What are They Doin’ With My Money Now?

The government is trying to come up with some kind of plan to rescue (or bail out) failing mortgage banks and investment firms with billions of dollars of taxpayer's money.

I hesitate to write this because I’m neither an economist nor a politician, however, the banking problems on Wall Street are on everyone’s minds and there is a lot of confusion and misunderstanding. I’ve been trying to read up on it because, as a Realtor, I’m expected to know what’s going on, right? I try… The news is changing so rapidly right now that it’s hard to keep up. Let me give a couple views of what’s happening…

BACKGROUND
Throughout the ‘good times’ of the last decade there were a couple trends going on. It became politically correct to encourage broader home ownership. The Community Reinvestment Act was revised in 1995 to require Fannie Mae & Freddie Mac to devote a percentage of their lending to support affordable housing. In effect, these new rules loosened loan qualifications to allow more people to become homeowners. This was supported by nearly everyone involved because it meant that more homes were selling, more loans were made, and more people were buying homes. It worked as long as home prices continued to rise.

Once housing markets began to slow down and prices started to fall, many of these homes were no longer worth what was owed for them. If the homeowners didn’t keep paying, then the banks were stuck with homes that they could not sell. What was an asset became a liability.

The core of a bank’s business is loaning money, and when their assets are worthless, their ability to loan funds is gone. Therefore, some of these banks are failing. When this happens in large numbers, the government gets very nervous and wants to do something.

BAILOUT TIME?
So, Congress is trying to come up with a plan. The most recent proposal was a $700 Billion ‘bail out’ that would buy up these ‘assets’ that the banks cannot sell to anyone else. This is the core purpose- to take these lousy home loans off of lender’s books. The loans are no longer liquid and no one knows what they are really worth.

Some people are saying that the government could make a profit down the road by buying up these assets and selling them later. This is a possibility, but there aren’t many people that would say that we want the government investing our tax dollars in this. The real goal of the bail out is to stabilize the financial ‘crisis’ so that consumer confidence can be restored- a key factor in the recovery of the housing market or stock market.

If the government does buy these questionable mortgages, it is likely that they will also initiate some kind of ‘work out’ plan to help reduce the number of foreclosures and get homeowners set up with payments that they can afford. After doing this, they hope that the number of mortgages headed toward default would decrease.

ANOTHER VIEW
Some economists say that the banks should be allowed to file bankruptcy. Jeffrey A. Miron, writing for CNN, shares this point of view. He writes, “Bankruptcy does not mean that the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a business that remains profitable.”

Miron also calls the talk about the economy collapsing “ridiculous scare-mongering”. He contends that if these ailing banks go under, then some other company will step up to make the loans as long as there is profit to be made.

FEAR DRIVING DECISIONS
Dave Ramsey, personal finance guru and syndicated talk show host, has his own plan that he’s calling the “Common Sense Fix”. He says that fear is driving a lot of decision-making going on and this is only heightened because of the election and current political climate.

Ramsey’s one page plan includes three things: 1. Provide government-backed insurance for sub-prime mortgages (with strings attached to help restructure delinquent loans), 2. Change the Mark to Market accounting rules and 3. Remove the capital gains tax completely- flooding the market with investor funds, not taxpayer dollars.

It’s clear that there is a lot of fear out there. It appears that our financial systems were built on shaky ground, which is a good reason to be a little skeptical right now. Who do we trust in a time when everyone seems to have political motives or a company to save? Can the same people that guided us into the mess now fix it?

CLEANING HOUSE
Hopefully, the net result of this complex situation is that we do find a solid footing for our markets and restoration of our confidence. Whenever you clean house, it usually gets messy before things get organized again. That may be what we’re experiencing right now.

-Peter

www.NashvilleCityHomes.com

A Closer Look At PMI

PMI stands for private mortgage insurance. No one really cares about it until it's time to get a mortgage. If you aren't putting down at least 20% expect to see a PMI charge as part of your payment each month. It's basically like paying an extra 1% of interest on your loan per year.

Why would anyone do that?!

The banks require it. In the olden days, buyers HAD to have a decent down payment so that the banks felt comfortable loaning the money. In order to increase their business the banks figured out a way to offset this risk to an insurance company that insures them against default. Of course, the buyer has to pay for this.

Note that I said, "insures them [banks] against default". This will benefit the banks, -not you, the borrower. If you default, the PMI company may cover the bank's losses, but they can then come after you for the money unless the bank has forgiven the loan.

I was meeting with a seller the other day who thought the whole thing was crazy. He said, "The banks think we can't afford $1100 a month, so instead they charge PMI, increasing the total payment to $1200 a month! That doesn't make any sense!"

He's right, but having PMI was the only way that the bank would have made this loan. It was figured into the payment from the beginning and without it, he might still be renting.

The good thing is that Federal law requires PMI to drop off after you have at least 22% equity in the home. You can also be proactive and get them to remove it as soon as you reach 20% equity in the home. Contact your lender to find out how they handle it. If you've made improvements or had substantial appreciation you may be able to have the home appraised to show the increase in equity and get the PMI removed.

Please note that I am not a mortgage guy so check with your lender to better understand your exact situation and how PMI affects you.

-Peter

www.NashvilleCityHomes.com

Making An Offer With an FHA Loan

With the changes in the mortgage industry many home buyers are turning to FHA Loans because they still offer the opportunity to purchase a home with little or no down payment. There has been a noticeable increase in buyers using FHA even among my own clients.

The problem is that there are a lot of misunderstandings about how this works, some of which I addressed in my article, "Myth-Busting FHA Loans...". Today I wanted to talk about how to structure an offer when you're using FHA.

Two main questions-
1. Should we ask for the Seller to pay for some or all of your closing costs?
2. Do we need to ask the Seller for down payment assistance?
Both of these items are built into the offer, often on raising the sales price so that the bottom line is still agreeable to the Seller.

Closing costs are extremely common to ask for. The costs vary, but most programs will only let the Sellers pay 3% of the purchase price toward your closing costs and prepaids. This will save you (as the buyer) some out-of-pocket cash and basically let you roll these fees into your loan. We want to make sure to include this in the offer.

The misunderstandings come when we're talking about down payment assistance. Currently, the Seller can contribute to a 'charity' such as Ameridream which, in turn, will contribute toward the down payment. There are rumors that new legislation in congress will change this, but for now, it's still happening. (Read how it works here.) It's best to talk to your lender about this because often then banks will have specific wording that they want put in the contract to make this happen. So, in addition to asking for closing costs, we would ask for 3-5% of the purchase price to be paid toward the down payment.

Help the Seller Understand
Often, the biggest hurdle to overcome with an FHA-financed offer is helping the Seller understand it. They often think that the Buyer is trying to be sneaky and take advantage of them. The key is to tabulate all of the numbers and focus on their net proceeds- how much they will make from the sale. It can also be helpful to compare these numbers to how a conventional loan would be handled so they see the differences.

The goal in every negotiation is agreement- a win/win situation. For the most part, Sellers seem open to these type of offers, but it takes a little more time to educate them and build trust. As it becomes more common, I'm sure it will get easier for us all.

-Peter

www.NashvilleCityHomes.com

Myth-busting FHA Loans- A Success Story

With the tightening of loan qualifications with most lenders, the 100% financing of yesteryear is all but gone. However, there is a way with FHA. In fact, I had some clients close last week who bought a home with nothing to pay except a little earnest money.

FHA loans are quite mystifying until you worked with them a couple times. I’m not mortgage guy, but let me explain the basics from my experience, both on the buying and selling side of them. First, a couple myths to bust:

MYTH 1- FHA will require lots of repairs
Years ago this may be a concern, but the revisions made in January 2006 loosened many of the guidelines, requiring fewer items to be repaired. The inspection for these repairs is done by an FHA approved appraiser as part of the appraisal.

MYTH 2- Sellers will have extra hidden costs to pay
As with any contract, everything is negotiable. It is very common that the sellers will assist with the buyer’s closing costs or possibly contribute to a charity like Ameridream to give the buyers some down payment assistance, but this is all negotiated upfront. Before we have a binding contract, the seller will know their net proceeds from the sale without fear of surprise costs due to the FHA financing.

MYTH 3- Financing for FHA buyers is more likely to fall through
I doubt it’s any more likely than with any other financing. I’m not sure about the exact stats, but the strength of a buyer’s pre-approval is always suspect until the lender has actually collected the required paperwork to make sure that they qualify and that no surprises lurk beneath the surface. It’s always good to work closely with the lenders to make sure that the buyers really are qualified, but sellers who are worried about this should probably just be thankful to have a buyer, right? :)

To achieve a 100% loan through FHA, the seller or possibly a family member contributes to a charity such as Ameridream who will, in turn, contribute toward the buyer’s downpayment. Sellers are often uncomfortable with this at first, but I always try to explain it upfront so that they understand how it works. The funds are built into the sales price and negotiated upfront. It’s completely legal, but still a little complicated. I wrote more about these programs in this article from Jan. 2007.

Back to real life… My clients last week bought a historic home built in 1932. It hadn’t been renovated, but has been in the same family since the ‘60’s. It wasn’t in major disrepair, but still had some old knob & tube wiring, and all the plaster walls intact. Very low funk factor. The only FHA repair we had to do was to replace a portion of the roof that had an obvious leak that had come through the drywall in a back addition on the house. This was no problem, since the buyers were going to fix that anyway. (It helped that their Realtor [me] occasionally does some roofing and drywall, eh?)

The lending bank was a slow mover that I’ll avoid in the future, but otherwise, the process went smoothly. In the end, the buyers were thrilled and excited to finally own a home of their own. They’ve already started ripping up carpet to reveal some well-preserved hardwood floors.

After a few successful closings involving FHA financing, I’m a fan. They do require some extra work and sometimes a lot of patience, but a qualified buyer can still own a home without a down payment.

Just make sure you work with a great lender and Realtor who can get it done for you. Thinking about it? Give me a call.

-Peter
www.NashvilleCityHomes.com

An (Unnecessary) Foreclosure Victim

I was sad to see a new listing pop up this week. It was one of my previous listings that had since been foreclosed on and was now for sale by the bank. The sad part is that the bank foreclosed even though I had sent them a legitimate offer as part of a short sale.

It was the classic case of getting the runaround from the bank. We listed the property and got offers. I had all the paperwork in order and had jumped through all the hoops to submit the offer to the lender- one of the big players in the sub-prime loan game. However, once it was ready for the banks consideration- no reply.

Worse, when I called them to check on the status (enduring excruciating hold times), if I ever talked to a human they would tell me that I needed to talk to someone in a different department and then proceed to give me the exact phone number that I had just called in the first place.

I don't want to scare you away from attempting a short sale or trying to buy a house this way, but just be prepared to wait. It's not uncommon to wait weeks or months waiting for a response from the bank. In our case, the seller apparently didn't have that kind of time.

I know that the bank's 'loss mitigation departments', as they are often called, are completely swamped at this point. I suppose we may have been moved to the top of the heap if this was a high dollar property. Still, the home was a really big deal to my client and I'm sorry to see it end this way.

-Peter

www.NashvilleCityHomes.com

Fear Hurting the Markets?

On my way home after an appointment with some fantastic clients, I turned on the radio and caught Neal Cavuto being interviewed about the economy. Cavuto has always seemed like a fairly level headed fellow to me so I was interested to see what he thought of things.

Cavuto offered an insightful perspective on some of the economic dynamics going on right now. He said that the problem was NOT because banks don't have the money to loan- they do. They are just afraid of making bad deals so they've tightened their qualifications and really limited the mortgage options available, especially to 'less qualified' buyers.

He also said that the problem also is NOT that qualified home buyers aren't able to get the loans either- they can! Instead of buying, many buyers are waiting, scared to buy a home that may go down in value.

Bottom line- FEAR is hurting our economy right now.

I tend to agree with this insight. Not that there aren't other issues going on (and plenty of things to be afraid of!), but so much of the strength of the economy is based on perception or our confidence in it.

Instead of screaming that the 'sky is falling' Cavuto talked about our economy working in cycles and that certain 'corrections' are to be expected. He said that people should simply not expect to keep seeing home prices increase at 30% a year without some sort of correction. However, while these times can be painful, the overall economic slope is strong and is historically resilient.

Note: I am no economist. I'm a Realtor. :) However, I'm seeing the trickle down effects of this:

1. My investor clients are having a little more difficulty qualifying for loans that were easy just a year ago.
2. Builders are halting projects as new construction loans are drying up, waiting for new home inventories to decrease.
3. Buyers that aren't relocating are taking their time to find a home. Demanding more for less money. They've got the leverage right now.

Of course there are many opportunities out there right now- if you know where to look.

-Peter

www.NashvilleCityHomes.com

Keep Everything on the Table (and Avoid Jail)

It's not unusual in a real estate transaction to have the Sellers contribute toward the Buyer's closing costs. Buyers that are short on cash, but have the credit to get a mortgage often ask for this to help cover their out-of-pocket expenses. This is all fine and acceptable as long as it's DISCLOSED to all parties and APPROVED by the lender.

This means that all the transfers of monies related to a specific real estate transaction are listed on the HUD settlement statement at closing. This disclosure is important, mainly because the lender wants to make sure that the money being borrowed is actually paying for the property that secures the loan and not going to the buyer as cash under the table at closing.

Here's a real life example: I know of a situation where a lender (off the record, of course) told a buyer that in order to get some extra cash that she needed for repairs she could raise the sales price and then ask the seller to cut a personal check back to her outside of closing. At first, this may sound like a great idea, right? Why not? The seller gets their money, the buyer gets the house, the lender closes the deal. Here's why: IT'S FRAUD.

Mortgage fraud, actually, which makes it extremely odd that the lender would even suggest it 'off the record'. Lenders usually have a cap on how much can be contributed by the Seller- typically 3-4% of the sales price. If the buyer needs more cash for repairs, they can get a second home equity loan or get a second job, but they can't get it from the Seller outside of closing.

Cash-Back Schemes: The buyer and seller collude to deceive the lender as to the true sale price of a property. The seller gives the buyer a cash rebate which is not disclosed to the lender. As a result the lender lends too much, and the buyer and seller pocket the overage. This scheme usually requires appraisal fraud to deceive the lender. "Get Rich Quick" real-estate gurus' courses frequently rely heavily on this mechanism for profitability. (From Wikipedia)

Mortgage fraud is a federal crime and penalties can be quite severe. For me, I prefer to stay out of jail so don't call me if you're planning to try it!

Click here for a great article about if from Bankrate.com.

-Peter

www.NashvilleCityHomes.com
REALTOR. City Home Specialist.

Charities Giving Down Payment Assistance

I’m currently working with a couple clients that are getting FHA insured loans. This program offers assistance to homebuyers that may not qualify for typical conforming loans with competitive rates. They also offer loans with down payments as low as 3% and even that can be paid for by a grant from a charity. What!!?? A charity?

Yes. FHA regulations state that a home seller cannot directly contribute to a buyer’s down payment. However, they can contribute to a non-profit charity, which, in turn, gives down payment assistance to the buyer. It sounds a little shady, but it is a very common practice.

Of course the sellers of the home aren’t going to contribute to this ‘down payment charity’ for the good of all mankind! This contribution is just added to the sales price. That means if a buyer wants to purchase a $100,000 home and needs the 3% down payment assistance, they should offer –roughly- $103,000 for it.

It is common for buyers to make such requests. Typically a buyer may offer a higher price if the sellers will pay a portion of the buyer’s closing costs. Some sellers will balk at this, but most are just interested in the NET, or what is left for the Seller after all those costs are paid.

This system is, for the most part, good. The sellers get their home sold, and the buyer gets a home without a lot of up-front cash. However, one problem that may arise is that the price may have been inflated to account for these costs. For example, our $103,000 sale from above would be more accurately recorded as a $100,000 sale. The problem could be that the property may not appraise for that amount and the deal would fall through, or the buyer may be generally paying too much for a home in order to finance his/her downpayment into the deal.

I was speaking to one mortgage broker recently who works with many first time homebuyers. He said that probably 85% of his business deals with FHA loans. A couple of the lenders I work with have mentioned that the FHA has loosened their eligibility requirements a little over recent years making it easier for people and homes to qualify. This means I'm sure to see a lot more FHA loans in my clients futures.

For more information, click here for a great article I found from BankRate.com.

Have questions? Contact me here.

Have a ‘charitable’ day,

-Peter

www.NashvilleCityHomes.com
REALTOR. City Home Specialist.