, 2004:
Sen. Thomas Carper (D., Del.): What is the wrong that we're trying to right here? What is the potential harm that we're trying to avert?
Federal Reserve Chairman Alan Greenspan: Well, I think that that is a very good question, senator.
What we're trying to avert is we have in our financial system right now two very large and growing financial institutions which are very effective and are essentially capable of gaining market shares in a very major market to a large extent as a consequence of what is perceived to be a subsidy that prevents the markets from adjusting appropriately, prevents competition and the normal adjustment processes that we see on a day-by-day basis from functioning in a way that creates stability. . . . And so what we have is a structure here in which a very rapidly growing organization, holding assets and financing them by subsidized debt, is growing in a manner which really does not in and of itself contribute to either home ownership or necessarily liquidity or other aspects of the financial markets. . . .
Sen. Richard Shelby (R., Ala.): [T]he federal government has [an] ambiguous relationship with the GSEs. And how do we actually get rid of that ambiguity is a complicated, tricky thing. I don't know how we do it.
I mean, you've alluded to it a little bit, but how do we define the relationship? It's important, is it not?
Mr. Greenspan: Yes. Of all the issues that have been discussed today, I think that is the most difficult one. Because you cannot have, in a rational government or a rational society, two fundamentally different views as to what will happen under a certain event. Because it invites crisis, and it invites instability. . .
Sen. Christopher Dodd (D., Conn.): I, just briefly will say, Mr. Chairman, obviously, like most of us here, this is one of the great success stories of all time. And we don't want to lose sight of that and [what] has been pointed out by all of our witnesses here, obviously, the 70% of Americans who own their own homes today, in no small measure, due because of the work that's been done here. And that shouldn't be lost in this debate and discussion. . . .
* * *
Senate Banking Committee, April 6, 2005:
Sen. Schumer: I'll lay my marker down right now, Mr. Chairman. I think Fannie and Freddie need some changes, but I don't think they need dramatic restructuring in terms of their mission, in terms of their role in the secondary mortgage market, et cetera. Change some of the accounting and regulatory issues, yes, but don't undo Fannie and Freddie.
* * *
Senate Banking Committee, June 15, 2006:
Sen. Robert Bennett (R., Utah): I think we do need a strong regulator. I think we do need a piece of legislation. But I think we do need also to be careful that we don't overreact.
I know the press, particularly, keeps saying this is another Enron, which it clearly is not. Fannie Mae has taken its lumps. Fannie Mae is paying a very large fine. Fannie Mae is under a very, very strong microscope, which it needs to be. . . . So let's not do nothing, and at the same time, let's not overreact. . .
Sen. Jack Reed (D., R.I.): I think a lot of people are being opportunistic, . . . throwing out the baby with the bathwater, saying, "Let's dramatically restructure Fannie and Freddie," when that is not what's called for as a result of what's happened here. . . .
Sen. Chuck Hagel (R., Neb.): Mr. Chairman, what we're dealing with is an astounding failure of management and board responsibility, driven clearly by self interest and greed. And when we reference this issue in the context of -- the best we can say is, "It's no Enron." Now, that's a hell of a high standard.
http://online.wsj.com/article/SB122290574391296381.html?mod=djempersonal
www.wsjonline.com
House Financial Services Committee hearing, Sept. 10, 2003:
Rep. Barney Frank (D., Mass.): I worry, frankly, that there's a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. . . .
Rep. Maxine Waters (D., Calif.), speaking to Housing and Urban Development Secretary Mel Martinez:
Secretary Martinez, if it ain't broke, why do you want to fix it? Have the GSEs [government-sponsored enterprises] ever missed their housing goals?
* * *
House Financial Services Committee hearing, Sept. 25, 2003:
Rep. Frank: I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing. . . .
* * *
House Financial Services Committee hearing, Sept. 25, 2003:
Rep. Gregory Meeks, (D., N.Y.): . . . I am just pissed off at Ofheo [Office of Federal Housing Enterprise Oversight] because if it wasn't for you I don't think that we would be here in the first place.
And Freddie Mac, who on its own, you know, came out front and indicated it is wrong, and now the problem that we have and that we are faced with is maybe some individuals who wanted to do away with GSEs in the first place, you have given them an excuse to try to have this forum so that we can talk about it and maybe change the direction and the mission of what the GSEs had, which they have done a tremendous job. . .
Ofheo Director Armando Falcon Jr.: Congressman, Ofheo did not improperly apply accounting rules; Freddie Mac did. Ofheo did not try to manage earnings improperly; Freddie Mac did. So this isn't about the agency's engagement in improper conduct, it is about Freddie Mac. Let me just correct the record on that. . . . I have been asking for these additional authorities for four years now. I have been asking for additional resources, the independent appropriations assessment powers.
Congresspeople don't want to remember. This is not a matter of the agency engaging in any misconduct. . . .
Rep. Waters: However, I have sat through nearly a dozen hearings where, frankly, we were trying to fix something that wasn't broke. Housing is the economic engine of our economy, and in no community does this engine need to work more than in mine. With last week's hurricane and the drain on the economy from the war in Iraq, we should do no harm to these GSEs. We should be enhancing regulation, not making fundamental change.
Mr. Chairman, we do not have a crisis at Freddie Mac, and in particular at Fannie Mae, under the outstanding leadership of Mr. Frank Raines. Everything in the 1992 act has worked just fine. In fact, the GSEs have exceeded their housing goals. . . .
Rep. Frank: Let me ask [George] Gould and [Franklin] Raines on behalf of Freddie Mac and Fannie Mae, do you feel that over the past years you have been substantially under-regulated?
Mr. Raines?
Mr. Raines: No, sir.
Mr. Frank: Mr. Gould?
Mr. Gould: No, sir. . . .
Mr. Frank: OK. Then I am not entirely sure why we are here. . . .
Rep. Frank: I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists.
* * *
Senate Banking Committee, Oct. 16, 2003:
Sen. Charles Schumer (D., N.Y.): And my worry is that we're using the recent safety and soundness concerns, particularly with Freddie, and with a poor regulator, as a straw man to curtail Fannie and Freddie's mission. And I don't think there is any doubt that there are some in the administration who don't believe in Fannie and Freddie altogether, say let the private sector do it. That would be sort of an ideological position.
Mr. Raines: But more importantly, banks are in a far more risky business than we are.
* * *
Senate Banking Committee, Feb. 24-25, 2004:
Sen. Thomas Carper (D., Del.): What is the wrong that we're trying to right here? What is the potential harm that we're trying to avert?
Federal Reserve Chairman Alan Greenspan: Well, I think that that is a very good question, senator.
What we're trying to avert is we have in our financial system right now two very large and growing financial institutions which are very effective and are essentially capable of gaining market shares in a very major market to a large extent as a consequence of what is perceived to be a subsidy that prevents the markets from adjusting appropriately, prevents competition and the normal adjustment processes that we see on a day-by-day basis from functioning in a way that creates stability. . . . And so what we have is a structure here in which a very rapidly growing organization, holding assets and financing them by subsidized debt, is growing in a manner which really does not in and of itself contribute to either home ownership or necessarily liquidity or other aspects of the financial markets. . . .
Sen. Richard Shelby (R., Ala.): [T]he federal government has [an] ambiguous relationship with the GSEs. And how do we actually get rid of that ambiguity is a complicated, tricky thing. I don't know how we do it.
I mean, you've alluded to it a little bit, but how do we define the relationship? It's important, is it not?
Mr. Greenspan: Yes. Of all the issues that have been discussed today, I think that is the most difficult one. Because you cannot have, in a rational government or a rational society, two fundamentally different views as to what will happen under a certain event. Because it invites crisis, and it invites instability. . .
Sen. Christopher Dodd (D., Conn.): I, just briefly will say, Mr. Chairman, obviously, like most of us here, this is one of the great success stories of all time. And we don't want to lose sight of that and [what] has been pointed out by all of our witnesses here, obviously, the 70% of Americans who own their own homes today, in no small measure, due because of the work that's been done here. And that shouldn't be lost in this debate and discussion. . . .
* * *
Senate Banking Committee, April 6, 2005:
Sen. Schumer: I'll lay my marker down right now, Mr. Chairman. I think Fannie and Freddie need some changes, but I don't think they need dramatic restructuring in terms of their mission, in terms of their role in the secondary mortgage market, et cetera. Change some of the accounting and regulatory issues, yes, but don't undo Fannie and Freddie.
* * *
Senate Banking Committee, June 15, 2006:
Sen. Robert Bennett (R., Utah): I think we do need a strong regulator. I think we do need a piece of legislation. But I think we do need also to be careful that we don't overreact.
I know the press, particularly, keeps saying this is another Enron, which it clearly is not. Fannie Mae has taken its lumps. Fannie Mae is paying a very large fine. Fannie Mae is under a very, very strong microscope, which it needs to be. . . . So let's not do nothing, and at the same time, let's not overreact. . .
Sen. Jack Reed (D., R.I.): I think a lot of people are being opportunistic, . . . throwing out the baby with the bathwater, saying, "Let's dramatically restructure Fannie and Freddie," when that is not what's called for as a result of what's happened here. . . .
Sen. Chuck Hagel (R., Neb.): Mr. Chairman, what we're dealing with is an astounding failure of management and board responsibility, driven clearly by self interest and greed. And when we reference this issue in the context of -- the best we can say is, "It's no Enron." Now, that's a hell of a high standard.
http://online.wsj.com/article/SB122290574391296381.html?mod=djempersonal
Selling a Principle Residence Formerly Used for Investment Purposes?
Amendment to IRC §121 May Reduce the $250,000/$500,000 Exclusion
Internal Revenue Code (“IRC”) §121 allows taxpayers selling a principal residence to exclude $250,000 of gain from taxation (or, $500,000 for married taxpayers, filing jointly) as long as they have lived in the residence for 2 out of the preceding 5 years.
Alternatively, for taxpayers selling investment/rental property, while they may not exclude gain from taxation, they can nonetheless defer payment of taxes by completing their disposition as an exchange under IRC §1031.
While the rules for excluding gain from taxation or deferring payment of taxation may seem fairly straightforward under the above code sections, they become more complicated if the property was used as both a principal residence and for investment/rental purposes.
Fortunately, in February of 2005, the IRS issued Revenue Procedure 2005-14 clarifying that taxpayers are entitled to take advantage of both the §121 capital gains exclusion and the §1031 capital gains deferral. However, Rev. Proc. 2005-14 only addresses situations wherein the property being sold is investment property formerly used as a principal residence; it does not address how to apply §121 to situations when the property being sold is a principal residence formerly used for investment purposes.
Now, pursuant to the Housing Assistance Tax Act of 2008, taxpayers selling a principal residence formerly used for investment purposes, have specific guidance on the application of §121. Specifically, IRC §121 has been amended, effective January 1, 2009. Again, the amendment only affects taxpayers who are selling a principal residence (“qualified use”), which they formerly used for investment (“non-qualified use”). The central point of the §121 amendment is that these taxpayers are not entitled to the full §121 exclusion because the prior investment use is considered “non-qualified” use and any gain allocated to the period of non-qualified use may not be excluded under §121.
How to determine the amount of gain that is not eligible for exclusion
The period of non-qualified use (period not used as a principal residence) must be divided by the total years of ownership to determine the amount of the gain that is not eligible for exclusion under §121.
Any period of non-qualified use before January 1, 2009 should not be included in the calculation. And, depreciation should also be excluded from the calculation and is simply taxed at the applicable recapture rate.
Summary of the rules under §121 amendment
Sale of residence that was formerly investment property – the taxpayer is entitled to only a prorated portion of the $250,000/$500,000 exclusion.
Non-qualified use prior to January 1, 2009 is disregarded, except for purposes of meeting the 5 year rule under HR 4520, if applicable.
Gain resulting from depreciation is taxed and is disregarded for purposes of determining the prorated amount of the exclusion
The application of the amendment is illustrated by the following examples:
Example 1: Taxpayer acquires an investment property, rents it for 3 years and then occupies it for 5 years as his principal residence (no use prior to 2009) before selling it and realizing $350,000 of gain of which $40,000 is from depreciation deductions.
$40,000 of gain is depreciation and is excluded from the calculation. The remaining $310,000 is subject to the prorata calculation as follows:
3 (years of non-qualified use) =
3 (37.5%) x $310,000=$116,250
8 (years total ownership)
8
Thus $116,250 is not eligible for exclusion and is taxed at the applicable capital gains rate. $40,000 of gain is from depreciation and is taxed at the applicable recapture rate. The remaining gain of $193,750 may be excluded from taxation under §121.
Example 2: Taxpayer acquires an investment property in 2007, rents it until 2010, and then occupies it for three years as his principal residence before selling it in 2013, realizing $400,000 of gain. The two years prior to January 1, 2009 are disregarded (but included for determining the five year period).
1 year non-qualified use (disregard 2007, 2008) =
1 (16.66%) x $400,000=$66,640
6 years of total ownership
6
Thus, $66,640 is not eligible for exclusion and is taxed at the applicable capital gains rate. $250,000 of the remaining gain may be excluded under §121, with the balance of the gain, $83,360 taxed at the applicable capital gains rate. In sum, $250,000 is not taxed and $150,000 is taxed.
Taxpayers selling a principal residence after January 1, 2009, which was formerly used as an investment/rental property should consult with their tax or legal advisors regarding the application of the amendment to §121 to their particular situation.
Note 1:
If property was originally acquired as part of a 1031 exchange, H.R. 4520 mandates that the property must be owned by the taxpayer for at least 5 years in order to get the §121 exclusion (note: this is in addition to having lived in the property for 2 of the preceding 5 years.)
This article provided by:
Old Republic
The Meza Team
450 North Brand Blvd #800
Glendale, CA 91203
W: (800) 388-4853
M: (562) 572-1479
http://www.ortc.com
Internal Revenue Code (“IRC”) §121 allows taxpayers selling a principal residence to exclude $250,000 of gain from taxation (or, $500,000 for married taxpayers, filing jointly) as long as they have lived in the residence for 2 out of the preceding 5 years.
Alternatively, for taxpayers selling investment/rental property, while they may not exclude gain from taxation, they can nonetheless defer payment of taxes by completing their disposition as an exchange under IRC §1031.
While the rules for excluding gain from taxation or deferring payment of taxation may seem fairly straightforward under the above code sections, they become more complicated if the property was used as both a principal residence and for investment/rental purposes.
Fortunately, in February of 2005, the IRS issued Revenue Procedure 2005-14 clarifying that taxpayers are entitled to take advantage of both the §121 capital gains exclusion and the §1031 capital gains deferral. However, Rev. Proc. 2005-14 only addresses situations wherein the property being sold is investment property formerly used as a principal residence; it does not address how to apply §121 to situations when the property being sold is a principal residence formerly used for investment purposes.
Now, pursuant to the Housing Assistance Tax Act of 2008, taxpayers selling a principal residence formerly used for investment purposes, have specific guidance on the application of §121. Specifically, IRC §121 has been amended, effective January 1, 2009. Again, the amendment only affects taxpayers who are selling a principal residence (“qualified use”), which they formerly used for investment (“non-qualified use”). The central point of the §121 amendment is that these taxpayers are not entitled to the full §121 exclusion because the prior investment use is considered “non-qualified” use and any gain allocated to the period of non-qualified use may not be excluded under §121.
How to determine the amount of gain that is not eligible for exclusion
The period of non-qualified use (period not used as a principal residence) must be divided by the total years of ownership to determine the amount of the gain that is not eligible for exclusion under §121.
Any period of non-qualified use before January 1, 2009 should not be included in the calculation. And, depreciation should also be excluded from the calculation and is simply taxed at the applicable recapture rate.
Summary of the rules under §121 amendment
Sale of residence that was formerly investment property – the taxpayer is entitled to only a prorated portion of the $250,000/$500,000 exclusion.
Non-qualified use prior to January 1, 2009 is disregarded, except for purposes of meeting the 5 year rule under HR 4520, if applicable.
Gain resulting from depreciation is taxed and is disregarded for purposes of determining the prorated amount of the exclusion
The application of the amendment is illustrated by the following examples:
Example 1: Taxpayer acquires an investment property, rents it for 3 years and then occupies it for 5 years as his principal residence (no use prior to 2009) before selling it and realizing $350,000 of gain of which $40,000 is from depreciation deductions.
$40,000 of gain is depreciation and is excluded from the calculation. The remaining $310,000 is subject to the prorata calculation as follows:
3 (years of non-qualified use) =
3 (37.5%) x $310,000=$116,250
8 (years total ownership)
8
Thus $116,250 is not eligible for exclusion and is taxed at the applicable capital gains rate. $40,000 of gain is from depreciation and is taxed at the applicable recapture rate. The remaining gain of $193,750 may be excluded from taxation under §121.
Example 2: Taxpayer acquires an investment property in 2007, rents it until 2010, and then occupies it for three years as his principal residence before selling it in 2013, realizing $400,000 of gain. The two years prior to January 1, 2009 are disregarded (but included for determining the five year period).
1 year non-qualified use (disregard 2007, 2008) =
1 (16.66%) x $400,000=$66,640
6 years of total ownership
6
Thus, $66,640 is not eligible for exclusion and is taxed at the applicable capital gains rate. $250,000 of the remaining gain may be excluded under §121, with the balance of the gain, $83,360 taxed at the applicable capital gains rate. In sum, $250,000 is not taxed and $150,000 is taxed.
Taxpayers selling a principal residence after January 1, 2009, which was formerly used as an investment/rental property should consult with their tax or legal advisors regarding the application of the amendment to §121 to their particular situation.
Note 1:
If property was originally acquired as part of a 1031 exchange, H.R. 4520 mandates that the property must be owned by the taxpayer for at least 5 years in order to get the §121 exclusion (note: this is in addition to having lived in the property for 2 of the preceding 5 years.)
This article provided by:
Old Republic
The Meza Team
450 North Brand Blvd #800
Glendale, CA 91203
W: (800) 388-4853
M: (562) 572-1479
http://www.ortc.com
Wednesday, September 24, 2008
Home Resales Fall 2.2% in August
from The Wall Street Journal
Sept. 24, 2008
http://online.wsj.com/article/SB122226123307770911.html
Sales of previously owned homes declined in August, but in a promising sign the backlog of unsold homes shrank.
Sales of existing homes fell 2.2% in August from the previous month to an annual sales pace of 4.91 million units, the National Association of Realtors said Wednesday. The data cover sales of homes, condominiums, and townhouses.
The inventory of unsold houses fell to a 10.4-month supply at the current sales pace, compared to July's 10.9-month supply. The current inventory is still large and many analysts say prices must fall even more to attract buyers. The median home price was $203,100 in August, down 9.5% from the year before.
"We would not expect to see any real stability in the housing market until we work off more of this inventory," said Wachovia Corp. economist Adam York in a note to clients.
Sales increased in parts of California, Florida and Nevada where subprime loans and foreclosures are heavily concentrated, the NAR said. Chief economist Lawrence Yun noted that sales of deeply discounted properties "are accounting for a disproportionately high level of sales in the current market" and helping to drive down the median sales price.
Efforts to work through bloated inventories may be hampered by the financial crisis on Wall Street.
"Home sales will be constrained without a freer flow of credit into the mortgage market," Mr. Yun said. "The faster that happens, the sooner we'll see a broad stabilization in home prices that in turn will help the economy recover."
But lenders continued in the second quarter of 2008 to toughened standards on home loans, the Federal Reserve's latest quarterly survey of senior loan officers at U.S. banks showed. About 75% said they tightened standards on prime mortgages, and that tightening is expected to continue this year.
Besides tighter loan standards and falling prices, the housing market also has been hurt by a weakening job market. Nonfarm payrolls have declined for eight consecutive months.
Regionally, sales of existing homes declined 6.6% in the Northeast and 5.3% in the West. Sales rose 0.9% in the Midwest and 0.5% in the South.
Write to Jeff Bater at jeff.bater@dowjones.com
Sept. 24, 2008
http://online.wsj.com/article/SB122226123307770911.html
Sales of previously owned homes declined in August, but in a promising sign the backlog of unsold homes shrank.
Sales of existing homes fell 2.2% in August from the previous month to an annual sales pace of 4.91 million units, the National Association of Realtors said Wednesday. The data cover sales of homes, condominiums, and townhouses.
The inventory of unsold houses fell to a 10.4-month supply at the current sales pace, compared to July's 10.9-month supply. The current inventory is still large and many analysts say prices must fall even more to attract buyers. The median home price was $203,100 in August, down 9.5% from the year before.
"We would not expect to see any real stability in the housing market until we work off more of this inventory," said Wachovia Corp. economist Adam York in a note to clients.
Sales increased in parts of California, Florida and Nevada where subprime loans and foreclosures are heavily concentrated, the NAR said. Chief economist Lawrence Yun noted that sales of deeply discounted properties "are accounting for a disproportionately high level of sales in the current market" and helping to drive down the median sales price.
Efforts to work through bloated inventories may be hampered by the financial crisis on Wall Street.
"Home sales will be constrained without a freer flow of credit into the mortgage market," Mr. Yun said. "The faster that happens, the sooner we'll see a broad stabilization in home prices that in turn will help the economy recover."
But lenders continued in the second quarter of 2008 to toughened standards on home loans, the Federal Reserve's latest quarterly survey of senior loan officers at U.S. banks showed. About 75% said they tightened standards on prime mortgages, and that tightening is expected to continue this year.
Besides tighter loan standards and falling prices, the housing market also has been hurt by a weakening job market. Nonfarm payrolls have declined for eight consecutive months.
Regionally, sales of existing homes declined 6.6% in the Northeast and 5.3% in the West. Sales rose 0.9% in the Midwest and 0.5% in the South.
Write to Jeff Bater at jeff.bater@dowjones.com
Sunday, September 21, 2008
Our Current Situation from Mortgage Market Weekly
"THE PATH TO SUCCESS IS TO TAKE MASSIVE, DETERMINED ACTION." Anthony Robbins. And success in stabilizing the markets and the economy is exactly what the government is hoping will happen as a result of the massive, determined actions they took late last week in response to unprecedented happenings in the financial markets.
Treasury Secretary Hank Paulson announced that the US government will guarantee money market funds, after panic led to a "run on the bank" type of environment. A whopping $180 Billion was withdrawn from market funds on Thursday alone. And the fear was so great that a premium to put money into Treasury securities was paid, which actually exceeded the rate of return. So effectively, the return was negative! People were actually paying for a place to put their money that would be safe because they had fears of losing principal. The government guarantee helped to ease these fears and stabilize the markets.
The Fed announced plans to create a market place for illiquid mortgage debt. This should do a lot of long-term good to help the housing and lending environment. As if that weren't enough, the Securities and Exchange Commission also placed a temporary ban on the short selling of 799 different financially related stocks.
What prompted these dramatic actions? Very dramatic happenings earlier in the week.
After 158 years in existence, Lehman Brothers filed for bankruptcy last Monday due to overexposure of high-risk loans in the mortgage arena. Then, the Fed gave insurance giant AIG an $85 Billion lifeline to keep it from going into bankruptcy, after initially stating it would not intervene. Then it was announced that Merrill Lynch is being acquired by Bank of America, which will save them from the same fate as Lehman Brothers, and now troubled bank Washington Mutual is looking for a buyer as well.
Also playing a role was the fact that the Fed left its benchmark Fed Funds Rate (the rate banks charge each other for overnight lending) unchanged on Tuesday, not wanting to counter the recent improvements the US economy has made in the way of inflation. While this benefited Bonds and home loan rates earlier in the week, Stocks felt heavy selling pressure on the news...which added to the reasons for the actions taken late last week.
The government's announcements on Friday are great news for the overall health of our financial system, though they did cause Bonds and home loan rates to move away from their best levels of the week. All in all, Bonds and home loan ended the week slightly worse than where they began. Additionally, stocks had their most volatile week in history - but ended the week almost exactly where they started.
Forecast for the Week
The ride isn't over...the coming week may see more wild movement in the markets, as the financial sector responds to all the recent action, along with several reports due in the latter part of the week. We'll get a read on the housing market with Wednesday's Existing Home Sales Report and Thursday's New Home Sales Report. And we will get a read on the economy with Friday's Gross Domestic Product Report (GDP is the broadest measure of economic activity) and Thursday's Durable Goods Report.
What are "durable goods"? Simply put, they are items that are durable (i.e. cars, furniture, appliances, games, cameras, business equipment, etc), and are made to last longer than three years. This report shows a good measure of consumer and business consumption and buying behavior, and depending on the health of the report, could add to the volatility we have seen.
Remember when Bond prices move higher, home loan rates move lower...and vice versa. Bonds and home loan rates are still much improved from several weeks ago, despite giving up some recent gains. This could be a great time to take a close look at your home loan financing needs, as rates remain at historic lows. As always, I will be watching closely to see how Bonds and home loan rates continue to respond in these volatile times.
Sent to the SCV Home Team by:
Eric T. Mitchell,
CMP, CMC, CRMS
Vice President
| Business Development and Private Mortgage Banking |
Mitchell & Associates
a division of Metrocities Mortgage
Sherman Oaks CA 91403
Treasury Secretary Hank Paulson announced that the US government will guarantee money market funds, after panic led to a "run on the bank" type of environment. A whopping $180 Billion was withdrawn from market funds on Thursday alone. And the fear was so great that a premium to put money into Treasury securities was paid, which actually exceeded the rate of return. So effectively, the return was negative! People were actually paying for a place to put their money that would be safe because they had fears of losing principal. The government guarantee helped to ease these fears and stabilize the markets.
The Fed announced plans to create a market place for illiquid mortgage debt. This should do a lot of long-term good to help the housing and lending environment. As if that weren't enough, the Securities and Exchange Commission also placed a temporary ban on the short selling of 799 different financially related stocks.
What prompted these dramatic actions? Very dramatic happenings earlier in the week.
After 158 years in existence, Lehman Brothers filed for bankruptcy last Monday due to overexposure of high-risk loans in the mortgage arena. Then, the Fed gave insurance giant AIG an $85 Billion lifeline to keep it from going into bankruptcy, after initially stating it would not intervene. Then it was announced that Merrill Lynch is being acquired by Bank of America, which will save them from the same fate as Lehman Brothers, and now troubled bank Washington Mutual is looking for a buyer as well.
Also playing a role was the fact that the Fed left its benchmark Fed Funds Rate (the rate banks charge each other for overnight lending) unchanged on Tuesday, not wanting to counter the recent improvements the US economy has made in the way of inflation. While this benefited Bonds and home loan rates earlier in the week, Stocks felt heavy selling pressure on the news...which added to the reasons for the actions taken late last week.
The government's announcements on Friday are great news for the overall health of our financial system, though they did cause Bonds and home loan rates to move away from their best levels of the week. All in all, Bonds and home loan ended the week slightly worse than where they began. Additionally, stocks had their most volatile week in history - but ended the week almost exactly where they started.
Forecast for the Week
The ride isn't over...the coming week may see more wild movement in the markets, as the financial sector responds to all the recent action, along with several reports due in the latter part of the week. We'll get a read on the housing market with Wednesday's Existing Home Sales Report and Thursday's New Home Sales Report. And we will get a read on the economy with Friday's Gross Domestic Product Report (GDP is the broadest measure of economic activity) and Thursday's Durable Goods Report.
What are "durable goods"? Simply put, they are items that are durable (i.e. cars, furniture, appliances, games, cameras, business equipment, etc), and are made to last longer than three years. This report shows a good measure of consumer and business consumption and buying behavior, and depending on the health of the report, could add to the volatility we have seen.
Remember when Bond prices move higher, home loan rates move lower...and vice versa. Bonds and home loan rates are still much improved from several weeks ago, despite giving up some recent gains. This could be a great time to take a close look at your home loan financing needs, as rates remain at historic lows. As always, I will be watching closely to see how Bonds and home loan rates continue to respond in these volatile times.
Sent to the SCV Home Team by:
Eric T. Mitchell,
CMP, CMC, CRMS
Vice President
| Business Development and Private Mortgage Banking |
Mitchell & Associates
a division of Metrocities Mortgage
Sherman Oaks CA 91403
Wednesday, September 17, 2008
Wild Markets, The Fed, and Opportunities
Uncertainty in Financial Markets Could Cause Dramatic Rise in Existing ARMs at Next Adjustment
If you or anyone you know has an Adjustable Rate Mortgage, this is an important point to consider. Many ARM loans are tied to the London Interbank Offered Rate (LIBOR). In fact, there are six million loans in the United States that use LIBOR to determine the interest rate and as the name suggests, many banks use this rate to lend money to each other.
But, today, banks lack confidence that the money they lend will be paid back. In light of what has happened with Lehman Brothers, IndyMac Bank and others, as well as AIG, banks are requiring much higher rates on LIBOR to offset the added risk.
The Federal Reserve Left Rates Unchanged but...
The Federal Reserve met yesterday leaving the target rate unchanged at 2.00% but just like LIBOR the actual rate being charged by banks to each other is closer to 6.00%. This again suggests that those with ARM loans should consider a refinance into historically low fixed rates.
What Happened?
Financial companies have been under attack. IndyMac was the largest bank to falter in twenty years. What brought IndyMac down was their exposure to defaulting loans. This sapped investor confidence and drove down the stock price until they filed for bankruptcy.
Following IndyMac, we saw Fannie Mae, Freddie Mac, Lehman Brothers and Merrill Lynch succumb and were either forced into conservatorship, to close their doors, or to sell themselves. AIG, the world's largest insurance company was also impacted, forced to make a deal with the U.S. government to stay in business.
What You Can Do Now?
We have Team members who would be happy to go over your loan situation and help you understand how the recent events may affect you, and how you can best be protected. Additionally, chaotic times like these often present opportunities. I look forward to hearing from you.
If you or anyone you know has an Adjustable Rate Mortgage, this is an important point to consider. Many ARM loans are tied to the London Interbank Offered Rate (LIBOR). In fact, there are six million loans in the United States that use LIBOR to determine the interest rate and as the name suggests, many banks use this rate to lend money to each other.
But, today, banks lack confidence that the money they lend will be paid back. In light of what has happened with Lehman Brothers, IndyMac Bank and others, as well as AIG, banks are requiring much higher rates on LIBOR to offset the added risk.
The Federal Reserve Left Rates Unchanged but...
The Federal Reserve met yesterday leaving the target rate unchanged at 2.00% but just like LIBOR the actual rate being charged by banks to each other is closer to 6.00%. This again suggests that those with ARM loans should consider a refinance into historically low fixed rates.
What Happened?
Financial companies have been under attack. IndyMac was the largest bank to falter in twenty years. What brought IndyMac down was their exposure to defaulting loans. This sapped investor confidence and drove down the stock price until they filed for bankruptcy.
Following IndyMac, we saw Fannie Mae, Freddie Mac, Lehman Brothers and Merrill Lynch succumb and were either forced into conservatorship, to close their doors, or to sell themselves. AIG, the world's largest insurance company was also impacted, forced to make a deal with the U.S. government to stay in business.
What You Can Do Now?
We have Team members who would be happy to go over your loan situation and help you understand how the recent events may affect you, and how you can best be protected. Additionally, chaotic times like these often present opportunities. I look forward to hearing from you.
Tuesday, September 09, 2008
Update on Fannie and Freddie
Update on Fannie and Freddie
By: Tom Vanderwell, Straight Talk About Mortgages
Posted: Monday, September 8th, 2008, 8:40 am MST
Well, it happened. In case you haven't heard the news, Fannie and Freddie were bailed out by the Federal Government over the weekend. I'm not going to go over all of the details but just try to hit some "high points."
So, here goes:
1. The Federal government now owns 80% of Fannie and Freddie. That means that the shareholders in those two companies lost 80% of their equity in the company compared to what they had last Friday.
2. Why did the Government do this? It's pretty simple. The markets had lost confidence in the long term viability of the two institutions and therefore the debt that they have issued was being questioned and their ability to finance additional housing was being called in question. This was done to stabilize and calm the financial sector of the markets which were very volatile to say the least.
3. What has changed since Friday? A couple of things: 1) The "unofficial" backing of Fannie and Freddie's debt by the US Government is now official. 2) The question of what will happen to shareholders in the company has pretty much been answered.
4. What hasn't changed since Friday? The problems in the loan portfolios at Fannie and Freddie haven't gone away. The problems in the housing market haven't gone away. However, today the markets so far have been breathing a huge sigh of relief that says, "Yeah, Uncle Sam is here to protect us!"
So what does this mean going forward?
1. I've already heard that a lot of economists are saying that there could be a significant drop in mortgage rates. I'm not so convinced [and neither is the SCV Home Team] that we're going to see THAT BIG of a drop for a couple of reasons: a) The US Government just became on the hook for an additional $5 Trillion in debt and that will have an impact on the cost of treasury debt and so forth. b) The additional borrowings by the government are going to have an impact on the value of the dollar and that will make US debt more expensive. c) The only thing that has really changed is that the "right to foreclose" on Fannie and Freddie has actually happened. It hasn't changed that much. But we'll see. I hope I'm wrong. Our rates dropped by .25% today. [Due to overhanging federal debt and obligations, the SCV Home Team expects that interest rates will be rising at the end of this year, and dramatically so. Expect pre-election relative stability, then watch out!]
2. Volatility in the financial markets will be the "norm" this week. Expect big fluctuations as the markets attempt to sort out what this all means and what happens from here.
3. The government did this to prevent the mortgage markets from seizing up. That was a necessary step because having a mortgage market that keeps lending money is crucial to eventually working through the housing debacle that we are in. However, there are substantial issues in the mortgage world that aren't being solved by the takeover.
4. No substantial changes in programs or underwriting guidelines. The goal of the bailout was to keep Fannie and Freddie functioning and that will happen, but it's not going to make credit a lot easier or downpayment guidelines lower. Let's face it, Fannie and Freddie weren't making any money doing things the way they used to, so I don't think we'll see a return to that.
5. As the markets realize that the fundamental issues in today's housing/economic/credit market crunch haven't gone away, we'll see the euphoria of the first day or two slip and the value of the bailout will diminish. However, it will continue to keep the housing market moving so we can attempt to work through the inventory issues and eventually find a bottom and start building from there.
Is this the silver bullet that is going to answer all of the housing market and economy's problems? Sorry, I wish it was, but I don't see it that way. It was basically the implementation of what the markets felt was coming any way.
[ Tom Vanderwell
http://straighttalkaboutmortgages.com
or email Tom at:
straighttalkaboutmortgages@gmail.com ]
[The SCV Home Team concurs with this analysis.]
By: Tom Vanderwell, Straight Talk About Mortgages
Posted: Monday, September 8th, 2008, 8:40 am MST
Well, it happened. In case you haven't heard the news, Fannie and Freddie were bailed out by the Federal Government over the weekend. I'm not going to go over all of the details but just try to hit some "high points."
So, here goes:
1. The Federal government now owns 80% of Fannie and Freddie. That means that the shareholders in those two companies lost 80% of their equity in the company compared to what they had last Friday.
2. Why did the Government do this? It's pretty simple. The markets had lost confidence in the long term viability of the two institutions and therefore the debt that they have issued was being questioned and their ability to finance additional housing was being called in question. This was done to stabilize and calm the financial sector of the markets which were very volatile to say the least.
3. What has changed since Friday? A couple of things: 1) The "unofficial" backing of Fannie and Freddie's debt by the US Government is now official. 2) The question of what will happen to shareholders in the company has pretty much been answered.
4. What hasn't changed since Friday? The problems in the loan portfolios at Fannie and Freddie haven't gone away. The problems in the housing market haven't gone away. However, today the markets so far have been breathing a huge sigh of relief that says, "Yeah, Uncle Sam is here to protect us!"
So what does this mean going forward?
1. I've already heard that a lot of economists are saying that there could be a significant drop in mortgage rates. I'm not so convinced [and neither is the SCV Home Team] that we're going to see THAT BIG of a drop for a couple of reasons: a) The US Government just became on the hook for an additional $5 Trillion in debt and that will have an impact on the cost of treasury debt and so forth. b) The additional borrowings by the government are going to have an impact on the value of the dollar and that will make US debt more expensive. c) The only thing that has really changed is that the "right to foreclose" on Fannie and Freddie has actually happened. It hasn't changed that much. But we'll see. I hope I'm wrong. Our rates dropped by .25% today. [Due to overhanging federal debt and obligations, the SCV Home Team expects that interest rates will be rising at the end of this year, and dramatically so. Expect pre-election relative stability, then watch out!]
2. Volatility in the financial markets will be the "norm" this week. Expect big fluctuations as the markets attempt to sort out what this all means and what happens from here.
3. The government did this to prevent the mortgage markets from seizing up. That was a necessary step because having a mortgage market that keeps lending money is crucial to eventually working through the housing debacle that we are in. However, there are substantial issues in the mortgage world that aren't being solved by the takeover.
4. No substantial changes in programs or underwriting guidelines. The goal of the bailout was to keep Fannie and Freddie functioning and that will happen, but it's not going to make credit a lot easier or downpayment guidelines lower. Let's face it, Fannie and Freddie weren't making any money doing things the way they used to, so I don't think we'll see a return to that.
5. As the markets realize that the fundamental issues in today's housing/economic/credit market crunch haven't gone away, we'll see the euphoria of the first day or two slip and the value of the bailout will diminish. However, it will continue to keep the housing market moving so we can attempt to work through the inventory issues and eventually find a bottom and start building from there.
Is this the silver bullet that is going to answer all of the housing market and economy's problems? Sorry, I wish it was, but I don't see it that way. It was basically the implementation of what the markets felt was coming any way.
[ Tom Vanderwell
http://straighttalkaboutmortgages.com
or email Tom at:
straighttalkaboutmortgages@gmail.com ]
[The SCV Home Team concurs with this analysis.]
California Median Home Price Slips 37.7 Percent
Home sales increased 17.5 percent in June in California compared with the same period a year ago, while the median price of an existing home fell 37.7 percent, the California Association of Realtors® reported recently.
"Statewide home sales remained above the 400,000 level for the said C.A.R. President William E. Brown. "Following a 30-month string of year-to-year percentage decreases that began in October 2005, sales during June also posted their third consecutive year-to-year gain.
"Sales were driven in part by large shares of deeply discounted distressed sales in many parts of the state," he said. "With lower prices and favorable interest rates, affordability also has improved significantly in recent months, paving the way for many buyers to purchase their first home."
The median price of an existing, single-family detached home in California during June 2008 was $368,250, a 37.7 percent decrease from the revised $591,280 median for June 2007, C.A.R. reported. The June 2008 median price fell 4.3 percent compared with May's $385,840 median price.
The inventory dropped from a 10.2-month supply to 7.7 months, assuming sales continue at the rate posted during June.
Thirty-year fixed-rate mortgages averaged 6.32 percent during June, compared with 6.66 percent a year ago. Adjustable-rate loans averaged 5.15 percent compared to 5.68 percent in June 2007.
It took a median of 49.1 days in June 2008 to sell a single-family home, compared with 51.5 days for the same period a year ago.
[Long time readers of this Blog will understand the problems with 'median home prices' as a measure of home prices, but this report does show that home prices have fallen considerably from just a year ago. Home price changes vary considerably from town-to-town, and from neighborhood to neighborhood. If you would like an idea of the prevailing price changes for your home and neighborhood within our north Los Angeles market area, please give the SCV Home Team a call at 661-290-3750.]
"Statewide home sales remained above the 400,000 level for the said C.A.R. President William E. Brown. "Following a 30-month string of year-to-year percentage decreases that began in October 2005, sales during June also posted their third consecutive year-to-year gain.
"Sales were driven in part by large shares of deeply discounted distressed sales in many parts of the state," he said. "With lower prices and favorable interest rates, affordability also has improved significantly in recent months, paving the way for many buyers to purchase their first home."
The median price of an existing, single-family detached home in California during June 2008 was $368,250, a 37.7 percent decrease from the revised $591,280 median for June 2007, C.A.R. reported. The June 2008 median price fell 4.3 percent compared with May's $385,840 median price.
The inventory dropped from a 10.2-month supply to 7.7 months, assuming sales continue at the rate posted during June.
Thirty-year fixed-rate mortgages averaged 6.32 percent during June, compared with 6.66 percent a year ago. Adjustable-rate loans averaged 5.15 percent compared to 5.68 percent in June 2007.
It took a median of 49.1 days in June 2008 to sell a single-family home, compared with 51.5 days for the same period a year ago.
[Long time readers of this Blog will understand the problems with 'median home prices' as a measure of home prices, but this report does show that home prices have fallen considerably from just a year ago. Home price changes vary considerably from town-to-town, and from neighborhood to neighborhood. If you would like an idea of the prevailing price changes for your home and neighborhood within our north Los Angeles market area, please give the SCV Home Team a call at 661-290-3750.]
Monday, August 25, 2008
It's more than Fannie and Freddie (as if that wasn't enough)
by John Mauldin
August 22, 2008
Yet another crisis confronts us, as we will have to deal with the aftermath of a rather large number of bank failures over the next year, which is likely to overwhelm the ability of the FDIC to insure your bank deposits. Today we look at the banking system, the FDIC, and Freddie and Fannie. It's not pretty, but as realists we must know what we are facing.
The US Banking System Is in Trouble
A few weeks ago when I was in Maine, I met Chris Whalen. Chris is the managing director of a service called Institutional Risk Analytics, whose primary business is analyzing the health of banks and financial institutions. If you are one of their clients, you can go to their web site and drill quite deep into all aspects of every bank in America. And what they have done is come up with various metrics which compare how well-capitalized a bank is, how much risk it is taking, and what kind of losses (or profits) it can expect. It is a one of a kind firm, and the data gives Chris a very special perspective on the US banking system.
And what he sees is not pretty. There is a crisis brewing. He expects 100 banks to fail between now and July of 2009. Most of them will be small, but there will be a few large banks. The total assets of those banks he estimates to be $850 billion (not a typo!). Those are the assets the FDIC is going to have to cover when they take over the banks.
Take Washington Mutual as an example. There are problems there. Their debt now trades at 20%, which is worse than junk. There is no way they could issue preferred stock to recapitalize their business. And they are going to need more capital, as they have writedowns in their future due to the slowing of the economy. Any common issue would have to seriously dilute existing shareholders almost to the point of nothing. There are circumstances in which they can survive, but it would take a remarkable recovery for the US economy, which is not likely. Maybe management can pull a rabbit out of the hat, but it will need some strong magic to get the capital they need at a cost they can live with.
The FDIC has about $50 billion. These reserves have been built up over the years from deposit insurance paid by banks that are part of the program. They are going to need an estimated $20 billion just to cover the failure of Indy Mac. The FDIC will have to cover only a small percentage of the $850 billion, as some of those assets will surely be good. But if they have to cover 10%, then the FDIC would need another $50 billion. Does that sound like a lot? Chris thinks a more conservative number for planning purposes would be 20-25% potential losses, and you hope it does not get there.
Sometime in the next few quarters, Congress and the President, either the current group or early in the term of the next President, are going to have to address that potential shortfall, before we see bank runs as people fear that FDIC insurance reserves may not be enough. The very sad fact is that taxpayers are going to be on the hook for some time. What is likely to happen is that a loan facility will be made to the FDIC so they can borrow as much as they need, and pay it back from future bank insurance payments.
You can't make up the shortfall just by raising fees. Chris points out that raising fees right now is not really a winning option, as that just makes the financial books of marginal banks even worse. You can raise rates as the banking system returns to health.
If Congress and the President wait too long, there could be a very serious problem, as depositors could start moving their funds under $100,000 (the insured amount) to what they perceive may be a safer bank than their current bank. Rumors could run rampant. This is something that needs to be addressed now. Frankly, this should be addressed right after the elections AT THE LATEST, in consultation with Congress and the new President.
If you are worried about your bank, you can go to Chris's web site and pay $50 for a brief analysis of your bank and an update for the next four quarters. If you have less than $100,000 in your accounts, you should not worry. But for businesses with large deposits and cash flows, it might be worth checking on the health of your bank. The link is http://us1.institutionalriskanalytics.com/Cart/Request.asp?affiliate=bmg123.
You can click on the link that says "Click here for the free samples" in the lower right corner of the page to see if the format of what they offer is something you would find useful.
There's more to the article! Go to the website and subscribe for free!!
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
To subscribe to John Mauldin's E-Letter please click here:
http://www.frontlinethoughts.com/subscribe.asp
[While the rest of the local real estate community hates the bad news, now is not the time to be sticking your head in the sand. The SCV Home team likes to get ALL of the information, and go on from there. While we feel that it is always a great real estate market, it is not great for everyone at the same time. If you are thinking of BUYING REAL ESTATE in our local North Los Angeles market area, please give us a call today at 661-290-3750.]
August 22, 2008
Yet another crisis confronts us, as we will have to deal with the aftermath of a rather large number of bank failures over the next year, which is likely to overwhelm the ability of the FDIC to insure your bank deposits. Today we look at the banking system, the FDIC, and Freddie and Fannie. It's not pretty, but as realists we must know what we are facing.
The US Banking System Is in Trouble
A few weeks ago when I was in Maine, I met Chris Whalen. Chris is the managing director of a service called Institutional Risk Analytics, whose primary business is analyzing the health of banks and financial institutions. If you are one of their clients, you can go to their web site and drill quite deep into all aspects of every bank in America. And what they have done is come up with various metrics which compare how well-capitalized a bank is, how much risk it is taking, and what kind of losses (or profits) it can expect. It is a one of a kind firm, and the data gives Chris a very special perspective on the US banking system.
And what he sees is not pretty. There is a crisis brewing. He expects 100 banks to fail between now and July of 2009. Most of them will be small, but there will be a few large banks. The total assets of those banks he estimates to be $850 billion (not a typo!). Those are the assets the FDIC is going to have to cover when they take over the banks.
Take Washington Mutual as an example. There are problems there. Their debt now trades at 20%, which is worse than junk. There is no way they could issue preferred stock to recapitalize their business. And they are going to need more capital, as they have writedowns in their future due to the slowing of the economy. Any common issue would have to seriously dilute existing shareholders almost to the point of nothing. There are circumstances in which they can survive, but it would take a remarkable recovery for the US economy, which is not likely. Maybe management can pull a rabbit out of the hat, but it will need some strong magic to get the capital they need at a cost they can live with.
The FDIC has about $50 billion. These reserves have been built up over the years from deposit insurance paid by banks that are part of the program. They are going to need an estimated $20 billion just to cover the failure of Indy Mac. The FDIC will have to cover only a small percentage of the $850 billion, as some of those assets will surely be good. But if they have to cover 10%, then the FDIC would need another $50 billion. Does that sound like a lot? Chris thinks a more conservative number for planning purposes would be 20-25% potential losses, and you hope it does not get there.
Sometime in the next few quarters, Congress and the President, either the current group or early in the term of the next President, are going to have to address that potential shortfall, before we see bank runs as people fear that FDIC insurance reserves may not be enough. The very sad fact is that taxpayers are going to be on the hook for some time. What is likely to happen is that a loan facility will be made to the FDIC so they can borrow as much as they need, and pay it back from future bank insurance payments.
You can't make up the shortfall just by raising fees. Chris points out that raising fees right now is not really a winning option, as that just makes the financial books of marginal banks even worse. You can raise rates as the banking system returns to health.
If Congress and the President wait too long, there could be a very serious problem, as depositors could start moving their funds under $100,000 (the insured amount) to what they perceive may be a safer bank than their current bank. Rumors could run rampant. This is something that needs to be addressed now. Frankly, this should be addressed right after the elections AT THE LATEST, in consultation with Congress and the new President.
If you are worried about your bank, you can go to Chris's web site and pay $50 for a brief analysis of your bank and an update for the next four quarters. If you have less than $100,000 in your accounts, you should not worry. But for businesses with large deposits and cash flows, it might be worth checking on the health of your bank. The link is http://us1.institutionalriskanalytics.com/Cart/Request.asp?affiliate=bmg123.
You can click on the link that says "Click here for the free samples" in the lower right corner of the page to see if the format of what they offer is something you would find useful.
There's more to the article! Go to the website and subscribe for free!!
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
To subscribe to John Mauldin's E-Letter please click here:
http://www.frontlinethoughts.com/subscribe.asp
[While the rest of the local real estate community hates the bad news, now is not the time to be sticking your head in the sand. The SCV Home team likes to get ALL of the information, and go on from there. While we feel that it is always a great real estate market, it is not great for everyone at the same time. If you are thinking of BUYING REAL ESTATE in our local North Los Angeles market area, please give us a call today at 661-290-3750.]
Thursday, August 14, 2008
Recover and Rebuild from a Foreclosure or Short Sale
When homeowners find themselves upside down in their mortgage payments, they have no idea of which direction to turn, and it seems that it is almost impossible to get straight answers to their questions about what options they have, and how each option will affect their credit. The following is information to help answer those questions. Remember, there are NO quick fixes when it comes to credit, so it is imperative that you don't wait until the last minute to understand what the implications for your financial future are.
FORECLOSURE
Foreclosure is the legal process in which a bank or other secured creditor either sells or repossesses a parcel of real property, home or land, after the owner has failed to comply with the mortgage or deed of trust agreement with the lender. Most frequently, the violation of the mortgage agreement is the default of payment. The completion of the foreclosure process allows the lender to sell the property, and keep the proceeds to pay off the mortgage as well as any legal costs. The length of the foreclosure process varies from state to state.
If the foreclosed property is sold for less than the remaining primary mortgage balance, and there is no insurance to cover the loss, the court overseeing the foreclosure process may enter a deficiency judgment against the borrower. Deficiency judgments can be used to place a lien on the borrower's other personal property, obligating the borrower to repay the difference or suffer the loss of their property. It gives the lender a legal right to collect the remainder of debt out of borrower's other existing assets.
However, there are exceptions to this rule. If the mortgage is classified as "non-recourse debt," then the borrower has no personal liability in the event of foreclosure. This is often the case with residential mortgages. If so, the lender may not go after borrower's personal assets to recoup additional loss.
The lender's ability to pursue a deficiency judgment can be restricted by state laws. In California and some other states, original mortgages (the ones taken out at the time of purchase) are typically non-recourse loans, however, refinanced loans and home equity lines of credit aren't.
If the lender chooses not to pursue deficiency judgment---or can't because the mortgage is non-recourse-and writes off the loss, the borrower may have to pay income taxes on the un-repaid amount if it can be considered "forgiven debt."
Any other loans taken out against the property being foreclosed (second mortgages, HELOCs) are "wiped out" by foreclosure (in the sense that they are no longer attached to the property), but the borrower is still obligated to pay them off if they are not paid out of the foreclosure auction's proceeds.
How Does a Foreclosure Affect Credit?
A foreclosure can be reported as a Foreclosure or Repossession and carries a derogatory payment status of 8 or 9 (M1, R1 and I1 being the best and R9, I9, etc. being the most negative) which is just under a Public Record. There is a misconception that foreclosures are considered Public Records to the scoring system, however, they are not. Although there is a Public Notice Record on file once a foreclosure is filed, but this record is completely different than a credit report public record.
A Foreclosure will remain on a credit report for 7 years from completion date. And the score will drop from 50-250 points. The difference in point loss depends on how many points your client has to lose in the payment history factor of their credit. So if someone has a 750 credit score, and they opt to foreclose, their score could drop up to 250 points. However, if someone has a 500 credit score, they may lose 50 points for the same derogatory.
If a Deficiency Judgment or Tax Lien is filed in connection with a Foreclosure, the credit score can drop an additional 100 points.
Fannie Mae Waiting Period
The current selling guideline from Fannie Mae has upped the previous 4 year period of how much time must elapse after a foreclosure to 5 years from the date the foreclosure proceeding is completed, not started.
The exception for extenuating circumstances has been increased from a 2 year to a 3 year waiting period.
WORD OF CAUTION: If you have a borrower going through a foreclosure due to circumstances of losing a job, a medical crisis, sub-prime mortgage crisis fall-out, I suggest that you advise them to fully document their experience now. Not to wait until later, because the details and emotional energy of what they are going through will be more difficult to document and prove down the road if they decide to apply for a loan in 2 years based on an extenuating circumstance claim.
In General: When it comes to foreclosure and how it affects the ability to obtain credit in the future, there are multiple points of extremely negative impact. Deficiency judgments for the amount not collected by the lender in the foreclosure sale can end up on the borrower's credit report as a derogatory mark. Additionally, there is a high risk that the borrower will be hit with a substantial tax penalty which can result in a tax lien, which also appears on the credit report. As a general rule, other than a bankruptcy, foreclosure is the least desirable of all of the options available when a borrower is upside down in a home mortgage.
Deed in Lieu Of Foreclosure
An alternative to foreclosure is a "deed in lieu of foreclosure." In this scenario, the borrower turns the house over to the lender and walks away without owing anything. A deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The main advantage to the borrower is that it immediately releases him or her from most or all of the personal debt associated with the defaulted loan. The borrower also avoids a foreclosure proceeding and may receive more generous terms than he or she would in a formal foreclosure. Advantages to a lender include a reduction in the time and cost of repossessing the property.
However, the lender usually will not proceed with a deed in lieu of foreclosure if the outstanding debt on the property exceeds the current fair market value of the property. So in this market, this option probably won't be available to most homeowners who are upside down.
How Does a Deed in Lieu Of Foreclosure Affect the Borrower's Credit?
Most lenders report a deed in lieu of foreclosure as a foreclosure, so the credit scores will carry the same serious affect as if it were an actual foreclosure. However, what most borrowers don't know is that they can negotiate with the lender to report it differently in return for turning over the deed and avoiding foreclosure costs.
Many lenders will say that they cannot change the reporting status, but they can.
Here are their options in preferred order:
• Paid As Agreed - Credit scores will have already dropped over 100 points due to default in payments, however, if reported as Paid As Agreed, the borrower will be able to purchase another home in a shorter time period.
• Paid Settlement - Credit scores could drop up to 150 points.
The item will remain on the credit report for 7 years from the completion date or the settlement date.
Fannie Mae Waiting Period
The selling guideline from Fannie Mae has not changed. It is a 4 year period of how much time must elapse after a deed in lieu of foreclosure proceeding is completed.
The exception for extenuating circumstances also remains the same at 2 years.
Short Sale (aka Pre-Foreclosure Sale)
In my opinion, the best option is a short sale, which occurs when a bank or mortgage lender agrees to discount a loan balance, due to an economic hardship on the part of the home owner. The home owner sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove a proposed sale.
A short sale is typically executed to prevent a home foreclosure. Lenders often choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owners, the advantages include avoidance of having foreclosures on their credit histories. Additionally, a short sale is typically faster and less expensive than a foreclosure.
Junior lien holders, such as holders of second mortgages, HELOC lenders, and homeowner associations (special assessment liens), may also need to approve the short sale. Frequent objectors to short sales include those who hold tax liens (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even unrecorded) and mechanic's lien holders. It is possible for junior lien holders to prevent the short sale.
While it is frequently common for a lender to forgive the balance of the loan in question, it is unlikely that a lien holder that is not a mortgagee will forgive any of their balance. Further, it is common for a lender to omit updating the zero balance and settlement option on the mortgagor's credit report, or even flat-out refuse to do so "due to their financial loss."
The Mortgage Forgiveness Debt Relief Act Of 2007
When the lender decides to forgive all or a portion of the debt and accept less, the forgiven amount is considered as income for the borrower, like with a foreclosure, leaving it open to be taxed. However, The Mortgage Forgiveness Debt Relief Act of 2007 contains amendments to remove such tax liability, allowing the borrower and lender to work together to find a solution beneficial to both parties.
How Does a Short Sale Affect the Borrower's Credit?
The few reported short sales that I have seen have appeared as "Paid Settlements" on a mortgage account. In the wake of the current mortgage crisis, short sales are becoming extremely common, but legislation has not caught up with the tidal wave and there is no law on the books relating to them to date. As a result, there is an opportunity for the borrower to negotiate credit reporting with the lender. I've seen several successful negotiations, so be sure to let your borrower know that it is possible.
My view - a short sale proves that the borrower is exhausting every effort to pay the loan. The borrower has willingly committed to taking on months of emotional and physical stress in a good-faith effort to sell the property to maintain a good relationship with that lender. Most likely, the reason they can't afford their current mortgage is because they were in an adjustable product and their mortgage payment has doubled. That doesn't mean that they can't afford a different loan program with a lower payment. Which leads me to wonder what the incentive is for lenders not to negotiate with the borrower on how the item is reported to the bureaus. All they would be doing is cutting off a pretty substantial future income stream if they put these types of borrowers out of the market for two years. In that light, negotiation for a non-report on short sales is well worth it.
Here are their options in preferred order:
• Paid As Agreed - Won't hurt the score at all as long as the borrower has kept payments current.
Unrated - May drop a few points.
• Paid Settlement - Credit score will drop 50-150 points.
If reported, the item will remain on the credit report for 7 years from the completion date or the settlement date.
Fannie Mae Waiting Period
A few weeks ago, Fannie Mae was going to consider a short sale the same as a foreclosure, however, the current selling guideline from Fannie Mae has reduced the amount of time that must elapse after a short sale to 2 years from the date the short sale is completed, not started.
There is no exception for extenuating circumstances.
Bankruptcy Mortgage Relief
Currently, bankruptcy offers very limited protection to a homeowner who is upside down with their payments. The borrower can file a Chapter 7 which, depending on the state bankruptcy law, will most likely require him or her to surrender the property to the bankruptcy court, or file a Chapter 13 debt repayment plan to spread out prior delinquent payments over a number of months or years in the future. However, no bankruptcy proceeding can modify the terms of an existing home loan on a principal residence. Legislation is being proposed to Congress that would allow bankruptcy judges to modify the terms of an existing mortgage loan. I would not hold my breath. It could take years to make further substantial changes to the bankruptcy laws.
How Does a Bankruptcy Affect the Borrower's Credit?
My advice on this is to avoid Bankruptcy at all costs unless, your borrower is upside down on everything. Not only have the new bankruptcy filing requirements become more difficult and more costly, a public record will wreak havoc on credit scores and could stop someone from being hired or renting a place to live.
A Chapter 7 Bankruptcy will remain on the report for 10 years, and a Chapter 13 will remain for 7. The point loss could be from 100-350 points, depending on how many points the borrower has to lose in this factor.
Fannie Mae Waiting Period
The selling guideline from Fannie Mae has not changed. It is a 4 year period of how much time must elapse after a Chapter 7 Bankruptcy. The 4 year period can start on either the discharge or dismissal date.
The exception for extenuating circumstances is 2 years.
Again, the selling guideline from Fannie Mae has not changed. It is a 2 year period of how much time must elapse after a Chapter 13 Bankruptcy. The 2 year period can start on either the discharge or dismissal date.
In the case of multiple bankruptcies, the current selling guidelines that have just been added require a 5 year waiting period from the most recent discharge or dismissal date.
The exception for extenuating circumstances in the case of multiple bankruptcies is a 3 year waiting period from the most recent discharge or dismissal date.
What's the Good News?•
Aging Out: In all instances above where I reference how many points will be lost in each scenario, it is important to make sure your clients understand that over time, all derogatory accounts age out. This means, the older the account becomes, the less it will hurt their credit scores.
• 7 Year Reporting Period: The law states that derogatory items "can be" reported for 7-10 years as outlined above. It doesn't state that they "MUST BE.' My experience proves over and over again that there is no need to wait out the 7 years. You don't have to. You can start seeking early removal of the item by disputing to the credit bureaus that are reporting it. In many instances, after 3-4 years, the item will be deleted.
• You can Start Recovering and Rebuilding immediately. This is key information because many consumers feel doomed for the next 10 years. They have no idea that they can start rebuilding their credit immediately.
Information provided by Linda Ferrari, President, Credit Resource Corp. & Country Ridge Financial
as sent by Colleen Craig, Countryridge Financial in Valencia 661-290-3700
FORECLOSURE
Foreclosure is the legal process in which a bank or other secured creditor either sells or repossesses a parcel of real property, home or land, after the owner has failed to comply with the mortgage or deed of trust agreement with the lender. Most frequently, the violation of the mortgage agreement is the default of payment. The completion of the foreclosure process allows the lender to sell the property, and keep the proceeds to pay off the mortgage as well as any legal costs. The length of the foreclosure process varies from state to state.
If the foreclosed property is sold for less than the remaining primary mortgage balance, and there is no insurance to cover the loss, the court overseeing the foreclosure process may enter a deficiency judgment against the borrower. Deficiency judgments can be used to place a lien on the borrower's other personal property, obligating the borrower to repay the difference or suffer the loss of their property. It gives the lender a legal right to collect the remainder of debt out of borrower's other existing assets.
However, there are exceptions to this rule. If the mortgage is classified as "non-recourse debt," then the borrower has no personal liability in the event of foreclosure. This is often the case with residential mortgages. If so, the lender may not go after borrower's personal assets to recoup additional loss.
The lender's ability to pursue a deficiency judgment can be restricted by state laws. In California and some other states, original mortgages (the ones taken out at the time of purchase) are typically non-recourse loans, however, refinanced loans and home equity lines of credit aren't.
If the lender chooses not to pursue deficiency judgment---or can't because the mortgage is non-recourse-and writes off the loss, the borrower may have to pay income taxes on the un-repaid amount if it can be considered "forgiven debt."
Any other loans taken out against the property being foreclosed (second mortgages, HELOCs) are "wiped out" by foreclosure (in the sense that they are no longer attached to the property), but the borrower is still obligated to pay them off if they are not paid out of the foreclosure auction's proceeds.
How Does a Foreclosure Affect Credit?
A foreclosure can be reported as a Foreclosure or Repossession and carries a derogatory payment status of 8 or 9 (M1, R1 and I1 being the best and R9, I9, etc. being the most negative) which is just under a Public Record. There is a misconception that foreclosures are considered Public Records to the scoring system, however, they are not. Although there is a Public Notice Record on file once a foreclosure is filed, but this record is completely different than a credit report public record.
A Foreclosure will remain on a credit report for 7 years from completion date. And the score will drop from 50-250 points. The difference in point loss depends on how many points your client has to lose in the payment history factor of their credit. So if someone has a 750 credit score, and they opt to foreclose, their score could drop up to 250 points. However, if someone has a 500 credit score, they may lose 50 points for the same derogatory.
If a Deficiency Judgment or Tax Lien is filed in connection with a Foreclosure, the credit score can drop an additional 100 points.
Fannie Mae Waiting Period
The current selling guideline from Fannie Mae has upped the previous 4 year period of how much time must elapse after a foreclosure to 5 years from the date the foreclosure proceeding is completed, not started.
The exception for extenuating circumstances has been increased from a 2 year to a 3 year waiting period.
WORD OF CAUTION: If you have a borrower going through a foreclosure due to circumstances of losing a job, a medical crisis, sub-prime mortgage crisis fall-out, I suggest that you advise them to fully document their experience now. Not to wait until later, because the details and emotional energy of what they are going through will be more difficult to document and prove down the road if they decide to apply for a loan in 2 years based on an extenuating circumstance claim.
In General: When it comes to foreclosure and how it affects the ability to obtain credit in the future, there are multiple points of extremely negative impact. Deficiency judgments for the amount not collected by the lender in the foreclosure sale can end up on the borrower's credit report as a derogatory mark. Additionally, there is a high risk that the borrower will be hit with a substantial tax penalty which can result in a tax lien, which also appears on the credit report. As a general rule, other than a bankruptcy, foreclosure is the least desirable of all of the options available when a borrower is upside down in a home mortgage.
Deed in Lieu Of Foreclosure
An alternative to foreclosure is a "deed in lieu of foreclosure." In this scenario, the borrower turns the house over to the lender and walks away without owing anything. A deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The main advantage to the borrower is that it immediately releases him or her from most or all of the personal debt associated with the defaulted loan. The borrower also avoids a foreclosure proceeding and may receive more generous terms than he or she would in a formal foreclosure. Advantages to a lender include a reduction in the time and cost of repossessing the property.
However, the lender usually will not proceed with a deed in lieu of foreclosure if the outstanding debt on the property exceeds the current fair market value of the property. So in this market, this option probably won't be available to most homeowners who are upside down.
How Does a Deed in Lieu Of Foreclosure Affect the Borrower's Credit?
Most lenders report a deed in lieu of foreclosure as a foreclosure, so the credit scores will carry the same serious affect as if it were an actual foreclosure. However, what most borrowers don't know is that they can negotiate with the lender to report it differently in return for turning over the deed and avoiding foreclosure costs.
Many lenders will say that they cannot change the reporting status, but they can.
Here are their options in preferred order:
• Paid As Agreed - Credit scores will have already dropped over 100 points due to default in payments, however, if reported as Paid As Agreed, the borrower will be able to purchase another home in a shorter time period.
• Paid Settlement - Credit scores could drop up to 150 points.
The item will remain on the credit report for 7 years from the completion date or the settlement date.
Fannie Mae Waiting Period
The selling guideline from Fannie Mae has not changed. It is a 4 year period of how much time must elapse after a deed in lieu of foreclosure proceeding is completed.
The exception for extenuating circumstances also remains the same at 2 years.
Short Sale (aka Pre-Foreclosure Sale)
In my opinion, the best option is a short sale, which occurs when a bank or mortgage lender agrees to discount a loan balance, due to an economic hardship on the part of the home owner. The home owner sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove a proposed sale.
A short sale is typically executed to prevent a home foreclosure. Lenders often choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owners, the advantages include avoidance of having foreclosures on their credit histories. Additionally, a short sale is typically faster and less expensive than a foreclosure.
Junior lien holders, such as holders of second mortgages, HELOC lenders, and homeowner associations (special assessment liens), may also need to approve the short sale. Frequent objectors to short sales include those who hold tax liens (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even unrecorded) and mechanic's lien holders. It is possible for junior lien holders to prevent the short sale.
While it is frequently common for a lender to forgive the balance of the loan in question, it is unlikely that a lien holder that is not a mortgagee will forgive any of their balance. Further, it is common for a lender to omit updating the zero balance and settlement option on the mortgagor's credit report, or even flat-out refuse to do so "due to their financial loss."
The Mortgage Forgiveness Debt Relief Act Of 2007
When the lender decides to forgive all or a portion of the debt and accept less, the forgiven amount is considered as income for the borrower, like with a foreclosure, leaving it open to be taxed. However, The Mortgage Forgiveness Debt Relief Act of 2007 contains amendments to remove such tax liability, allowing the borrower and lender to work together to find a solution beneficial to both parties.
How Does a Short Sale Affect the Borrower's Credit?
The few reported short sales that I have seen have appeared as "Paid Settlements" on a mortgage account. In the wake of the current mortgage crisis, short sales are becoming extremely common, but legislation has not caught up with the tidal wave and there is no law on the books relating to them to date. As a result, there is an opportunity for the borrower to negotiate credit reporting with the lender. I've seen several successful negotiations, so be sure to let your borrower know that it is possible.
My view - a short sale proves that the borrower is exhausting every effort to pay the loan. The borrower has willingly committed to taking on months of emotional and physical stress in a good-faith effort to sell the property to maintain a good relationship with that lender. Most likely, the reason they can't afford their current mortgage is because they were in an adjustable product and their mortgage payment has doubled. That doesn't mean that they can't afford a different loan program with a lower payment. Which leads me to wonder what the incentive is for lenders not to negotiate with the borrower on how the item is reported to the bureaus. All they would be doing is cutting off a pretty substantial future income stream if they put these types of borrowers out of the market for two years. In that light, negotiation for a non-report on short sales is well worth it.
Here are their options in preferred order:
• Paid As Agreed - Won't hurt the score at all as long as the borrower has kept payments current.
Unrated - May drop a few points.
• Paid Settlement - Credit score will drop 50-150 points.
If reported, the item will remain on the credit report for 7 years from the completion date or the settlement date.
Fannie Mae Waiting Period
A few weeks ago, Fannie Mae was going to consider a short sale the same as a foreclosure, however, the current selling guideline from Fannie Mae has reduced the amount of time that must elapse after a short sale to 2 years from the date the short sale is completed, not started.
There is no exception for extenuating circumstances.
Bankruptcy Mortgage Relief
Currently, bankruptcy offers very limited protection to a homeowner who is upside down with their payments. The borrower can file a Chapter 7 which, depending on the state bankruptcy law, will most likely require him or her to surrender the property to the bankruptcy court, or file a Chapter 13 debt repayment plan to spread out prior delinquent payments over a number of months or years in the future. However, no bankruptcy proceeding can modify the terms of an existing home loan on a principal residence. Legislation is being proposed to Congress that would allow bankruptcy judges to modify the terms of an existing mortgage loan. I would not hold my breath. It could take years to make further substantial changes to the bankruptcy laws.
How Does a Bankruptcy Affect the Borrower's Credit?
My advice on this is to avoid Bankruptcy at all costs unless, your borrower is upside down on everything. Not only have the new bankruptcy filing requirements become more difficult and more costly, a public record will wreak havoc on credit scores and could stop someone from being hired or renting a place to live.
A Chapter 7 Bankruptcy will remain on the report for 10 years, and a Chapter 13 will remain for 7. The point loss could be from 100-350 points, depending on how many points the borrower has to lose in this factor.
Fannie Mae Waiting Period
The selling guideline from Fannie Mae has not changed. It is a 4 year period of how much time must elapse after a Chapter 7 Bankruptcy. The 4 year period can start on either the discharge or dismissal date.
The exception for extenuating circumstances is 2 years.
Again, the selling guideline from Fannie Mae has not changed. It is a 2 year period of how much time must elapse after a Chapter 13 Bankruptcy. The 2 year period can start on either the discharge or dismissal date.
In the case of multiple bankruptcies, the current selling guidelines that have just been added require a 5 year waiting period from the most recent discharge or dismissal date.
The exception for extenuating circumstances in the case of multiple bankruptcies is a 3 year waiting period from the most recent discharge or dismissal date.
What's the Good News?•
Aging Out: In all instances above where I reference how many points will be lost in each scenario, it is important to make sure your clients understand that over time, all derogatory accounts age out. This means, the older the account becomes, the less it will hurt their credit scores.
• 7 Year Reporting Period: The law states that derogatory items "can be" reported for 7-10 years as outlined above. It doesn't state that they "MUST BE.' My experience proves over and over again that there is no need to wait out the 7 years. You don't have to. You can start seeking early removal of the item by disputing to the credit bureaus that are reporting it. In many instances, after 3-4 years, the item will be deleted.
• You can Start Recovering and Rebuilding immediately. This is key information because many consumers feel doomed for the next 10 years. They have no idea that they can start rebuilding their credit immediately.
Information provided by Linda Ferrari, President, Credit Resource Corp. & Country Ridge Financial
as sent by Colleen Craig, Countryridge Financial in Valencia 661-290-3700
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