YOU’RE NOT ALONE IF YOU’RE HAVING
TROUBLE PAYING YOUR MORTGAGE
The housing boom led to a record homeownership rate of
nearly 70 percent, but some homeowners now face problems
making their mortgage payments and can’t refinance their
loans. Over the last few years, lenders invented new types of
mortgages to help families buy their first homes and refinance
their existing mortgages. Many of these mortgages helped
families without cash for a down payment, or with less-thanperfect
credit, qualify for loans known as “subprime” loans.
Subprime loans have a higher interest rate and higher costs,
such as prepayment penalties. A very popular, widely available
mortgage product is the hybrid adjustable rate mortgage
(ARM). Hybrid ARMs have an initial period with a lower
interest rate (“teaser rate”) followed by significant increases
over the remainder of the loan. The hefty payment increase is
often called “payment shock” because the borrower is surprised
by the size of the increase and can’t afford the new payment.
If you are having trouble paying your mortgage for any reason,
or expect problems, you should work with experts and your
lender to find a solution now. If you fall behind and don’t take
action, the lender will foreclose on your home. If that happens,
you may lose your home and all of the money you have already
invested in it. The sooner you act, the better the chances you
will avoid foreclosure.
The Center for Responsible Lending estimates that 2.2 million
American households with subprime mortgages have lost or
will lose their homes as monthly payments rise on high-risk
mortgages. These families stand to lose as much as $164 billion
of equity in their homes.
This brochure will help you understand your options and give
you tips on how to avoid losing your home—regardless of
what kind of mortgage you have.
MORTGAGES WITH “PAYMENT SHOCK”
Mortgages like these can give you a “payment shock”:
• 2/28 and 3/27 Mortgages. A 2/28 or 3/27 adjustable rate
mortgage gives the borrower a fixed payment for the initial
two- or three-year period before adjusting the mortgage up as
often as every six months. After the initial “teaser rate” period,
your mortgage payments typically adjust up every six months.
• Interest-Only Mortgages. An interest-only mortgage lets
you pay only the interest on the loan for the first 5 or 10
years and nothing to pay off the loan amount (principal).
After the interest-only period, the mortgage requires much
higher payments covering both interest and principal that
must be repaid over the remaining years of the loan.
• Payment Option Adjustable Rate Mortgages. Payment
option mortgages let the borrower decide how much to pay
each month. You can even pay less than the interest, and add
the unpaid interest to the total amount of principal you owe.
Or you can pay just the interest or an amount sufficient to
pay off the loan in 15 or 30 years. These mortgages can have
an especially big payment shock.
Be careful if your mortgage has any of the following features:
• A “teaser rate” or “no interest” period that expires and leads
to a big jump in your monthly payment.
• An option to pay less than the full interest due in any given
month. Taking that option makes the amount you owe go up
instead of down, since the interest you don’t pay is added to
your loan balance.
• An adjustable interest rate with very high or no limits on the
amount your payment can go up.
• A payment that doesn’t include an amount for paying
property taxes and homeowners insurance. This means
you may be hit with big bills you didn’t expect.
HOW REALTORS® CAN HELP
REALTORS® are in the business of helping people become
homeowners and want to do everything they can to make
sure you can afford to stay in your home.
• The best and least expensive option will often be working
with the current lender (or the “loan servicer” hired by the
lender to oversee your loan). Read more about your
options in the next section.
• If your current lender isn’t willing or able to help, you may
be able to refinance your current mortgage with another
lender. REALTORS® can help you find responsible lenders
that make fair and affordable loans.
• To address the growing foreclosure problem, especially
with subprime loans, some state and local governments
and nonprofit organizations are offering financial assistance.
Ask your REALTOR® or counselor about who to call.
• Counseling agencies are in the business of helping
borrowers like you. Check out Counseling Resources
for some ideas.
• Remember, you should shop just as carefully for a
mortgage as you do for a car or anything else you buy.
Getting the lowest possible rate and fees can save you
many thousands of dollars over the life of the loan.
• Sometimes the only option is selling the home. Of course, no
one is better at helping a seller than a REALTOR®. It is better
to sell than go through foreclosure because it will be easier to
qualify for credit in the future and buy another home.
• Be wary of advertisements like “Cash for Houses/Any
Situation” or “We Buy Houses for Cash.” Consumer
groups have learned that many of these are scams that
bait homeowners with the promise of rescuing them from
imminent foreclosure. Unfortunately, the “rescue” often
involves the borrower signing over the house and the
family being evicted from their home.
TALK TO YOUR LENDER
Talking to the lender, or “loan servicer” that collects the
payments, should be one of your first steps. The earlier you
call, the better your chance to work out a solution. Here are
some options:
• Forbearance. Lenders may let you make a partial
payment, or skip payments, if you have a reasonable plan
to catch up. Tell your lender if you expect a tax refund, a
bonus, or a new job.
• Reinstatement. Reinstatement refers to making a payment
that covers all your late payments, usually at the end of a
forbearance period.
• Repayment Plan. If you can’t afford reinstatement, but
can start making payments to catch up, the lender may let
you pay an additional amount each month until you are
caught up.
• Loan Modification. Your lender may agree to amend your
mortgage to help you avoid foreclosure.
The options include:
° Adding all the missed payments to the loan amount
and increasing the monthly payment to cover the
larger loan.
° Giving you more years to pay off the loan, lowering
the interest rate, and/or forgiving part of the loan, to
lower your monthly payment.
° Switching from an adjustable rate mortgage to a fixed
rate mortgage, so you aren’t exposed to increases in
your monthly payment.
° Requiring amounts for taxes and insurance to be
included with your monthly mortgage payment so you
avoid big bills in addition to your mortgage.
• Sign Over the Property to the Lender in Exchange
for Debt Forgiveness. This can hurt your credit, but is
better than having a foreclosure in your credit history.
ADDITIONAL RESOURCES
For immediate advice, call 888.995.HOPE to speak to a
counselor on how to avoid foreclosure. Available in English and
Spanish, 24/7. Or visit www.995hope.org for more information.
HUD Resources:
• For a list of HUD-approved counseling agencies, by state,
go to www.hud.gov/counseling.
• HUD’s Internet page—“How to Avoid Foreclosure”—is
aimed at borrowers with FHA-insured mortgages, but can
help other borrowers as well. Go to www.hud.gov/foreclosure.
Freddie Mac: “Keeping Your Home, Protecting Your
Investment.” Go to www.freddiemac.com and search for
this brochure by typing in the full name of the brochure.
Ginnie Mae: For a simple calculator to help homebuyers
estimate how much they can afford to spend, read “How
Much Home Can You Afford?” http://www.GinnieMae.gov.
“Looking for the Best Mortgage” is a brochure issued by
11 federal agencies on how to shop, compare, and negotiate
the best deal on a home loan.
www.federalreserve.gov/pubs/mortgage/mortb_1.htm.
Americans for Fairness in Lending: To find consumer
resources related to a variety of lending issues, go to
www.affil.org.
Consumer Handbook on Adjustable Rate Mortgages
(the “CHARM” booklet) issued by the Federal Reserve
Board (FRB) and the Office of Thrift Supervision (OTS).
http://www.FederalReserve.gov. At the FRB site, click
on “publications and education resources” and then on
“consumer information brochures.”
Credit-reporting agencies:
• Equifax 800.685.1111 www.Equifax.com
• Experian 888.397.3742 www.Experian.com
• TransUnion 800.916.8800 www.TransUnion.com
Go to www.AnnualCreditReport.com to ask for a free copy
of your credit report, once a year, or call 877.322.8228.
COUNSELING RESOURCES
Non-profit organizations dedicated to helping consumers
avoid foreclosure can be invaluable.
• NeighborWorks® organizations work with the
Homeownership Preservation Foundation to support a
nationwide assistance number—888.995.HOPE. You can
speak with a counselor, day or night, to help you get back
on track financially. (English and Spanish)
• Reputable counseling agencies, such as NeighborWorks®
organizations, can help you avoid foreclosure. Look up
your nearest NeighborWorks® organization at www.nw.org.
• The U.S. Department of Housing and Urban Development
(HUD) website has a list of HUD-approved counseling
organizations, by state (www.hud.gov/counseling). We
recommend that the list be used as a starting point to
find good counselors. You also can call 800.569.4287
or TDD 800.877.8339.
• Watch out for questionable counseling companies
who advertise that, for a minimal fee, they will assist
homeowners by hiring a lawyer to defend the foreclosure
in court or negotiate lender assistance on the borrowers’
behalf. You should call a HUD-approved counseling
organization, a local NeighborWorks® organization,
or 888.995.HOPE before you pay or sign anything.
Saturday, June 30, 2007
Beware of Predatory Loans!
For most families, buying a home is the biggest and smartest
purchase they ever make. One of the keys to success is getting
an affordable home loan with fair terms and reasonable costs.
Unfortunately, home buyers need to be aware that some loans
are not in their best interest. When loans hurt instead of help,
they can quickly lead to foreclosure and even bankruptcy.
There is no single definition of predatory lending, because the
term covers a wide range of abusive practices. Some practices
may be predatory for one borrower but not for another,
because everyone’s circumstances are different. Predatory
lenders often take advantage of first-time homebuyers and
others who may be vulnerable to high-pressure sales tactics.
This article will help consumers learn about the risks of
predatory loans and how to avoid them. REALTORS® can
provide information about predatory lending, refer clients
to reputable housing counseling organizations, and encourage
families to make informed decisions about how to finance
their homes.
Responsible lenders play a vital role in helping families achieve
homeownership, but consumers need to make sure they are not
dealing with a predatory lender. Some unscrupulous lenders are
only interested in taking as much money as possible, and are
not concerned about whether loans are affordable, sustainable,
and truly helpful to home buyers and homeowners.
WHAT ARE SOME OF THE PROBLEMS CONNECTED TO PREDATORY LENDING?
Nearly all predatory lending occurs in the “subprime market,”
where loans are sold to people with less than ideal credit
histories, such as a short work history, high debt, and a record
of late payments on credit cards or other debt. Subprime loans
have played an important role in helping millions of consumers
achieve homeownership, but, unfortunately, some lenders abuse
their role and take unfair advantage of vulnerable borrowers.
Here are a few examples of problems with predatory loans:
High interest rates and fees. Predatory lenders often
charge extremely high interest and fees that are added into
the total amount of the loan the borrower must repay. These
lenders charge what they can get away with, not a fair
amount based on the credit history of the borrower.
Broken promises/“bait and switch.” Sometimes home
buyers are offered a new loan or a refinance of an existing loan
that seems to meet all of their needs only to find that interest
rates and fees have changed when they get to the closing table.
Agreeing to last-minute changes can cost thousands of dollars
and result in a loan they just can’t afford.
Loans that start low and go high. Adjustable rate loans
are popular in today’s market, but many that seem to be
affordable are likely to have steep cost increases in the
future. Avoid “payment shock” by considering whether
you can pay for the loan both now and in the future.
Loan “flipping.” Too many homeowners are persuaded to
refinance their mortgage, sometimes repeatedly, when there
is no real benefit. Even when a family receives some cash
from a refinance, the gains should be weighed against the
costs of excessive fees and a higher loan amount. Often a
borrower has other options, such as obtaining a second
mortgage instead of refinancing the entire existing mortgage.
Steering. Some families who receive subprime loans could
qualify for a much more affordable home loan. Predatory
lenders use aggressive sales tactics to steer families into
unnecessarily expensive loan products.
SHOP FOR THE LOWEST-COST LOAN
REALTORS® develop relationships of trust with the families
they serve, and can help you avoid predatory loans by
encouraging careful shopping.
Ask these important questions:
• What is my credit score? Can I have a copy of my credit report?
• What is the best interest rate today? Do I qualify?
• Is the loan’s interest rate fixed or adjustable?
• What is the term (length) of the loan?
• What are the total loan fees?
• What is the total monthly payment? Does this include property taxes and insurance? If not, how much will I need each month for taxes and insurance?
• Is there an application fee? If so, what is it, and how much is refundable if I don’t qualify?
• Are there any prepayment penalties? If so, what are they and how long do they last?
POSSIBLE WARNING SIGNS OF A PREDATORY LOAN
• Sounds too easy. “Guaranteed approval” or “no income
verification” regardless of borrower’s current employment,
credit history, and assets. These claims indicate the lender
doesn’t care about whether you can afford to make the
payments over the long haul.
• Excessive fees. Higher lender and/or mortgage broker
fees than are typical in your market. Because these costs
can be financed as part of the loan, they are easy to
disguise or downplay. On competitive loans, fees are
negotiable. It is common for home buyers to pay only one
percent of the loan amount for prime loans. By contrast, a
typical predatory loan may cost five percent or more.
• Large future costs. High-risk adjustable rate mortgages
where the payment rises a lot after a short introductory
period are seldom appropriate for families who already
have had problems repaying other loans. Home buyers also
should avoid a large single “balloon” payment (a lump sum
due at the end of the loan’s term).
• Closing delays. The lender deliberately delays closing so
the commitment on a reasonably-priced loan expires.
• Over-valued property. Inflated appraisals that allow
excessive fees to be included in the loan and result in the
borrower owing more to the bank than the home is worth.
• Barriers to refinancing. Prepayment penalties that make
it hard for a borrower to refinance in order to pay off a
high-cost loan by taking advantage of a low-cost loan.
• No down payment loans. These loans may be split into
two mortgages, with one having a much higher cost. Home
buyers should be sure they can afford the payments.
• Unethical document management. An ethical lender or
broker will always require you to sign key loan papers, and
they will never ask you to sign a document dated before
the date you sign it.
Getting the right loan for you is just as important as getting the right house for you!
Call Ray Kutylo and the SCV Home Team at 661-287-9164 and let's get started!
OTHER IMPORTANT RESOURCES FOR YOU...
Fannie Mae: “For Home Buyers & Homeowners”
at http://www.fanniemae.com/.
Freddie Mac: “Buying and Owning a Home”
at http://www.freddiemac.com/.
Ginnie Mae:
For a simple calculator to help homebuyers estimate how
much they can afford to spend, read “How Much Home
Can You Afford?” at http://www.ginniemae.gov/.
HUD Housing Counselors:
For a list of counseling agencies, by state, approved by the
Department of Housing and Urban Development (HUD),
go to www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm.
Credit-reporting agencies:
• Equifax 800.685.1111 http://www.equifax.com/.
• Experian 888.397.3742 http://www.experian.com/.
• TransUnion 800.916.8800 http://www.transunion.com/.
Go to http://www.annualcreditreport.com/ to ask for a free copy
of your credit report, once a year, or call 877.322.8228.
See also, http://www.ftc.gov/.
“Looking for the Best Mortgage” is a brochure on how to
shop, compare, and negotiate the best deal on a home loan.
The brochure is a joint effort of 11 federal agencies,
including the Federal Trade Commission (FTC), the Federal
Reserve Board, HUD, and the Department of Justice.
www.federalreserve.gov/pubs/mortgage/mortb_1.htm.
Consumer Handbook on Adjustable Rate Mortgages
(the CHARM booklet) issued by the Federal Reserve
Board (FRB) and the Office of Thrift Supervision (OTS).
http://www.federalreserve.gov/. At the FRB site, click
on “publications and education resources” and then on
“consumer information brochures.”
ADDITIONAL RESOURCES
The National Association of REALTORS® (NAR):
For information on NAR’s Housing Opportunity Program,
go to www.REALTOR.org/HousingOpportunity.
The Center for Responsible Lending (CRL):
For information about predatory mortgage lending practices,
including “The Seven Signs of Predatory Lending,” go to
http://www.responsiblelending.org/.
Other brochures to help consumers shop for the best
mortgage:
• NAR and CRL have issued two other brochures:
• “Specialty (Non-Traditional) Mortgages: What Are
the Risks and Advantages?”
• “Traditional Mortgages: Understanding Your Options”
• NAR and the Federal Housing Administration of the U.S.
Department of Housing and Urban Development have
issued a brochure on “FHA Insured Mortgages.” FHA
mortgages provide a safe and affordable option for
homebuyers.
You may view, download, and order these brochures. Go to:
http://www.realtor.org/housopp.nsf/pages/mortgages
purchase they ever make. One of the keys to success is getting
an affordable home loan with fair terms and reasonable costs.
Unfortunately, home buyers need to be aware that some loans
are not in their best interest. When loans hurt instead of help,
they can quickly lead to foreclosure and even bankruptcy.
There is no single definition of predatory lending, because the
term covers a wide range of abusive practices. Some practices
may be predatory for one borrower but not for another,
because everyone’s circumstances are different. Predatory
lenders often take advantage of first-time homebuyers and
others who may be vulnerable to high-pressure sales tactics.
This article will help consumers learn about the risks of
predatory loans and how to avoid them. REALTORS® can
provide information about predatory lending, refer clients
to reputable housing counseling organizations, and encourage
families to make informed decisions about how to finance
their homes.
Responsible lenders play a vital role in helping families achieve
homeownership, but consumers need to make sure they are not
dealing with a predatory lender. Some unscrupulous lenders are
only interested in taking as much money as possible, and are
not concerned about whether loans are affordable, sustainable,
and truly helpful to home buyers and homeowners.
WHAT ARE SOME OF THE PROBLEMS CONNECTED TO PREDATORY LENDING?
Nearly all predatory lending occurs in the “subprime market,”
where loans are sold to people with less than ideal credit
histories, such as a short work history, high debt, and a record
of late payments on credit cards or other debt. Subprime loans
have played an important role in helping millions of consumers
achieve homeownership, but, unfortunately, some lenders abuse
their role and take unfair advantage of vulnerable borrowers.
Here are a few examples of problems with predatory loans:
High interest rates and fees. Predatory lenders often
charge extremely high interest and fees that are added into
the total amount of the loan the borrower must repay. These
lenders charge what they can get away with, not a fair
amount based on the credit history of the borrower.
Broken promises/“bait and switch.” Sometimes home
buyers are offered a new loan or a refinance of an existing loan
that seems to meet all of their needs only to find that interest
rates and fees have changed when they get to the closing table.
Agreeing to last-minute changes can cost thousands of dollars
and result in a loan they just can’t afford.
Loans that start low and go high. Adjustable rate loans
are popular in today’s market, but many that seem to be
affordable are likely to have steep cost increases in the
future. Avoid “payment shock” by considering whether
you can pay for the loan both now and in the future.
Loan “flipping.” Too many homeowners are persuaded to
refinance their mortgage, sometimes repeatedly, when there
is no real benefit. Even when a family receives some cash
from a refinance, the gains should be weighed against the
costs of excessive fees and a higher loan amount. Often a
borrower has other options, such as obtaining a second
mortgage instead of refinancing the entire existing mortgage.
Steering. Some families who receive subprime loans could
qualify for a much more affordable home loan. Predatory
lenders use aggressive sales tactics to steer families into
unnecessarily expensive loan products.
SHOP FOR THE LOWEST-COST LOAN
REALTORS® develop relationships of trust with the families
they serve, and can help you avoid predatory loans by
encouraging careful shopping.
Ask these important questions:
• What is my credit score? Can I have a copy of my credit report?
• What is the best interest rate today? Do I qualify?
• Is the loan’s interest rate fixed or adjustable?
• What is the term (length) of the loan?
• What are the total loan fees?
• What is the total monthly payment? Does this include property taxes and insurance? If not, how much will I need each month for taxes and insurance?
• Is there an application fee? If so, what is it, and how much is refundable if I don’t qualify?
• Are there any prepayment penalties? If so, what are they and how long do they last?
POSSIBLE WARNING SIGNS OF A PREDATORY LOAN
• Sounds too easy. “Guaranteed approval” or “no income
verification” regardless of borrower’s current employment,
credit history, and assets. These claims indicate the lender
doesn’t care about whether you can afford to make the
payments over the long haul.
• Excessive fees. Higher lender and/or mortgage broker
fees than are typical in your market. Because these costs
can be financed as part of the loan, they are easy to
disguise or downplay. On competitive loans, fees are
negotiable. It is common for home buyers to pay only one
percent of the loan amount for prime loans. By contrast, a
typical predatory loan may cost five percent or more.
• Large future costs. High-risk adjustable rate mortgages
where the payment rises a lot after a short introductory
period are seldom appropriate for families who already
have had problems repaying other loans. Home buyers also
should avoid a large single “balloon” payment (a lump sum
due at the end of the loan’s term).
• Closing delays. The lender deliberately delays closing so
the commitment on a reasonably-priced loan expires.
• Over-valued property. Inflated appraisals that allow
excessive fees to be included in the loan and result in the
borrower owing more to the bank than the home is worth.
• Barriers to refinancing. Prepayment penalties that make
it hard for a borrower to refinance in order to pay off a
high-cost loan by taking advantage of a low-cost loan.
• No down payment loans. These loans may be split into
two mortgages, with one having a much higher cost. Home
buyers should be sure they can afford the payments.
• Unethical document management. An ethical lender or
broker will always require you to sign key loan papers, and
they will never ask you to sign a document dated before
the date you sign it.
Getting the right loan for you is just as important as getting the right house for you!
Call Ray Kutylo and the SCV Home Team at 661-287-9164 and let's get started!
OTHER IMPORTANT RESOURCES FOR YOU...
Fannie Mae: “For Home Buyers & Homeowners”
at http://www.fanniemae.com/.
Freddie Mac: “Buying and Owning a Home”
at http://www.freddiemac.com/.
Ginnie Mae:
For a simple calculator to help homebuyers estimate how
much they can afford to spend, read “How Much Home
Can You Afford?” at http://www.ginniemae.gov/.
HUD Housing Counselors:
For a list of counseling agencies, by state, approved by the
Department of Housing and Urban Development (HUD),
go to www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm.
Credit-reporting agencies:
• Equifax 800.685.1111 http://www.equifax.com/.
• Experian 888.397.3742 http://www.experian.com/.
• TransUnion 800.916.8800 http://www.transunion.com/.
Go to http://www.annualcreditreport.com/ to ask for a free copy
of your credit report, once a year, or call 877.322.8228.
See also, http://www.ftc.gov/.
“Looking for the Best Mortgage” is a brochure on how to
shop, compare, and negotiate the best deal on a home loan.
The brochure is a joint effort of 11 federal agencies,
including the Federal Trade Commission (FTC), the Federal
Reserve Board, HUD, and the Department of Justice.
www.federalreserve.gov/pubs/mortgage/mortb_1.htm.
Consumer Handbook on Adjustable Rate Mortgages
(the CHARM booklet) issued by the Federal Reserve
Board (FRB) and the Office of Thrift Supervision (OTS).
http://www.federalreserve.gov/. At the FRB site, click
on “publications and education resources” and then on
“consumer information brochures.”
ADDITIONAL RESOURCES
The National Association of REALTORS® (NAR):
For information on NAR’s Housing Opportunity Program,
go to www.REALTOR.org/HousingOpportunity.
The Center for Responsible Lending (CRL):
For information about predatory mortgage lending practices,
including “The Seven Signs of Predatory Lending,” go to
http://www.responsiblelending.org/.
Other brochures to help consumers shop for the best
mortgage:
• NAR and CRL have issued two other brochures:
• “Specialty (Non-Traditional) Mortgages: What Are
the Risks and Advantages?”
• “Traditional Mortgages: Understanding Your Options”
• NAR and the Federal Housing Administration of the U.S.
Department of Housing and Urban Development have
issued a brochure on “FHA Insured Mortgages.” FHA
mortgages provide a safe and affordable option for
homebuyers.
You may view, download, and order these brochures. Go to:
http://www.realtor.org/housopp.nsf/pages/mortgages
Friday, June 29, 2007
Tighter Lending Rules May Backfire
Part 1 of 2: Can feds make mortgages more affordable?
Monday, June 25, 2007
By Jack Guttentag Inman News
(This is Part 1 of a two-part series.)
Case histories of subprime loans that have gone to foreclosure often generate righteous indignation. With benefit of hindsight, many if not most of them look as if they never should have been made. Such indignation is one important motivator for recent demands that government should require that all home mortgages be "affordable."
While affordability is a difficult concept to define rigorously, one well-defined affordability rule has emerged with the approval of bank regulators, community groups and many legislators. It applies to adjustable-rate mortgages, or ARMs, which have more than their proportionate share of foreclosures.
In many cases, lenders assess the ability of ARM borrowers to make their payments at the initial interest rate, which is artificially low. When the rate increases, the payment also increases and may become unaffordable.
I will use the 2/28 ARM, the most widely used instrument in the subprime market, to illustrate. The rate is fixed for two years, after which it is adjusted every six months to equal the value of the rate index at the time of the adjustment, plus a margin, which is fixed for the life of the loan. Any rate increase may be limited by a rate-adjustment cap.
For example, assume the initial rate is 6 percent; the index is one-year LIBOR, which currently is about 5.4 percent; the margin is 6 percent; and the adjustment cap is 3 percent. If the index remains unchanged, the rate after two years will rise to 9 percent, the maximum permitted by the cap, and six months later to 11.4 percent. Assuming a 30-year mortgage, the payment will increase by 32.7 percent in month 25, and by another 21.3 percent in month 31. The borrower may not be able to manage such formidable increases.
The affordability proponents propose that lenders should be required to qualify borrowers at the fully indexed rate, or FIR, which is the current value of the index plus the margin, rather than the initial rate. In the example, the FIR is 5.4 percent + 6 percent = 11.4 percent. The logic is that borrowers who at the outset can meet the payment calculated at the FIR will find it affordable 24 or 30 months later when the rate increases.
The requirement, however, would have little impact because it can be so easily (and legally) evaded. This may be a good thing because the consequences of an effective rule might well be unacceptable.
Borrowers are qualified using maximum ratios of mortgage payment plus other housing expenses to income. Assume the maximum ratio is 36 percent and that the borrower taking out the 2/28 ARM described above barely qualifies -- his ratio is 36 percent -- when the payment is calculated at 6 percent. Calculating the payment at the FIR of 11.4 percent would push the ratio to 51 percent, making the borrower ineligible.
The maximum ratio, however, remains within the lender's discretion. This means that a lender who wants to make the loan has only to increase the maximum ratio to 51 percent and, presto, the borrower qualifies at the FIR. This would be a completely legal evasion. In the subprime market, ratios of 50-55 percent are not uncommon.
In principle, government could close this escape valve by freezing the qualification ratio, and 25 years ago this might have been possible. Ratios of 36 percent and 28 percent, measured with and without nonmortgage debt service, were then more or less the norm. As underwriting systems have evolved, however, maximum ratios have proliferated. They now vary from one loan program to another, and with other factors that affect risk, such as credit score, down payment, type of property, and loan purpose.
Government intrusion into this very complex process in order to make the FIR rule effective would be a disaster, and nobody has suggested it.
Proponents of the FIR rule either don't realize how easily the rule can be evaded, or are satisfied to go through the motions. If the rule was effective, they might be forced to confront a really thorny issue.
Any government underwriting rule that is more restrictive than those selected by lenders, and which cannot be evaded, will reduce the number of households who qualify for loans. Of this group that is cut from the market, some would lose their homes through default and foreclosure had they received loans. This is the intended benefit of the more restrictive rule. A larger number, however, would have become successful homeowners under the previous rules and are now denied this opportunity. This is the unintended but inescapable cost of the restrictive rule.
To prevent one foreclosure by tightening standards, we prevent a larger number of successful loans. I don't know what that number is, or what society should view as an acceptable number. These questions have been studiously avoided.
Next week: Unaffordable loans that are in the public interest.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com/.
Monday, June 25, 2007
By Jack Guttentag Inman News
(This is Part 1 of a two-part series.)
Case histories of subprime loans that have gone to foreclosure often generate righteous indignation. With benefit of hindsight, many if not most of them look as if they never should have been made. Such indignation is one important motivator for recent demands that government should require that all home mortgages be "affordable."
While affordability is a difficult concept to define rigorously, one well-defined affordability rule has emerged with the approval of bank regulators, community groups and many legislators. It applies to adjustable-rate mortgages, or ARMs, which have more than their proportionate share of foreclosures.
In many cases, lenders assess the ability of ARM borrowers to make their payments at the initial interest rate, which is artificially low. When the rate increases, the payment also increases and may become unaffordable.
I will use the 2/28 ARM, the most widely used instrument in the subprime market, to illustrate. The rate is fixed for two years, after which it is adjusted every six months to equal the value of the rate index at the time of the adjustment, plus a margin, which is fixed for the life of the loan. Any rate increase may be limited by a rate-adjustment cap.
For example, assume the initial rate is 6 percent; the index is one-year LIBOR, which currently is about 5.4 percent; the margin is 6 percent; and the adjustment cap is 3 percent. If the index remains unchanged, the rate after two years will rise to 9 percent, the maximum permitted by the cap, and six months later to 11.4 percent. Assuming a 30-year mortgage, the payment will increase by 32.7 percent in month 25, and by another 21.3 percent in month 31. The borrower may not be able to manage such formidable increases.
The affordability proponents propose that lenders should be required to qualify borrowers at the fully indexed rate, or FIR, which is the current value of the index plus the margin, rather than the initial rate. In the example, the FIR is 5.4 percent + 6 percent = 11.4 percent. The logic is that borrowers who at the outset can meet the payment calculated at the FIR will find it affordable 24 or 30 months later when the rate increases.
The requirement, however, would have little impact because it can be so easily (and legally) evaded. This may be a good thing because the consequences of an effective rule might well be unacceptable.
Borrowers are qualified using maximum ratios of mortgage payment plus other housing expenses to income. Assume the maximum ratio is 36 percent and that the borrower taking out the 2/28 ARM described above barely qualifies -- his ratio is 36 percent -- when the payment is calculated at 6 percent. Calculating the payment at the FIR of 11.4 percent would push the ratio to 51 percent, making the borrower ineligible.
The maximum ratio, however, remains within the lender's discretion. This means that a lender who wants to make the loan has only to increase the maximum ratio to 51 percent and, presto, the borrower qualifies at the FIR. This would be a completely legal evasion. In the subprime market, ratios of 50-55 percent are not uncommon.
In principle, government could close this escape valve by freezing the qualification ratio, and 25 years ago this might have been possible. Ratios of 36 percent and 28 percent, measured with and without nonmortgage debt service, were then more or less the norm. As underwriting systems have evolved, however, maximum ratios have proliferated. They now vary from one loan program to another, and with other factors that affect risk, such as credit score, down payment, type of property, and loan purpose.
Government intrusion into this very complex process in order to make the FIR rule effective would be a disaster, and nobody has suggested it.
Proponents of the FIR rule either don't realize how easily the rule can be evaded, or are satisfied to go through the motions. If the rule was effective, they might be forced to confront a really thorny issue.
Any government underwriting rule that is more restrictive than those selected by lenders, and which cannot be evaded, will reduce the number of households who qualify for loans. Of this group that is cut from the market, some would lose their homes through default and foreclosure had they received loans. This is the intended benefit of the more restrictive rule. A larger number, however, would have become successful homeowners under the previous rules and are now denied this opportunity. This is the unintended but inescapable cost of the restrictive rule.
To prevent one foreclosure by tightening standards, we prevent a larger number of successful loans. I don't know what that number is, or what society should view as an acceptable number. These questions have been studiously avoided.
Next week: Unaffordable loans that are in the public interest.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com/.
Thursday, June 28, 2007
Mold... Hazard or Hype?
In the real estate industry, mold has become a factor that may hurt a deal. Some agents are afraid to recommend a mold inspection, the neglect of which can expose them to unforeseen liability in the future.
Everybody wants to live in a healthy home environment. Mold problems can affect the health of your client’s family and the value of their new home. Unfortunately, the subject of mold has become quite blown out of proportion over the past few years.
There are situations that can arise as a result of improper care and maintenance. The trick is learning how to deal with mold and moisture issues based on facts and not hysteria or hype. The biggest mistake you can make is to neglect to take care of a moisture intrusion or mold issue immediately and sufficiently.
What to Look For:
As a homeowner, you should take the time to perform your own inspection of the property and look for any signs of prior water damage. There are certain indicators you can look for to yourself. All mold problems stem from a moisture problem so you should check for stains around the windows and doors, look in the bathrooms for moisture stains due to leaks or floods and locate any poor caulking jobs that do not properly seal fixtures and therefore allow moisture to get into the walls or floors. Also check for any signs of moisture damage to the walls, ceilings or floors. Upon finding any such conditions, a formal inspection is recommended.
You should also look for evidence of condensation or poor ventilation. When a room is not properly ventilated, condensation can form leading to potential mold problems. Check the bathrooms to ensure that there is either an exhaust fan or a window installed. Kitchens should have an exhaust fan as well. Test any fans to ensure that they are in working condition.
Be on the lookout for leaks and if you find any ensure they are repaired as quickly as possible. You are likely to find leaks under stoves, refrigerators, dishwashers & washing machines and under kitchen and bathroom sinks. A leak in any location can lead to a mold problem if improperly handled.
In many cases a musty smell can indicate a mold problem. The smell can be a result of a dirty HVAC filter, a prior leak or flooding which was not properly dried out, or a current situation, such as a leaky pipe in the walls. You may not be able to locate where the smell is coming from. In that case a mold inspection should definitely be recommended in order to determine the source of moisture and the extent of the situation.
Mold problems should not create unnecessary concern or panic. One way to protect your interest and reduce concern is hire a mold inspection company that is independent from the other companies that do repair work and/or lab analysis. This removes potential for conflict of interest.
Remember that there is a solution to every problem and that many times that solution may be as simple as house cleaning or changing out an air filter. Don’t expose yourself to liability in the future. Find a mold inspection company that you can trust and reduce your liability.
By Chris Wrightsman – CEO of Mold-Check Professionals. You can contact Chris at 818/951-9120
Everybody wants to live in a healthy home environment. Mold problems can affect the health of your client’s family and the value of their new home. Unfortunately, the subject of mold has become quite blown out of proportion over the past few years.
There are situations that can arise as a result of improper care and maintenance. The trick is learning how to deal with mold and moisture issues based on facts and not hysteria or hype. The biggest mistake you can make is to neglect to take care of a moisture intrusion or mold issue immediately and sufficiently.
What to Look For:
As a homeowner, you should take the time to perform your own inspection of the property and look for any signs of prior water damage. There are certain indicators you can look for to yourself. All mold problems stem from a moisture problem so you should check for stains around the windows and doors, look in the bathrooms for moisture stains due to leaks or floods and locate any poor caulking jobs that do not properly seal fixtures and therefore allow moisture to get into the walls or floors. Also check for any signs of moisture damage to the walls, ceilings or floors. Upon finding any such conditions, a formal inspection is recommended.
You should also look for evidence of condensation or poor ventilation. When a room is not properly ventilated, condensation can form leading to potential mold problems. Check the bathrooms to ensure that there is either an exhaust fan or a window installed. Kitchens should have an exhaust fan as well. Test any fans to ensure that they are in working condition.
Be on the lookout for leaks and if you find any ensure they are repaired as quickly as possible. You are likely to find leaks under stoves, refrigerators, dishwashers & washing machines and under kitchen and bathroom sinks. A leak in any location can lead to a mold problem if improperly handled.
In many cases a musty smell can indicate a mold problem. The smell can be a result of a dirty HVAC filter, a prior leak or flooding which was not properly dried out, or a current situation, such as a leaky pipe in the walls. You may not be able to locate where the smell is coming from. In that case a mold inspection should definitely be recommended in order to determine the source of moisture and the extent of the situation.
Mold problems should not create unnecessary concern or panic. One way to protect your interest and reduce concern is hire a mold inspection company that is independent from the other companies that do repair work and/or lab analysis. This removes potential for conflict of interest.
Remember that there is a solution to every problem and that many times that solution may be as simple as house cleaning or changing out an air filter. Don’t expose yourself to liability in the future. Find a mold inspection company that you can trust and reduce your liability.
By Chris Wrightsman – CEO of Mold-Check Professionals. You can contact Chris at 818/951-9120
Wednesday, June 27, 2007
Gift Taxes and Estate Taxes
Some interesting facts that you should know about Gift Taxes and Estate Taxes because you are all building up vast estates.
There are confusing and constantly changing regulations and limits. For example, the exclusion for Estate Taxes will be $2 million for 2007 and 2008 and goes to $3 million for 2009. Estate Tax rates have been lowered to 45% for 2007-2009. The Estate Tax has been repealed for 2010 (no tax that year). The Estate Tax changes will sunset after 2010. Therefore, if Congress doesn't pass any new laws by 2011, the limits will revert back to 2000 and the exclusion will be $1million and the tax rate 55%. For good tax planning you best die in 2010.
There is one other item you should ask your tax advisor. In 2010 there is another twist that will affect community property states (read California).
There is no estate tax in 2010 but step-up-in-basis will be capped. Let's say you are single and you have a piece of land you bought years ago for $1 million and it is worth $4 million today (lucky buy). Currently, if it passes to your heirs they would get a full step-up-in-basis so if they sold it tomorrow there would be no capital gains tax. This year there would be estate taxes upon your death on $2 million ($4 million minus the current $2 million exclusion). In 2010 the maximum step-up-in-basis value will be $3.4 million to a spouse and $1.2 million to any other heir. There would be no estate tax but if your heirs sold it the day after inheriting, there would be capital gains tax on $1.8 million. ($1 million basis plus $1.2 million step upsubtracted from $4 million sales price or $1.8 million.)
This is really confusing so talk to your tax advisor if you have any questions. What should you do? Give your estate away $12,000 a year to each heir and die broke. (Die Broke is a great book byStephen Pollan.)
There are confusing and constantly changing regulations and limits. For example, the exclusion for Estate Taxes will be $2 million for 2007 and 2008 and goes to $3 million for 2009. Estate Tax rates have been lowered to 45% for 2007-2009. The Estate Tax has been repealed for 2010 (no tax that year). The Estate Tax changes will sunset after 2010. Therefore, if Congress doesn't pass any new laws by 2011, the limits will revert back to 2000 and the exclusion will be $1million and the tax rate 55%. For good tax planning you best die in 2010.
There is one other item you should ask your tax advisor. In 2010 there is another twist that will affect community property states (read California).
There is no estate tax in 2010 but step-up-in-basis will be capped. Let's say you are single and you have a piece of land you bought years ago for $1 million and it is worth $4 million today (lucky buy). Currently, if it passes to your heirs they would get a full step-up-in-basis so if they sold it tomorrow there would be no capital gains tax. This year there would be estate taxes upon your death on $2 million ($4 million minus the current $2 million exclusion). In 2010 the maximum step-up-in-basis value will be $3.4 million to a spouse and $1.2 million to any other heir. There would be no estate tax but if your heirs sold it the day after inheriting, there would be capital gains tax on $1.8 million. ($1 million basis plus $1.2 million step upsubtracted from $4 million sales price or $1.8 million.)
This is really confusing so talk to your tax advisor if you have any questions. What should you do? Give your estate away $12,000 a year to each heir and die broke. (Die Broke is a great book byStephen Pollan.)
Tuesday, June 26, 2007
Hospital Hearing at City Council Raises Serious Questions
The Santa Clarita City Council held a lengthy hearing on the proposed expansion of Henry Mayo Newhall Memorial Hospital site by G&L Realty of Beverly Hills. The majority component is a buildout of medical office buildings and an increase in density of four times the current hospital facility density. Significant traffic, noise, and density problems seem inevitable with the Council's approval of this 25 year Master Plan.
The Santa Clarita Planning Commission approved the much contested 25-year expansion plan for the Henry Mayo Newhall Memorial Hospital (HMNMH) in Valencia by a 3-2 vote in February. The proposal will now go to the Santa Clarita City Council for final approval. This week's hearing resulted in some city council members asking for additional information about the hospital expansion plan from the independent consulting service, the City's Planning Dept, and the City Attorney.
Residents of Valencia Summit and surrounding neighborhoods are concerned about the increase in traffic and the likelihood of the use of eminent domain to widen roads in the area to accomodate the expansion.
Smart Growth SCV has been very vocal in fighting the expansion, stating that there will be very few beds added to the hospital and that the expansion will mostly be for office space. The HMNMH hospital developers have made some concessions to the local residents by reducing the height of some buildings and eliminating one proposed building, but Smart Growth SCV claims that this is not enough.
Hospital officials say that the expansion plan would allow for an expansion in cardiac care, a new women's center and a neonatal intensive care unit, all services that are currently unavailable in the SCV. Critics say that the expansion provides mainly for office space, and not for the much touted additional beds and facilities that were the key selling points of the plan.
Hospital officials have prepared a fact sheet showing the original proposal and the modified proposal to encourage residents to support their expansion plan.
I have listened to much of the testimony on Channel 20, and it appears to me that the site is completely inadequate for the planned use. While the G&L Realty representatives, who presented this latest incarnation of the proposal, characterized the opponents as a few local NIMBYs and a competing hospital, the fact of the matter is that this plan, if approved, would justify asking some serious questions about the competence of our city council members, along with City Planning, and the City Attorney, who seemed content to enter into an agreement that would basically give a blank check to the co-applicants, G&L Realty and HMNMH, without any assurance or guarantee that actual hospital facilities would be built after the medical office buildings are constructed and this community hospital site is converted to a high-density commercial complex.
Shame and Kudos due
Shame on the city council and city management for even considering this type of over-development in this residential neighborhood. With other hospital developers in the wings, wouldn't it be more prudent to encourage others and distribute services towards sites more suited for a hospital? The televised hearing did not reflect well on our council members Frank Ferry and Bob Kellar, who should have been much more prepared with all of the facts instead of parroting G&L's party line.
Kudos to Tim Ben Boydston, who took the initiative in first asking the hard questions. While I had my reservations about the qualifications of the CRT owner and director when he was appointed to the city council, he has so far done a pretty good job. In addition, recognition and kudos go to Laurene Weste for her follow-up directives to city staff to answer serious questions about this proposal before bringing it back to review by the City Council.
The Santa Clarita Planning Commission approved the much contested 25-year expansion plan for the Henry Mayo Newhall Memorial Hospital (HMNMH) in Valencia by a 3-2 vote in February. The proposal will now go to the Santa Clarita City Council for final approval. This week's hearing resulted in some city council members asking for additional information about the hospital expansion plan from the independent consulting service, the City's Planning Dept, and the City Attorney.
Residents of Valencia Summit and surrounding neighborhoods are concerned about the increase in traffic and the likelihood of the use of eminent domain to widen roads in the area to accomodate the expansion.
Smart Growth SCV has been very vocal in fighting the expansion, stating that there will be very few beds added to the hospital and that the expansion will mostly be for office space. The HMNMH hospital developers have made some concessions to the local residents by reducing the height of some buildings and eliminating one proposed building, but Smart Growth SCV claims that this is not enough.
Hospital officials say that the expansion plan would allow for an expansion in cardiac care, a new women's center and a neonatal intensive care unit, all services that are currently unavailable in the SCV. Critics say that the expansion provides mainly for office space, and not for the much touted additional beds and facilities that were the key selling points of the plan.
Hospital officials have prepared a fact sheet showing the original proposal and the modified proposal to encourage residents to support their expansion plan.
I have listened to much of the testimony on Channel 20, and it appears to me that the site is completely inadequate for the planned use. While the G&L Realty representatives, who presented this latest incarnation of the proposal, characterized the opponents as a few local NIMBYs and a competing hospital, the fact of the matter is that this plan, if approved, would justify asking some serious questions about the competence of our city council members, along with City Planning, and the City Attorney, who seemed content to enter into an agreement that would basically give a blank check to the co-applicants, G&L Realty and HMNMH, without any assurance or guarantee that actual hospital facilities would be built after the medical office buildings are constructed and this community hospital site is converted to a high-density commercial complex.
Shame and Kudos due
Shame on the city council and city management for even considering this type of over-development in this residential neighborhood. With other hospital developers in the wings, wouldn't it be more prudent to encourage others and distribute services towards sites more suited for a hospital? The televised hearing did not reflect well on our council members Frank Ferry and Bob Kellar, who should have been much more prepared with all of the facts instead of parroting G&L's party line.
Kudos to Tim Ben Boydston, who took the initiative in first asking the hard questions. While I had my reservations about the qualifications of the CRT owner and director when he was appointed to the city council, he has so far done a pretty good job. In addition, recognition and kudos go to Laurene Weste for her follow-up directives to city staff to answer serious questions about this proposal before bringing it back to review by the City Council.
Private Transfer Tax Opposed by Realtors
The following is a California Association of Realtors update from Sacramento:
C.A.R. OPPOSES AB 1574 (HOUSTON) PRIVATE TRANSFER TAX
AB 1574 was scheduled to be heard by the Senate Transportation and Housing Committee on Tuesday, June 26. AB 1574 is the builder-sponsored response to C.A.R. sponsored SB 670 and would legitimize the use of private transfer taxes without real safeguards needed to protect home buyers.
C.A.R. is opposing AB 1574 because these "taxes" add to the cost of owning a home and will encourage a tidal wave of developers, private entities and others hoping to profit from increased sales prices that are not required to add value to the property. While the developers who currently employ this scheme try to define it as a "mitigation fee," implying that the funds somehow improve the property or the development, this is not required to be the case.
How We Got Here:
A loophole in California law lets developers and other non-government entities impose "private" transfer taxes (PTTs) on homes every time the property is sold--with NO oversight, NO accountability and NO limit on the number of separate private transfer taxes that can be piled onto a home. While AB 1574's supporters claimed that the bill addressed many problems with these taxes brought to light by C.A.R.'s bill, it really did nothing to fix them. As recently amended, AB 1574 requires that the Department of Real Estate to provide oversight for the imposition of PTTs and requires that these taxes be imposed though a covenant, restriction, or condition contained in any deed, contract, security instrument, or other instrument affecting the transfer or sale of real property.
Why C.A.R. is Opposing AB 1574:
This is REAL money! If you impose a 1.75% private transfer tax the highest rate that's come to light so far on the state's median priced home of $567,690, that's a tax of almost $10,000, due and payable EVERY TIME the property is sold!
AB 1574 DOES NOT PLACE A CAP ON THE AMOUNT OF THE FEE.
The taxes are imposed on buyers EACH TIME the property sells. Private transfer taxes can go on and on and on. These taxes are collected as long as mandated by the deed, which can be indefinitely.
AB 1574 NOW CAPS THE DURATION OF THE FEE TO 99 YEARS, LONGER THAN MOST LIFETIMES!!
There are few controls over how the collected revenue is spent. AB 1574 allows the entities receiving the revenue to spend up to 10 percent on administration and overhead and there is no prohibition on using the funds for lobbying or litigation.
AB 1574 WILL PROVIDE AN ON-GOING SOURCE OF REVENUE TO NON-PROFITS WITH WHICH THEY CAN ADVANCE THEIR POLITICAL AGENDA.
Private transfer taxes increase the already substantial cost of buying a home. A recent C.A.R. study shows that every time the cost of a home increases by $10,000, another 200,000 purchasers can't afford to buy a home.
Despite what some developers claim, these aren't mitigation fees they're taxes. They don't necessarily benefit the assessed homeowners and, instead, serve largely as an ongoing revenue source for the organizations benefiting from the fee.
These taxes will hurt the housing market. Home buyers will either avoid homes that require paying a private transfer tax or seek to offset the cost of the tax.
Even the disclosure provided by AB 1574 is inadequate! For example, AB 1574 fails to provide prospective home buyers with any of the following information: actual cost estimates, expiration date of the fee, or notice that the cost of the tax should be weighed against any benefits when deciding whether to buy the home.
C.A.R. OPPOSES AB 1574 (HOUSTON) PRIVATE TRANSFER TAX
AB 1574 was scheduled to be heard by the Senate Transportation and Housing Committee on Tuesday, June 26. AB 1574 is the builder-sponsored response to C.A.R. sponsored SB 670 and would legitimize the use of private transfer taxes without real safeguards needed to protect home buyers.
C.A.R. is opposing AB 1574 because these "taxes" add to the cost of owning a home and will encourage a tidal wave of developers, private entities and others hoping to profit from increased sales prices that are not required to add value to the property. While the developers who currently employ this scheme try to define it as a "mitigation fee," implying that the funds somehow improve the property or the development, this is not required to be the case.
How We Got Here:
A loophole in California law lets developers and other non-government entities impose "private" transfer taxes (PTTs) on homes every time the property is sold--with NO oversight, NO accountability and NO limit on the number of separate private transfer taxes that can be piled onto a home. While AB 1574's supporters claimed that the bill addressed many problems with these taxes brought to light by C.A.R.'s bill, it really did nothing to fix them. As recently amended, AB 1574 requires that the Department of Real Estate to provide oversight for the imposition of PTTs and requires that these taxes be imposed though a covenant, restriction, or condition contained in any deed, contract, security instrument, or other instrument affecting the transfer or sale of real property.
Why C.A.R. is Opposing AB 1574:
This is REAL money! If you impose a 1.75% private transfer tax the highest rate that's come to light so far on the state's median priced home of $567,690, that's a tax of almost $10,000, due and payable EVERY TIME the property is sold!
AB 1574 DOES NOT PLACE A CAP ON THE AMOUNT OF THE FEE.
The taxes are imposed on buyers EACH TIME the property sells. Private transfer taxes can go on and on and on. These taxes are collected as long as mandated by the deed, which can be indefinitely.
AB 1574 NOW CAPS THE DURATION OF THE FEE TO 99 YEARS, LONGER THAN MOST LIFETIMES!!
There are few controls over how the collected revenue is spent. AB 1574 allows the entities receiving the revenue to spend up to 10 percent on administration and overhead and there is no prohibition on using the funds for lobbying or litigation.
AB 1574 WILL PROVIDE AN ON-GOING SOURCE OF REVENUE TO NON-PROFITS WITH WHICH THEY CAN ADVANCE THEIR POLITICAL AGENDA.
Private transfer taxes increase the already substantial cost of buying a home. A recent C.A.R. study shows that every time the cost of a home increases by $10,000, another 200,000 purchasers can't afford to buy a home.
Despite what some developers claim, these aren't mitigation fees they're taxes. They don't necessarily benefit the assessed homeowners and, instead, serve largely as an ongoing revenue source for the organizations benefiting from the fee.
These taxes will hurt the housing market. Home buyers will either avoid homes that require paying a private transfer tax or seek to offset the cost of the tax.
Even the disclosure provided by AB 1574 is inadequate! For example, AB 1574 fails to provide prospective home buyers with any of the following information: actual cost estimates, expiration date of the fee, or notice that the cost of the tax should be weighed against any benefits when deciding whether to buy the home.
Sunday, June 24, 2007
Multiple Factors Fueling Housing Decline, Recession Possible
Friday, June 22, 2007 - By Donald W. Riegle and Bartly Dzivi
The personal pain of losing one's home through foreclosure should not be understated, but as Warren Buffet remarked recently, the subprime mortgage problem is not likely by itself to trigger a recession.
Unfortunately, there are four other housing-related dominoes about to fall that will act to depress the economy over the next two years, and raise a very significant risk of recession.
The first domino is the rapid decline in mortgage equity withdrawal, the process that allows consumers to obtain cash through home equity lines and loans, mortgage refinancing, and home sales.
A recent study co-authored by Alan Greenspan indicates that consumers obtained approximately $1 trillion in cash through these techniques in 2005, which in turn boosted consumer spending by $325 billion that year.
Goldman Sachs has determined that the temporary boost to spending from the booming housing economy has already dropped from 7 percent of GDP in 2005 to 4 percent of GDP in 2006, and they project it will drop significantly again in 2007. Early indications for 2007 through the end of March show that home equity lines of credit had actually decreased over the prior six months - the first such drop since 1999.
The second domino may well topple with the scheduled interest rate increases in adjustable rate mortgages.
The Mortgage Bankers' Association estimates that up to $1.5 trillion of adjustable rate mortgages are scheduled to reset upward in 2007. And more of the same is in store for 2008. Because personal savings rates are already negative, higher monthly mortgage payments will necessarily decrease funds available to consumers for other spending.
The third domino - the wealth effect - refers to consumers spending a greater percentage of their income because they believe they have a higher net worth. Since a home is usually a person's largest asset, its current value has a big impact on most consumers' perceived wealth, and their spending habits.
The S&P/Case-Shiller home price index indicates national home prices have fallen about 1 percent since February 2006. The National Association of Realtors has predicted, for the first time since it has kept the statistic that the median price for all U.S. homes will decline by 1 percent in 2007.
The forth and final domino is just beginning to sway as the number of residential construction, real estate and mortgage finance jobs - which have increased greatly during the past six years - now are beginning to rapidly decline.
Early in the decade the housing boom swelled the membership of the National Association of Realtors by 500,000 from 2002 to now, and helped add more than 800,000 construction jobs from March 2004 to April 2006.
An analyst at Moody's calculates that 200,000 housing related jobs have already been lost since the peak of the housing market. An analyst at Citigroup estimates that 600,000 residential construction jobs, and an additional 300,000 manufacturing jobs tied to housing, will disappear in 2007.
The culmination of these falling housing dominos is the stagnation we are just beginning to see in consumer spending. The Commerce Department's report of weaker than expected consumer spending in March, the weakest since the fall of 2005 in the aftermath of Hurricane Katrina, appears to be the beginning of the consumer led slowdown.
This is a warning sign that troubled times lie ahead for businesses that sell to consumers - especially in regions where once robust appreciation in home prices has now reversed.
For example, automotive analysts found that 30 percent of automobiles sold in California in 2006 were financed with home equity loans. Now we see that retail auto sales declined 17 percent in California in just the first ten weeks of 2007.
While corporate profits have soared in recent years, workers' wages have not. From 2000 to 2005, real median family income actually declined in the U.S. Yet, consumers kept spending, temporarily boosted by cash from the housing boom.
So one must look at the overall recessionary risk to the economy from the gathering storm in the housing sector - a storm now being whipped into a potentially destructive whirlwind by higher interest rates, tighter credit standards, falling home prices, and corresponding contractions in consumer spending.
The weak employment report shows non-farm payrolls rose a mere 88,000 in April. The slowing economy is signaling a growing recession risk which could further accelerate the deflationary spiral now underway in the housing sector.
If as expected the employment, home sales price and consumer sales data for May confirm that the significant slowdown is continuing, the Federal Reserve should lower the Federal Funds rate by one-half of 1 percent at its June meeting. Then it should continue to monitor the data and take further easing action, if appropriate, during the rest of the year. This would provide some measure of direct relief to borrowers with adjustable rate loans, and provide needed stimulus to the rest of the economy.
The Federal Reserve and regulators that are properly addressing predatory lending practices also need to give housing lenders express guidance to prevent an overreaction that would worsen the decline of housing values.
The personal pain of losing one's home through foreclosure should not be understated, but as Warren Buffet remarked recently, the subprime mortgage problem is not likely by itself to trigger a recession.
Unfortunately, there are four other housing-related dominoes about to fall that will act to depress the economy over the next two years, and raise a very significant risk of recession.
The first domino is the rapid decline in mortgage equity withdrawal, the process that allows consumers to obtain cash through home equity lines and loans, mortgage refinancing, and home sales.
A recent study co-authored by Alan Greenspan indicates that consumers obtained approximately $1 trillion in cash through these techniques in 2005, which in turn boosted consumer spending by $325 billion that year.
Goldman Sachs has determined that the temporary boost to spending from the booming housing economy has already dropped from 7 percent of GDP in 2005 to 4 percent of GDP in 2006, and they project it will drop significantly again in 2007. Early indications for 2007 through the end of March show that home equity lines of credit had actually decreased over the prior six months - the first such drop since 1999.
The second domino may well topple with the scheduled interest rate increases in adjustable rate mortgages.
The Mortgage Bankers' Association estimates that up to $1.5 trillion of adjustable rate mortgages are scheduled to reset upward in 2007. And more of the same is in store for 2008. Because personal savings rates are already negative, higher monthly mortgage payments will necessarily decrease funds available to consumers for other spending.
The third domino - the wealth effect - refers to consumers spending a greater percentage of their income because they believe they have a higher net worth. Since a home is usually a person's largest asset, its current value has a big impact on most consumers' perceived wealth, and their spending habits.
The S&P/Case-Shiller home price index indicates national home prices have fallen about 1 percent since February 2006. The National Association of Realtors has predicted, for the first time since it has kept the statistic that the median price for all U.S. homes will decline by 1 percent in 2007.
The forth and final domino is just beginning to sway as the number of residential construction, real estate and mortgage finance jobs - which have increased greatly during the past six years - now are beginning to rapidly decline.
Early in the decade the housing boom swelled the membership of the National Association of Realtors by 500,000 from 2002 to now, and helped add more than 800,000 construction jobs from March 2004 to April 2006.
An analyst at Moody's calculates that 200,000 housing related jobs have already been lost since the peak of the housing market. An analyst at Citigroup estimates that 600,000 residential construction jobs, and an additional 300,000 manufacturing jobs tied to housing, will disappear in 2007.
The culmination of these falling housing dominos is the stagnation we are just beginning to see in consumer spending. The Commerce Department's report of weaker than expected consumer spending in March, the weakest since the fall of 2005 in the aftermath of Hurricane Katrina, appears to be the beginning of the consumer led slowdown.
This is a warning sign that troubled times lie ahead for businesses that sell to consumers - especially in regions where once robust appreciation in home prices has now reversed.
For example, automotive analysts found that 30 percent of automobiles sold in California in 2006 were financed with home equity loans. Now we see that retail auto sales declined 17 percent in California in just the first ten weeks of 2007.
While corporate profits have soared in recent years, workers' wages have not. From 2000 to 2005, real median family income actually declined in the U.S. Yet, consumers kept spending, temporarily boosted by cash from the housing boom.
So one must look at the overall recessionary risk to the economy from the gathering storm in the housing sector - a storm now being whipped into a potentially destructive whirlwind by higher interest rates, tighter credit standards, falling home prices, and corresponding contractions in consumer spending.
The weak employment report shows non-farm payrolls rose a mere 88,000 in April. The slowing economy is signaling a growing recession risk which could further accelerate the deflationary spiral now underway in the housing sector.
If as expected the employment, home sales price and consumer sales data for May confirm that the significant slowdown is continuing, the Federal Reserve should lower the Federal Funds rate by one-half of 1 percent at its June meeting. Then it should continue to monitor the data and take further easing action, if appropriate, during the rest of the year. This would provide some measure of direct relief to borrowers with adjustable rate loans, and provide needed stimulus to the rest of the economy.
The Federal Reserve and regulators that are properly addressing predatory lending practices also need to give housing lenders express guidance to prevent an overreaction that would worsen the decline of housing values.
Friday, June 15, 2007
Custom Home on 1/2 Acre in Newhall
21613 Placerita Canyon Road, Newhall, CA
$979,000
RARE Custom Ranch with Upgrades Galore & In-Town Location! Privacy plus, w/serene retreat from entry thru gated circular drive to customized home to park-like yard w/pool & gazebo! Every part of 1/2 acre utilized to the max. Description/photos don't do this home justice. Professional recent remodel in kitchen & baths. Extensive use of stone & wood floors and high wood-beamed ceilings. Extras incl lighted basketball court, massive heritage oak, dream kitchen & baths, 4th BR w/separate entrance and private gym.
4 Bedrooms
4 Baths
3010 Square Feet
1/2 Acre
Pool
2 Car Garage
Shown by Appointment Only To Pre-Qualified Buyers
Ray Kutylo and the SCV Home Team
Keller Williams VIP Properties
Santa Clarita
661-287-9164
More information at http://www.scvhometeam.com/
$979,000
RARE Custom Ranch with Upgrades Galore & In-Town Location! Privacy plus, w/serene retreat from entry thru gated circular drive to customized home to park-like yard w/pool & gazebo! Every part of 1/2 acre utilized to the max. Description/photos don't do this home justice. Professional recent remodel in kitchen & baths. Extensive use of stone & wood floors and high wood-beamed ceilings. Extras incl lighted basketball court, massive heritage oak, dream kitchen & baths, 4th BR w/separate entrance and private gym.4 Bedrooms
4 Baths
3010 Square Feet
1/2 Acre
Pool
2 Car Garage
Shown by Appointment Only To Pre-Qualified Buyers
Ray Kutylo and the SCV Home Team
Keller Williams VIP Properties
Santa Clarita
661-287-9164
More information at http://www.scvhometeam.com/
U.S. Foreclosures Rise a Whopping 90 Percent From One Year Earlier
IRVINE, CA - RealtyTrac® released its May 2007 U.S. Foreclosure Market Report, which shows a total of 176,137 foreclosure filings — default notices, auction sale notices and bank repossessions — were reported during the month, up 19 percent from the previous month and up nearly 90 percent from May 2006. The report also shows a national foreclosure rate of one foreclosure filing for every 656 U.S. households during the month.
“After a barely perceptible dip in April, foreclosure activity roared back with a vengeance in May,” said James J. Saccacio, chief executive officer of RealtyTrac. “Such strong activity in the midst of the typical spring buying season could foreshadow even higher foreclosure levels later in the year. Certainly not every community nationwide is seeing an increase in foreclosures, but foreclosed properties are becoming more commonplace and adding to the downward pressure on home prices in many areas.”
Nevada, Colorado, California post top foreclosure rates
Nevada registered a May foreclosure rate of one foreclosure filing for every 166 households — the nation’s highest for the fifth month in a row and nearly four times the national average. The state reported a total of 5,235 foreclosure filings during the month, a 40 percent increase from the previous month and nearly five times the number reported in May 2006.
Colorado documented the nation’s second highest state foreclosure rate, one foreclosure filing for every 290 households — 2.3 times the national average. The state reported 6,321 foreclosure filings, a nearly 9 percent increase from the previous month and an increase of more than 50 percent from May 2006. The state’s foreclosure total was eighth highest among the states.
California foreclosure activity increased 30 percent from the previous month and more than 350 percent from May 2006, boosting the state’s foreclosure rate to third highest in the country. California documented one foreclosure filing for every 308 households, more than twice the national average.
Other states with foreclosure rates ranking among the nation’s 10 highest in May were Florida, Ohio, Arizona, Georgia, Michigan, Indiana and Connecticut.
California, Florida, Ohio document largest foreclosure totals
For the fifth straight month California reported the most foreclosure filings of any state, with 39,659 in May. Florida reported 21,704 foreclosure filings, the second biggest state total. Foreclosure activity in Florida increased 52 percent from the previous month and 144 percent from May 2006, raising its foreclosure rate to one foreclosure filing for every 336 households — fourth highest among all the states.
With 13,214 foreclosure filings reported in May, Ohio documented the nation’s third highest state total for the third month in a row. The state’s foreclosure activity increased 16 percent from the previous month and more than 150 percent from May 2006, resulting in a foreclosure rate of one foreclosure filing for every 362 households — fifth highest among the states and 1.8 times the national average.
Other states with foreclosure filing totals among the nation’s 10 highest in May were Texas, Michigan, Georgia, Illinois, Colorado, Arizona and Nevada.
California cities continue to dominate top metro foreclosure ratesThe cities with the nation’s top three metropolitan foreclosure rates were all located in California, and three other California cities also documented foreclosure rates among the top 10.
A 49 percent increase in foreclosure activity ensured that Stockton, Calif., would continue to register the highest metropolitan foreclosure rate. The city reported one foreclosure filing for every foreclosure filing for every 88 households — nearly 7.5 times the national average.
Merced, Calif., documented the second highest metro foreclosure rate, one foreclosure filing for every 100 households, followed by Modesto, Calif., with one foreclosure filing for every 118 households. Other California metros in the top 10 were Riverside-San Bernardino at No. 5, Vallejo-Fairfield at No. 6, and Sacramento at No. 7. Other cities in the top 10 were Las Vegas at No. 4, Denver at No. 7, Detroit a No. 8, and Miami at No. 10.
“After a barely perceptible dip in April, foreclosure activity roared back with a vengeance in May,” said James J. Saccacio, chief executive officer of RealtyTrac. “Such strong activity in the midst of the typical spring buying season could foreshadow even higher foreclosure levels later in the year. Certainly not every community nationwide is seeing an increase in foreclosures, but foreclosed properties are becoming more commonplace and adding to the downward pressure on home prices in many areas.”
Nevada, Colorado, California post top foreclosure rates
Nevada registered a May foreclosure rate of one foreclosure filing for every 166 households — the nation’s highest for the fifth month in a row and nearly four times the national average. The state reported a total of 5,235 foreclosure filings during the month, a 40 percent increase from the previous month and nearly five times the number reported in May 2006.
Colorado documented the nation’s second highest state foreclosure rate, one foreclosure filing for every 290 households — 2.3 times the national average. The state reported 6,321 foreclosure filings, a nearly 9 percent increase from the previous month and an increase of more than 50 percent from May 2006. The state’s foreclosure total was eighth highest among the states.
California foreclosure activity increased 30 percent from the previous month and more than 350 percent from May 2006, boosting the state’s foreclosure rate to third highest in the country. California documented one foreclosure filing for every 308 households, more than twice the national average.
Other states with foreclosure rates ranking among the nation’s 10 highest in May were Florida, Ohio, Arizona, Georgia, Michigan, Indiana and Connecticut.
California, Florida, Ohio document largest foreclosure totals
For the fifth straight month California reported the most foreclosure filings of any state, with 39,659 in May. Florida reported 21,704 foreclosure filings, the second biggest state total. Foreclosure activity in Florida increased 52 percent from the previous month and 144 percent from May 2006, raising its foreclosure rate to one foreclosure filing for every 336 households — fourth highest among all the states.
With 13,214 foreclosure filings reported in May, Ohio documented the nation’s third highest state total for the third month in a row. The state’s foreclosure activity increased 16 percent from the previous month and more than 150 percent from May 2006, resulting in a foreclosure rate of one foreclosure filing for every 362 households — fifth highest among the states and 1.8 times the national average.
Other states with foreclosure filing totals among the nation’s 10 highest in May were Texas, Michigan, Georgia, Illinois, Colorado, Arizona and Nevada.
California cities continue to dominate top metro foreclosure ratesThe cities with the nation’s top three metropolitan foreclosure rates were all located in California, and three other California cities also documented foreclosure rates among the top 10.
A 49 percent increase in foreclosure activity ensured that Stockton, Calif., would continue to register the highest metropolitan foreclosure rate. The city reported one foreclosure filing for every foreclosure filing for every 88 households — nearly 7.5 times the national average.
Merced, Calif., documented the second highest metro foreclosure rate, one foreclosure filing for every 100 households, followed by Modesto, Calif., with one foreclosure filing for every 118 households. Other California metros in the top 10 were Riverside-San Bernardino at No. 5, Vallejo-Fairfield at No. 6, and Sacramento at No. 7. Other cities in the top 10 were Las Vegas at No. 4, Denver at No. 7, Detroit a No. 8, and Miami at No. 10.
Thursday, June 14, 2007
Timing the Market
Timing Your Purchase to the Market Cycle.
One problem with attempting to time your purchase to the business cycle is that even experts have problems accurately predicting the future economy. Even when they can, the real estate market does not necessarily move in tandem with the stock market or the economy as a whole.
Part of the reason is interest rates. When the economy is doing well, interest rates are generally higher. The result is that fewer people can afford houses. When the economy slows down, interest rates fall, the "affordability index" moves up and more people can afford houses.
As you can see, this cycle does not move "in sync" with the rest of the economy. It is also influenced by how many people have jobs, whether they are well-paying jobs, and consumer outlook for the future. All these factors make it difficult to know, in advance, whether the housing market is going to boom or bust. What makes most sense is the "buy and hold" strategy. Buy a home you expect to remain in for at least seven years or more.
Why You Should Not Wait to Purchase a Home.
Even if you could "time the market," that strategy would most benefit first-time buyers. You see, people who already have a home usually need to sell it in order to come up with the down payment for their next home. Even if they don't, they would have to carry the debt and obligations on two homes at the same time. This can create financial hardship, even when you rent out the previous home. There are maintenance costs, renters don't always make their payments on time, the rent may not cover the mortgage and other costs, and sometimes the property may be vacant.
So if you are a move-up buyer and want to purchase your next home during a depressed market, you generally have to sell your current home during that same depressed market. If you want to sell during a boom, then you also have to purchase during the same boom. It tends to equal out.
Finally, suppose you are a first-time buyer and wait think the end of a boom is near? If you guess wrong, are you going to wait...and wait...and wait...till the next depressed market? If so, you could miss out on loads of depreciation...and that is assuming you guess right about your market timing. In 1996, when the home market was struggling, who would have predicted what the next seven years would bring?
Are You Buying a House or a Home?
As you read and study about buying real estate, you will often find the words "house" and "home" used interchangeably. There is a huge difference between a house and a home.
A house can be a place to eat, sleep, park your car, and put all your "stuff" (including other family members). It is a material possession and an investment. A home is where you feel comfortable, warm, safe, and protected. A home is where you live.
A house is something you buy logically. A home is an emotional purchase. When buying real estate you have to balance your emotional wants and your logical needs because there will almost certainly be a time when the two conflict.
Example
For example, you may want a house with a view, but the payment is higher than you feel comfortable with on a thirty-year fixed rate mortgage. What do you do?
Purchase the house anyway and budget more carefully for the next few years? Buy the same house without the view and get it cheaper? Make a larger down payment by borrowing from your 401K or family members, so you get a lower payment? Get an adjustable rate mortgage with a smaller payment instead of a fixed rate loan? Or buy a smaller house and still get the view?
When viewing the house, most people look at it emotionally and envision it as a safe, happy, comfortable home. Later, when making the offer or filling out a mortgage application, your logic may begin to kick in, instead. That's when "buyer's remorse" may come up, but...that's a different article.
Balancing Act
The trick in buying real estate is to view all decisions with both a logical perspective and an emotional perspective. If a situation presents itself that requires a trade-off, decide on whether there is a huge conflict or a small one. Logic should win the big conflicts, but emotion should always be a factor, even winning the small ones.
You will find yourself owning a warm, happy, safe home – and an investment for the future at a price you are willing to pay.
One should consult with a qualified real estate planning professional like me prior to implementing any real estate planning strategies.
One problem with attempting to time your purchase to the business cycle is that even experts have problems accurately predicting the future economy. Even when they can, the real estate market does not necessarily move in tandem with the stock market or the economy as a whole.
Part of the reason is interest rates. When the economy is doing well, interest rates are generally higher. The result is that fewer people can afford houses. When the economy slows down, interest rates fall, the "affordability index" moves up and more people can afford houses.
As you can see, this cycle does not move "in sync" with the rest of the economy. It is also influenced by how many people have jobs, whether they are well-paying jobs, and consumer outlook for the future. All these factors make it difficult to know, in advance, whether the housing market is going to boom or bust. What makes most sense is the "buy and hold" strategy. Buy a home you expect to remain in for at least seven years or more.
Why You Should Not Wait to Purchase a Home.
Even if you could "time the market," that strategy would most benefit first-time buyers. You see, people who already have a home usually need to sell it in order to come up with the down payment for their next home. Even if they don't, they would have to carry the debt and obligations on two homes at the same time. This can create financial hardship, even when you rent out the previous home. There are maintenance costs, renters don't always make their payments on time, the rent may not cover the mortgage and other costs, and sometimes the property may be vacant.
So if you are a move-up buyer and want to purchase your next home during a depressed market, you generally have to sell your current home during that same depressed market. If you want to sell during a boom, then you also have to purchase during the same boom. It tends to equal out.
Finally, suppose you are a first-time buyer and wait think the end of a boom is near? If you guess wrong, are you going to wait...and wait...and wait...till the next depressed market? If so, you could miss out on loads of depreciation...and that is assuming you guess right about your market timing. In 1996, when the home market was struggling, who would have predicted what the next seven years would bring?
Are You Buying a House or a Home?
As you read and study about buying real estate, you will often find the words "house" and "home" used interchangeably. There is a huge difference between a house and a home.
A house can be a place to eat, sleep, park your car, and put all your "stuff" (including other family members). It is a material possession and an investment. A home is where you feel comfortable, warm, safe, and protected. A home is where you live.
A house is something you buy logically. A home is an emotional purchase. When buying real estate you have to balance your emotional wants and your logical needs because there will almost certainly be a time when the two conflict.
Example
For example, you may want a house with a view, but the payment is higher than you feel comfortable with on a thirty-year fixed rate mortgage. What do you do?
Purchase the house anyway and budget more carefully for the next few years? Buy the same house without the view and get it cheaper? Make a larger down payment by borrowing from your 401K or family members, so you get a lower payment? Get an adjustable rate mortgage with a smaller payment instead of a fixed rate loan? Or buy a smaller house and still get the view?
When viewing the house, most people look at it emotionally and envision it as a safe, happy, comfortable home. Later, when making the offer or filling out a mortgage application, your logic may begin to kick in, instead. That's when "buyer's remorse" may come up, but...that's a different article.
Balancing Act
The trick in buying real estate is to view all decisions with both a logical perspective and an emotional perspective. If a situation presents itself that requires a trade-off, decide on whether there is a huge conflict or a small one. Logic should win the big conflicts, but emotion should always be a factor, even winning the small ones.
You will find yourself owning a warm, happy, safe home – and an investment for the future at a price you are willing to pay.
One should consult with a qualified real estate planning professional like me prior to implementing any real estate planning strategies.
Tuesday, June 12, 2007
Housing Correction Duration Under Study at Harvard
By Glenn Roberts Jr. Inman News
The same forces that built up the housing boom also played a major role in its drop-off, according to the latest annual housing market report by Harvard University's Joint Center for Housing Studies.
"Except in the few areas facing real economic distress, this housing downturn has been driven largely by the market's own excesses. Chief among these is the oversupply of homes triggered by inflated demand from investors, second-home buyers and others intent on getting in on rapidly appreciating prices," according to "The State of the Nation's Housing" report.
Builders yanked the reigns on housing production to work off the oversupply, though "the retrenchment came too late," the report states. "Overbuilding does not appear to be quite as great today as in the years preceding the last major correction in 1987-1991, but it is close."
Markets such as Phoenix, which has strong job growth, should emerge first from the correction in housing inventory, the report states, while many overbuilt markets in California, Florida and the Washington, D.C., area "may not recover as quickly because their employment gains are not as great and their excess supplies are still high. These markets will be bellwethers for the duration and severity of the overall correction," the report states.
The fall of the real estate Gold Rush brought slowing homes sales, prices and production, and a rise in vacant for-sale homes, household debt and foreclosures.
Housing costs exceeded 30 percent of income for a record 37.3 million households in 2005, and the share of home mortgage debt in total household debt jumped from 65 percent in 2000 to 73 percent in 2006. "The rise in both mortgage and overall debt is evident for all households, all homeowners, and homeowners with mortgages, but is especially marked for low-income households," the report states.
The popularity of unconventional mortgage products and subprime lending during the real estate surge is now shaking out in rising mortgage payments, delinquencies and foreclosures. "The share of subprime loans originated in 2000 and foreclosed as of May 2005 was a distressing 12.9 percent," the report states, and "recently originated loans, which make up a much larger share of outstanding subprime mortgage debt, are on track to accumulate defaults at an even higher rate."
Among subprime adjustable-rate loans originated in 2006, by March 2007 the share of delinquencies or foreclosures was over 7 percent, compared to shares of less than 4 percent for 2005 loans and less than 2 percent for 2003 loans shortly after origination, the report states. The report cites research from Credit Suisse, which estimates the amount of adjustable-rate subprime debt resetting in 2007 and 2008 at $482 billion, with Alt-A loans accounting for an addition $57 billion worth of resets by 2008.
Things could get worse before they get better, according to the Harvard report. "Uncertainty about credit availability hangs over the housing market. While it is clear that lenders underestimated subprime risks, it is unknown how much worse conditions may get. It is especially troubling that subprime losses have been heavier than expected at only the first sign of softer prices and loan-rate resets. Much of the hope for a recovery in the for-sale markets now rests on the economy staging a soft landing, markets drawing down the excess supply, and loan performance improving," the report states.
It is uncertain when the real estate recovery will begin, the report states. "Now that the downturn is in full swing, the question of duration hangs over the market. Much depends on what happens with the economy, interest rates and credit availability. But it also depends importantly on just how much demand was inflated during the housing market run-up and how fast builders can work off the oversupply of homes."
Nicolas Retsinas, director of the Joint Center for Housing, said, "It's clear that we're in for a prolonged slump. Subprime lending and its implosion has certainly (delayed) any recovery."
The rate of job loss or growth is fundamental to the future of the housing market, Retsinas said, as is the extent to which foreclosures spike and the areas where foreclosures predominate.
Underlying demand for housing has propped up home prices, he said, noting that demographic trends are promising for household formation. But affordability remains a problem even with slowing or slight declines in price appreciation. Some markets are "hitting affordability ceilings," with a growth of overcrowding in some housing markets such as Los Angeles, he said.
"Even after the minimum-wage increase is fully implemented, households with a single minimum-wage worker will still be unable to afford even a modest two-bedroom rental apartment at today's rents anywhere in the country," the report states. "To escape ... heavy cost burdens, more and more households are resorting to long commutes or doubling up with other family members. With little regulatory relief in sight and slim chances for a significant expansion of federal (housing) subsidies, the prospects for a meaningful reduction in the number of housing cost-burdened households are dismal."
A market recovery should arrive quicker in the Northeast than in the Midwest, as the Midwest is wrestling with more severe economic problems than other U.S. regions, Retsinas said. The resale housing market recovery could begin later this year, he also said, while the recovery could be delayed until the end of 2008 for the new-home market.
The nation essentially "dodged the bullet of the housing market slump driving down the entire economy," though the real estate downturn "certainly dampened economic growth," Retsinas said.
Household growth is expected to grow from 12.6 million in 1995-2005 to 14.6 million in 2005-15, according to the report, because of high rates of immigration; the entry to the real estate market of "echo boomers," who are the children of the baby boom; and the longevity of pre-baby-boom generations.
Foreign-born U.S. consumers "are increasingly vital to the housing market, representing some 14 percent of recent home buyers and 18 percent of renters in 2005," the report states -- in California, New York, New Jersey and Florida about 20 percent of recent home buyers and 25 percent of renters are foreign-born.
"Home prices are likely to soften further," the report states, noting that most of the markets that experience drops in home prices typically have job losses and/or overbuilding. "Indeed, rapid price appreciation by itself seldom leads to corrections."
The same forces that built up the housing boom also played a major role in its drop-off, according to the latest annual housing market report by Harvard University's Joint Center for Housing Studies.
"Except in the few areas facing real economic distress, this housing downturn has been driven largely by the market's own excesses. Chief among these is the oversupply of homes triggered by inflated demand from investors, second-home buyers and others intent on getting in on rapidly appreciating prices," according to "The State of the Nation's Housing" report.
Builders yanked the reigns on housing production to work off the oversupply, though "the retrenchment came too late," the report states. "Overbuilding does not appear to be quite as great today as in the years preceding the last major correction in 1987-1991, but it is close."
Markets such as Phoenix, which has strong job growth, should emerge first from the correction in housing inventory, the report states, while many overbuilt markets in California, Florida and the Washington, D.C., area "may not recover as quickly because their employment gains are not as great and their excess supplies are still high. These markets will be bellwethers for the duration and severity of the overall correction," the report states.
The fall of the real estate Gold Rush brought slowing homes sales, prices and production, and a rise in vacant for-sale homes, household debt and foreclosures.
Housing costs exceeded 30 percent of income for a record 37.3 million households in 2005, and the share of home mortgage debt in total household debt jumped from 65 percent in 2000 to 73 percent in 2006. "The rise in both mortgage and overall debt is evident for all households, all homeowners, and homeowners with mortgages, but is especially marked for low-income households," the report states.
The popularity of unconventional mortgage products and subprime lending during the real estate surge is now shaking out in rising mortgage payments, delinquencies and foreclosures. "The share of subprime loans originated in 2000 and foreclosed as of May 2005 was a distressing 12.9 percent," the report states, and "recently originated loans, which make up a much larger share of outstanding subprime mortgage debt, are on track to accumulate defaults at an even higher rate."
Among subprime adjustable-rate loans originated in 2006, by March 2007 the share of delinquencies or foreclosures was over 7 percent, compared to shares of less than 4 percent for 2005 loans and less than 2 percent for 2003 loans shortly after origination, the report states. The report cites research from Credit Suisse, which estimates the amount of adjustable-rate subprime debt resetting in 2007 and 2008 at $482 billion, with Alt-A loans accounting for an addition $57 billion worth of resets by 2008.
Things could get worse before they get better, according to the Harvard report. "Uncertainty about credit availability hangs over the housing market. While it is clear that lenders underestimated subprime risks, it is unknown how much worse conditions may get. It is especially troubling that subprime losses have been heavier than expected at only the first sign of softer prices and loan-rate resets. Much of the hope for a recovery in the for-sale markets now rests on the economy staging a soft landing, markets drawing down the excess supply, and loan performance improving," the report states.
It is uncertain when the real estate recovery will begin, the report states. "Now that the downturn is in full swing, the question of duration hangs over the market. Much depends on what happens with the economy, interest rates and credit availability. But it also depends importantly on just how much demand was inflated during the housing market run-up and how fast builders can work off the oversupply of homes."
Nicolas Retsinas, director of the Joint Center for Housing, said, "It's clear that we're in for a prolonged slump. Subprime lending and its implosion has certainly (delayed) any recovery."
The rate of job loss or growth is fundamental to the future of the housing market, Retsinas said, as is the extent to which foreclosures spike and the areas where foreclosures predominate.
Underlying demand for housing has propped up home prices, he said, noting that demographic trends are promising for household formation. But affordability remains a problem even with slowing or slight declines in price appreciation. Some markets are "hitting affordability ceilings," with a growth of overcrowding in some housing markets such as Los Angeles, he said.
"Even after the minimum-wage increase is fully implemented, households with a single minimum-wage worker will still be unable to afford even a modest two-bedroom rental apartment at today's rents anywhere in the country," the report states. "To escape ... heavy cost burdens, more and more households are resorting to long commutes or doubling up with other family members. With little regulatory relief in sight and slim chances for a significant expansion of federal (housing) subsidies, the prospects for a meaningful reduction in the number of housing cost-burdened households are dismal."
A market recovery should arrive quicker in the Northeast than in the Midwest, as the Midwest is wrestling with more severe economic problems than other U.S. regions, Retsinas said. The resale housing market recovery could begin later this year, he also said, while the recovery could be delayed until the end of 2008 for the new-home market.
The nation essentially "dodged the bullet of the housing market slump driving down the entire economy," though the real estate downturn "certainly dampened economic growth," Retsinas said.
Household growth is expected to grow from 12.6 million in 1995-2005 to 14.6 million in 2005-15, according to the report, because of high rates of immigration; the entry to the real estate market of "echo boomers," who are the children of the baby boom; and the longevity of pre-baby-boom generations.
Foreign-born U.S. consumers "are increasingly vital to the housing market, representing some 14 percent of recent home buyers and 18 percent of renters in 2005," the report states -- in California, New York, New Jersey and Florida about 20 percent of recent home buyers and 25 percent of renters are foreign-born.
"Home prices are likely to soften further," the report states, noting that most of the markets that experience drops in home prices typically have job losses and/or overbuilding. "Indeed, rapid price appreciation by itself seldom leads to corrections."
Tuesday, June 05, 2007
Borrowers moving to fixed-rate mortgages
The biggest shift in mortgage trends has come from consumers who have been fleeing to the relative safety of fixed-rate loans over the last 15 months. Adjustable-rate mortgages that enjoyed popularity during the housing boom aren't nearly as attractive nowadays, Doug Duncan, chief economist for the Mortgage Bankers Association, said at a conference of the National Association of Real Estate Editors last week. ARMs made up a 41.9 percent share of all mortgage originations in January 2006 but have "plummeted" since to an 18.4 percent share in March 2007. With a shrinking spread between ARM interest rates and fixed rates, borrowers don't have as much of an incentive to bypass a more stable fixed-rate loan.
A survey recently released by TransUnion's TrueCredit.com also showed a year-over-year decrease in the number of those with ARMs. According to the survey, 24 percent of American homeowners with a mortgage said they were concerned about the monthly cost of their loans; 13 percent are worried they'll end up owing more than what their home is currently worth. In addition, 11 percent are worried about a payment increase when their ARMs adjust and seven percent are worried about not being able to refinance at all.
And the tightening of lending standards has not had much impact on mainstream borrowers, economists said at the NAREE conference. Citing statistics from a recent Federal Reserve survey of loan officers, Duncan said that 56 percent of loan officers were tightening their standards for subprime mortgages and 45 percent were tightening standards on nontraditional or Alt-A loans. In the meantime, only about 15 percent were tightening standards for prime borrowers, according to the Fed's report.
A survey recently released by TransUnion's TrueCredit.com also showed a year-over-year decrease in the number of those with ARMs. According to the survey, 24 percent of American homeowners with a mortgage said they were concerned about the monthly cost of their loans; 13 percent are worried they'll end up owing more than what their home is currently worth. In addition, 11 percent are worried about a payment increase when their ARMs adjust and seven percent are worried about not being able to refinance at all.
And the tightening of lending standards has not had much impact on mainstream borrowers, economists said at the NAREE conference. Citing statistics from a recent Federal Reserve survey of loan officers, Duncan said that 56 percent of loan officers were tightening their standards for subprime mortgages and 45 percent were tightening standards on nontraditional or Alt-A loans. In the meantime, only about 15 percent were tightening standards for prime borrowers, according to the Fed's report.
Monday, June 04, 2007
Foreclosures Like To Surge Next Year, Analysts Say
By Glenn Roberts Jr. Inman News
While part of the real estate downturn is behind us now, the buyer's market will likely continue for at least two more years, foreclosures are likely to surge and "we're heading into a year with some more price declines," a real estate consultant told an audience of building-industry professionals on Thursday.
John Burns, a consultant who presented a housing market outlook during the annual Pacific Coast Builders Conference in San Francisco, said that a combination of factors, including low interest rates and unconventional mortgage products, dug deep into the pool of future home buyers during the prolonged real estate boom. And the market is still adjusting, he said.
"I know with a very high level of confidence that the number of foreclosures is going to surge," he said, as a high volume of subprime loans and other adjustable-rate loans are headed for a major reset in rates.
"It's really going to occur -- most of it -- next year, so we're going to see some foreclosures and just be prepared for that." The subprime market accounted for 18 percent of all mortgage purchases in 2005 and 25 percent of all home purchases in California, he also noted.
Other economists and building-industry representatives also offered their views on the future of the housing market, and provided statistics on projected housing starts, sales and demographic trends.
Builders have dropped home prices to motivate buyers in the slowing sales environment -- up to 21 percent in some markets -- and "any new home you're selling is a screaming deal compared to any resale deal a consumer is looking at" because the resale market has not been as quick to adjust pricing, Burns said, adding that resale pricing may catch up with new-home pricing.
Meanwhile, National Association of Home Builders president Brian Catalde, who met with reporters at the conference, downplayed the problems in the subprime mortgage market. "Economists generally agree that the downturn in housing will not push the nation into a recession, and the situation in the subprime mortgage (market) is not likely to dramatically affect the economy."
He added, "In fact, we've heard a lot about the subprime mortgages -- there's no reason to push the panic button. The subprime sector is an important but relatively small slice of the overall mortgage market. The market is self-correcting. The investors have pulled back, the underwriting standards have tightened, abuses have been curbed and the bad guys have gone out of business."
He said that the association expects the housing market to begin to climb out of its slump early next year, though "the first stages of the return will be sluggish."
The association expects a 21 percent drop in total housing starts and 18 percent drop in new-home sales this year compared to 2006 -- the association's projection is 1.45 million housing starts in 2007, including 1.1 million for single-family home starts.
Raphael W. Bostic, associate director of the University of Southern California's Lusk Center for Real Estate, said the word that best characterizes the state of the national economy is "uncertainty," with mixed statistics on job creation and a decline in the growth of U.S. gross domestic product. Energy costs have risen dramatically and food costs have also been on the rise, particularly in the West, he said.
"We're in a very uncertain time and what this has translated to is a tremendous amount of uncertainty and nervousness and anxiety on the part of the American consumer. Nearly 70 percent of the U.S. economy is driven by consumer consumption so if households are not consuming the economy is not going to grow and we are all going to feel a considerable amount of pain," Bostic said.
Also, the nation's economy is increasingly tied to international decisions, he said. "As the world gets more integrated, we face continued and increasing exposure to things that happen overseas," such as investments from China and the Middle East, he said.
Bostic noted that Western states continue to dominate the list of U.S. states with the fastest home-price appreciation, though former leaders such as California, Nevada and Arizona have been bumped out by states such as Utah, Wyoming, Idaho, Washington and Oregon.
San Diego and Miami are among the "poster children for wild rides in the market," with significant swings in real estate prices, Bostic said. Some common elements for markets with declining prices are a high degree of speculation and a significant spurt of building, he also said.
Delores A. Conway, director for the Casden Real Estate Economics Forecast produced by the USC Lusk Center, said that economic problems -- such as major job losses in cities like Detroit -- can contribute to home-price declines.
Conway said home-price appreciation has slowed in all major California cities, with home-price appreciation slowing from 23 percent year-over-year at one point to a recent level of about 1 percent year-over-year in the San Bernardino, Calif., area, for example, owing in part to over-building.
Dowell Myers of USC, who presented a report on demographic trends with immigration and baby boomers, said there is a looming "generational housing bubble" in California as home-price affordability becomes a major hurdle for the next generation of buyers.
Myers noted that home prices in California were 150 percent higher than those in Texas in 2000 and have since escalated to 350 percent higher.
Alan Nevin, chief economist for the California Building Industry Association, said during a Thursday conference call that the association has lowered its expectations for building permits this year.
The association expects 90,000 to 100,000 total single-family building permits this year and 45,000 to 55,000 permits for multifamily projects, for a total of 135,000-155,000 permits, which compares with an earlier forecast of 155,000 to 175,000 permits for 2007 in California.
While part of the real estate downturn is behind us now, the buyer's market will likely continue for at least two more years, foreclosures are likely to surge and "we're heading into a year with some more price declines," a real estate consultant told an audience of building-industry professionals on Thursday.
John Burns, a consultant who presented a housing market outlook during the annual Pacific Coast Builders Conference in San Francisco, said that a combination of factors, including low interest rates and unconventional mortgage products, dug deep into the pool of future home buyers during the prolonged real estate boom. And the market is still adjusting, he said.
"I know with a very high level of confidence that the number of foreclosures is going to surge," he said, as a high volume of subprime loans and other adjustable-rate loans are headed for a major reset in rates.
"It's really going to occur -- most of it -- next year, so we're going to see some foreclosures and just be prepared for that." The subprime market accounted for 18 percent of all mortgage purchases in 2005 and 25 percent of all home purchases in California, he also noted.
Other economists and building-industry representatives also offered their views on the future of the housing market, and provided statistics on projected housing starts, sales and demographic trends.
Builders have dropped home prices to motivate buyers in the slowing sales environment -- up to 21 percent in some markets -- and "any new home you're selling is a screaming deal compared to any resale deal a consumer is looking at" because the resale market has not been as quick to adjust pricing, Burns said, adding that resale pricing may catch up with new-home pricing.
Meanwhile, National Association of Home Builders president Brian Catalde, who met with reporters at the conference, downplayed the problems in the subprime mortgage market. "Economists generally agree that the downturn in housing will not push the nation into a recession, and the situation in the subprime mortgage (market) is not likely to dramatically affect the economy."
He added, "In fact, we've heard a lot about the subprime mortgages -- there's no reason to push the panic button. The subprime sector is an important but relatively small slice of the overall mortgage market. The market is self-correcting. The investors have pulled back, the underwriting standards have tightened, abuses have been curbed and the bad guys have gone out of business."
He said that the association expects the housing market to begin to climb out of its slump early next year, though "the first stages of the return will be sluggish."
The association expects a 21 percent drop in total housing starts and 18 percent drop in new-home sales this year compared to 2006 -- the association's projection is 1.45 million housing starts in 2007, including 1.1 million for single-family home starts.
Raphael W. Bostic, associate director of the University of Southern California's Lusk Center for Real Estate, said the word that best characterizes the state of the national economy is "uncertainty," with mixed statistics on job creation and a decline in the growth of U.S. gross domestic product. Energy costs have risen dramatically and food costs have also been on the rise, particularly in the West, he said.
"We're in a very uncertain time and what this has translated to is a tremendous amount of uncertainty and nervousness and anxiety on the part of the American consumer. Nearly 70 percent of the U.S. economy is driven by consumer consumption so if households are not consuming the economy is not going to grow and we are all going to feel a considerable amount of pain," Bostic said.
Also, the nation's economy is increasingly tied to international decisions, he said. "As the world gets more integrated, we face continued and increasing exposure to things that happen overseas," such as investments from China and the Middle East, he said.
Bostic noted that Western states continue to dominate the list of U.S. states with the fastest home-price appreciation, though former leaders such as California, Nevada and Arizona have been bumped out by states such as Utah, Wyoming, Idaho, Washington and Oregon.
San Diego and Miami are among the "poster children for wild rides in the market," with significant swings in real estate prices, Bostic said. Some common elements for markets with declining prices are a high degree of speculation and a significant spurt of building, he also said.
Delores A. Conway, director for the Casden Real Estate Economics Forecast produced by the USC Lusk Center, said that economic problems -- such as major job losses in cities like Detroit -- can contribute to home-price declines.
Conway said home-price appreciation has slowed in all major California cities, with home-price appreciation slowing from 23 percent year-over-year at one point to a recent level of about 1 percent year-over-year in the San Bernardino, Calif., area, for example, owing in part to over-building.
Dowell Myers of USC, who presented a report on demographic trends with immigration and baby boomers, said there is a looming "generational housing bubble" in California as home-price affordability becomes a major hurdle for the next generation of buyers.
Myers noted that home prices in California were 150 percent higher than those in Texas in 2000 and have since escalated to 350 percent higher.
Alan Nevin, chief economist for the California Building Industry Association, said during a Thursday conference call that the association has lowered its expectations for building permits this year.
The association expects 90,000 to 100,000 total single-family building permits this year and 45,000 to 55,000 permits for multifamily projects, for a total of 135,000-155,000 permits, which compares with an earlier forecast of 155,000 to 175,000 permits for 2007 in California.
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