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What Happens When You Walk Away From Your Home?

2012-02-01T16:38:00Z

It was just last summer that Charlotte Perkins made the hardest decision of her life as she and her husband Jim were caught in the vise of the housing bust.

Wanting to downsize their lives as they headed toward retirement, they bought a new house in Mesa, Arizona, before they sold the old one, also in Mesa. Their previous home had been appraised at nearly $400,000 at the height of the market, but as the housing crisis ravaged Arizona, they were told they'd be lucky to get $200,000 for it.

They were carrying a loan of $260,000 on their original home alone, meaning they were well 'underwater,' owing much more than it was worth. Combined with the mortgage on the new house, their housing payments had become an "anchor around our necks," she says, threatening to gobble up all their retirement savings and leave them with nothing.

The couple made a difficult call: They would do a 'strategic default,' and simply stop paying the old mortgage. "We really had to wrestle with it," said Perkins, 60. "We had worked all of our lives to build good strong credit, and we're proud people. But it came down to, 'Can we keep doing this?' We had to say 'No.'"

As the housing bust drags on, many homeowners are thinking like Perkins. Almost 11 million homes are now underwater, says financial information provider CoreLogic. Around 3.5 million homeowners are behind in their payments and another 1.5 million homes are already in the foreclosure process, according to online marketplace RealtyTrac.

As banks start to work through their backlog of distressed properties, the New York Federal Reserve estimates that 3.6 million foreclosures will take place during the next couple of years.

So, the question is: Does it make sense to keep paying a massive mortgage, knowing that it might be decades before a home regains its prior value? Or is that akin to - as columnist James Surowiecki recently wrote in the New Yorker - "setting a pile of money on fire every month"?

"I constantly get the saddest e-mails from people saying, 'I've exhausted all my life savings, my retirement is gone, and now I have to default,'" said Jon Maddux, CEO of YouWalkAway.com,

a foreclosure agency that helps clients with strategic default (and charges a fee for it). "But if they had seen the writing on the wall a couple of years earlier, stopped paying the mortgage and stayed in the home throughout the whole process, they would be in a much better financial position."

Moral Quandary

There's a moral component to that decision, of course. People naturally feel embarrassed about breaking a contract and not paying their bills; no one wants to be branded a deadbeat. But remember that companies default on their obligations when it makes financial sense for them to do so, via the bankruptcy process. Even the Mortgage Bankers Association itself, in a flourish of irony, arranged for a short sale of its Washington headquarters.

It's not personal; it's business. So think of strategic default as a business decision, and do a cold-eyed cost-benefit analysis of whether it makes sense for you, advises Carl Archer, an attorney with Maselli Warren in Princeton, New Jersey.

"People think it reflects on their integrity, and say 'I wasn't raised this way,'" said Archer. "But the more businesslike attitude is to say that there's a contract, there are penalties for violating that contract, and sometimes it just makes financial sense to break it."

The penalties largely revolve around your credit record, which admittedly gets blown up in the near-term. For a few years you can likely forget about qualifying for a mortgage or a car loan. When lenders are ready to take a chance on you again, you'll have to pay for the privilege, with stiff interest rates due to your default history.

What Happens to Scores

Charlotte Perkins watched her credit score go from a pristine 800 to 685, dropping every time she missed a payment. Credit-scoring firm FICO estimates that someone with a 680 score would see that number sink between 85-100 points after a strategic default, and someone with 780 could crater 140-160 points.

Not desirable, of course, but not the end of the world either. For Perkins, for instance, she already had a loan on her Ford Escape, and the mortgage on her new house, before she even started the default process. She hasn't seen any changes on her credit cards since, in terms of limits or interest rates.

Now that the previous home was auctioned off in December, she can start slowly rebuilding her credit, a process that should take about seven years.

Strategic default isn't a decision to be taken lightly, of course. If everyone did it, the housing market -- and the banks -- would be in much worse shape than they already are.

The following are some of the issues to keep in mind:

1. Look to it as a last resort, not a first option. Your financial troubles could be alleviated with a simple refinancing, especially since 30-year mortgage rates are near record lows of below 4 percent. If the banks are hesitant to rework your loan, look into the number of government programs designed to keep you in your home, which can be researched at MakingHomeAffordable.gov.

2. Location, location, location. Each state has its own rules and regulations regarding foreclosures, which affect both the length of the process and what you could be liable for in the end. In so-called 'non-recourse' states like Arizona, California and Texas, a lender cannot come after you for any deficiency (for instance, if your mortgage was $300,000 and they're only able to sell the property for $200,000). In other states they can pursue the difference, in theory - which is why some homeowners opt to file for bankruptcy, to free themselves from those potential obligations as well.

3. Use the interim to save like a demon. If you're in a state like New York or Florida, which require a judicial review of every foreclosure, it might be a couple of years before you actually have to pack up. In the meantime, be extremely disciplined about stockpiling cash. That will help you with a down payment for a rental, to pay for a car in cash if you need to, or to clear up other debts you might have. "Save money as if you were still paying the mortgage," says Archer. "If you don't, then you'll run out of both time and money, and then you'll be in a real tough spot."

4. Know the tax implications. Historically, if you have a debt that's forgiven, the canceled amount is considered taxable by the IRS. In the wake of the housing bust, though, the Mortgage Forgiveness Debt Relief Act was drafted to spare you those taxes. That legislation expires at the end of 2012, though - so if it's not extended, you could potentially face a tax bill for the difference.

5. Talk to a professional. A bankruptcy or real-estate attorney can help you through a very tricky process. The National Association of Consumer Bankruptcy Attorneys, for instance, has a searchable database of lawyers at www.nacba.org.

"Strategic default is not an easy decision, and there's a cost either way," said Gerri Detweiler, director of consumer education for Credit.com. "Would you rather be $200,000 underwater, or would you rather have seven years of damage to your credit report? It depends whether you're finally at the point where enough is enough."

Relying On An Agent

2012-01-24T17:05:00Z

The latest NAR Profile of Home Buyers and Sellers showed a growing trend among recent buyers. The latest figures show that 89 percent of buyers purchased their home with the help of a real estate or broker. This is a sharp increase from a decade ago in 2001, when only 69 percent of buyers enlisted the help of an agent or broker. Why do today's buyers buyers choose to work with an agent? Let's look at just a few of the many reasons an agent can be your biggest ally. First, agents are licensed professionals, which means they had to complete coursework and pass an exam in order to become and agent. They have the education and experience to help you navigate what will be one of the biggest purchases of your life. They also have access to a wide range of properties and can guide you to those that are the best fit for you, which can save you time and energy. If you are unsure what type of property you're interest in, an agent can help explain the pros and cons of things such as condo life versus single-family detached living. Where are the up and coming neighborhoods? Which areas are more walkable or have access to better schools? These are all issues an agent deals with daily. They can also ease the burden of buying by simplifying the process. They set up showings, drive you to appointments if needed, and help you handle the intricacies of negotiations. Today's market also presents challenges that simply weren't present or didn't dominate the market a decade ago. Buyers are faced with some great deals, but through some complicated channels, such as short sale or foreclosure. How does one handle these sort of contracts? Your agent or broker will know. According to the NAR, "More than ever home buyers are relying on real estate agents and brokers to help them with their home purchase regardless of whether the home they are buying is a foreclosure, short sale, or even a FSBO sale because they need a real estate agent to help them through the process." Finally, buyers are unsure if now is really a good time to buy. They need to rely on someone with local market knowledge. Is this a good neighbor to invest in? Are prices still dropping in this community? How long do homes take to sell? What is the median selling price? Buyers want the best deal out there. The 2011 Profile found that more buyers are opting against dual agency, where the agent represents both the buyer and seller. This could signal that today's buyers are very cautious about getting into the market. While a dual agent isn't supposed to harbor any bias, buyers now want to be extra sure they are getting the best deal possible. In fact, "60 percent of recent buyers had an oral or written arrangement with the real estate agent or broker so that the buyer's agent only represented the buyer and not the seller." If you are considering entering buying a home this year, be sure to strongly consider using a real estate agent. They could be your biggest ally.

Fannie Mae sees 2012 home sales up 3.5% to 4.74 million

2012-01-17T16:24:00Z

The housing sector will likely take incremental steps forward in 2012, though total originations will fall on fewer refinances, according to economists at Fannie Mae.

The second half of the year should outpace the first six months in terms of growth, though fiscal policy and political uncertainty in Washington will likely drive consumer and business activity, the mortgage giant said.

Chief Economist Doug Duncan said positive consumer activity and challenges in housing and the global economy will equate to moderate growth for the year.

"We're entering 2012 with decent momentum, especially on the employment side, which is fostering positive household and consumer behavior," Duncan said in a release. "Unfortunately, we expect this momentum to slow as we move through the first half of the year."

The report released Friday forecast total home sales to increase 3.5% to about 4.74 million in 2012 from 2011 with another 5% gain in 2013 to nearly 5 million. New home sales could jump 10.4% for 2012.

The Federal Housing Finance Agency home sales price index, excluding refinances, could dip 1.1% for 2012 from a year before, according to the forecast. Economists predicted the 2011 index would finish 4.6% lower than 2010.

Mortgage originations as dollar volume could see a decline as well in 2012, largely on a steep drop in refinances. The Fannie report said total originations will fall to $1.01 trillion in 2012 from a predicted final 2011 tally of $1.36 trillion. Economists expected refinancing to plummet to $540 billion from $894 billion.

Purchase mortgages, however, will rise to $471 billion in 2012 from a estimated 2011 total of $464, according to the report.

Total single-family outstanding mortgage debt will likely drop 1.3% to $10.14 trillion in 2012.

For the U.S. economy as a whole, Fannie researchers predicted real GDP would increase 3.3% in the fourth quarter to finish the year at 1.7% growth. Economists forecast 2.3% GDP growth for 2012 and 2013.

FHA Waives Anti-Flipping Rule Through Year-End to Speed REO Sales

2012-01-10T16:40:00Z

The Federal Housing Administration (FHA) is extending the temporary waiver of its property anti-flipping rule through the end of 2012. FHA rules typically prohibit insuring a mortgage on a home owned by the seller for less than 90 days. In 2010, however, the agency waived this regulation, and later extended the waiver through 2011. The new extension announced late last week will permit buyers to continue to use FHA-insured financing to purchase HUD-owned and bank-owned properties, no matter how long the homeowner has held the title, through December 31, 2012. FHA says the waiver will allow homes to resell as quickly as possible, helping to stabilize real estate prices and revitalize communities experiencing high foreclosure activity. “This extension is intended to accelerate the resale of foreclosed properties in neighborhoods struggling to overcome the possible effects of abandonment and blight,” said Carol Galante, FHA’s Acting Commissioner. “FHA remains a critical source of mortgage financing and stability and we must make every effort that to promote recovery in every responsible way we can.” According to FHA, the waiver contains strict conditions and guidelines to prevent predatory property flipping in which properties are quickly resold at inflated prices to unsuspecting borrowers. Among these conditions, all transactions must be arms-length, with no link between the buying and selling parties. In addition, in cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the waiver will apply only if the lender meets specific conditions, and documents the justification for the increase in value. FHA’s property-flipping waiver is limited to forward mortgages, and does not apply to the agency’s Home Equity Conversion Mortgage (HECM) for purchase program. Since the original waiver went into effect on February 1, 2010, FHA has insured nearly 42,000 mortgages worth more than $7 billion on properties resold within 90 days of acquisition. The agency says its own research has found that in today’s market, acquiring, rehabilitating, and reselling foreclosed properties to prospective homeowners often takes less than 90 days. As a result, FHA says prohibiting the use of its mortgage insurance for a subsequent resale within 90 days would adversely impact the willingness of sellers to consider offers from potential FHA buyers, namely because they would be required to cover holding costs and the risk of vandalism that comes with allowing a property to sit vacant over a 90-day period of time.

Pending Home Sales Rise Again in November, Highest in a Year-and-a-Half

2012-01-03T15:34:00Z

Washington, DC, December 29, 2011

Pending home sales continued to gain in November and reached the highest level in 19 months, according to the National Association of Realtors®.

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, increased 7.3 percent to 100.1 in November from an upwardly revised 93.3 in October and is 5.9 percent above November 2010 when it stood at 94.5. The October upward revision resulted in a 10.4 percent monthly gain.

The last time the index was higher was in April 2010 when it reached 111.5 as buyers rushed to beat the deadline for the home buyer tax credit. The data reflects contracts but not closings.

Lawrence Yun, NAR chief economist, said the gains may result partially from delayed transactions. “Housing affordability conditions are at a record high and there is a pent-up demand from buyers who’ve been on the sidelines, but contract failures have been running unusually high. Some of the increase in pending home sales appears to be from buyers recommitting after an initial contract ran into problems, often with the mortgage,” he said.

“November is doing reasonably well in comparison with the past year. The sustained rise in contract activity suggests that closed existing-home sales, which are the important final economic impact figures, should continue to improve in the months ahead,” Yun added.

Pending home sales are not affected by the recently published rebenchmarking of existing-home sales because the index uses a different methodology based directly on contract signings, and is adjusted for seasonality.

The PHSI in the Northeast rose 8.1 percent to 77.1 in November but is 0.3 percent below November 2010. In the Midwest the index increased 3.3 percent to 91.6 in November and is 9.5 percent above a year ago. Pending home sales in the South rose 4.3 percent in November to an index of 103.8 and remain 8.7 percent above November 2010. In the West the index surged 14.9 percent to 121.2 in November and is 2.9 percent higher than a year ago.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries

Roadmap to a Housing Rebound

2011-12-08T22:55:00Z

If you're a homeowner these days--and almost two thirds of Americans are--the housing market generally doesn't fall into the realm of pleasant dinner conversation.

The once-booming industry has been bruised and bloodied from nearly every angle: Home prices have plunged 30 percent nationally over the past five years, millions of Americans have lost their homes to foreclosure, and millions more are on the brink with underwater mortgages. Still others are seriously delinquent on their home loans.

Things are bad, maybe the worst they've ever been, but there's likely to be more pain before there are any real gains for the housing market, experts say, primarily because of the giant inventory of homes on the market and the certainty more will be coming through the pipeline over the next few years.

Still, the U.S. economy is resilient. The recovery has absorbed a debt-ceiling fiasco at home, a near financial meltdown in Europe, and political chaos in the Middle East. The job market is also improving, consumers are spending more, and corporate balance sheets remain healthy, all of which are critical for the housing market to rebound.

The remaining puzzle piece is time and how much of it the housing market will need to recover. Here are some other hurdles the housing market needs to overcome before a rebound takes root:

Job growth/broader economic gains. After a bumpy several months, the employment outlook has started to improve, with the private sector adding more than 200,000 jobs in November, according to payroll firm ADP. That's certainly good news, but we're not out of the woods yet. The national unemployment rate is still sky high at 9 percent and the pace of job growth needs to double before it translates into the broader economic growth needed to bolster a housing recovery.

"The situation in the housing market is tightly bound with what's happening in the broader economy," says Stan Humphries, chief economist at Zillow. "A broader economic recovery is going to have to precede a recovery in housing. Really, job growth is so essential for housing demand."

Particularly important is the unemployment rate among young Americans between 25 and 34 years old.

"These are the people that are forming households and buying their first homes," says Jed Kolko, chief economist at Trulia. Due to the bad economy, more young Americans have been "doubling up," moving in with friends or living at home to ride out lean times. That's put the kibosh on demand, according to some, which is part of the reason why there's still so much housing inventory to work through.

Clarity on foreclosure processes. A group of states has banded together to sue lenders and mortgage servicers over what they claim to be improper foreclosure practices. Awaiting rulings in those suits, lenders have held back on foreclosures, slowing the pace and increasing the backlog. The longer it takes to get clarity on how to proceed with foreclosures, the longer it will take to clear that inventory and the longer it will take for housing prices and the broader housing market to recover.

Faster foreclosure processes. Getting homes that are likely to be foreclosed upon or homes that already are in foreclosure to the market is key to exposing the nation's shadow inventory, which has been keeping prices depressed around the country.

"The longer this goes on, the longer the foreclosure inventory will perpetuate and the longer we'll be stuck in a rut," says Anthony Sanders, professor of real estate finance at George Mason University.

The attorneys general investigation has slowed down the foreclosure process, lengthening the time it takes to get delinquent loans through the pipeline and on the market to be sold. But speeding up the foreclosure process is a double-edged sword. More foreclosures will further bloat the housing inventory, driving down prices even more.

But that's to be expected, says Chris Flanagan, strategist at Bank of America. "The implications of what we're seeing is that you have to have prices go down before they go up," he says. "At a minimum, things need to make it through the pipeline. Having it sit there is a dead weight on the economy and it ultimately creates more downside potential because of the backlog."

Reduced inventory. Next on the to-do list is to clear out the massive housing inventory the United States has. Especially with the influx of homes likely to come on to the market when foreclosure processes finally get ironed out, we're going to have a lot of stock to deal with. But reducing the supply of homes should help boost prices in the long run, and price appreciation is good for the housing market.

"There really has to be a way to clear the excess inventory out there," Sanders says. "[Banks and servicers] know how to do it. It's called lower the price. The problem is they don't want to lower the price too much because they're very nervous about taking huge losses." Huge losses sometimes leave the taxpayer on the hook, making the entire issue intensely political, Sanders adds.

Other experts say the government has a different role, a role facilitating financing for government- and bank-owned properties. The Federal Housing Finance Agency has thrown around a couple of proposals for dealing with these assets, but nothing has been finalized.

"It would help a lot to have some government-sponsored financing of these [properties]," Flanagan says. "It would help them in the end if they allowed more investors to come in."

Converting foreclosures into sales would help stabilize neighborhoods and home values, Flanagan adds, and, in some cases, improve the availability of rental homes, a sector of the market that has seen an uptick in demand as the foreclosure crisis hit.

Increasing rents. The completion of the cycle comes when rent increases to a point where it's more attractive to buy a home than to continue renting. With affordability at record levels, when the jobs market recovers and the economy finds its footing, more renters should turn into homeowners, which will reduce the supply of homes and help stabilize prices.

Five Great Things about Homeownership

2011-11-15T13:03:00Z

If you've been on the fence about homeownership, now is the time to take a leap! Don't let the negative press deter you from one of life's greatest joys.

1. Equity. When you pay rent, you never see that money again. It is lining the landlord's pocket. Yes, buying a home may come with some hefty initial costs (downpayment, closing costs, inspections), but you will make that money back over time in equity built in the home. Historically, homes appreciate by about 4 to 6 percent a year. Some areas are still experiencing normal appreciation rates. For the areas that have seen harder times since the recession, experts feel that the housing market will recover. Homeownership is about building long-term wealth. A home bought for $10,000 in 1960 is most likely worth 10 times that in today's market.Take a look at five short and sweet reasons that homeownership is great!

2. Relationships: Renters tend to see their neighbors come and go quickly. Some people sign year leases while others are in the community for much shorter terms. Apartment complexes also tend to have less common shared space for people to meet, greet, and socialize. Homeowners, however, have yards, walking trails, or community pools and clubhouses where they can get to know each other. Neighbors stay put much longer (at least three to five years if they hope to recoup their closing costs). This means more time to develop relationships. Research has shown that people with healthy relationships have more happiness and less stress.

3. Predictability: Well, as long as you have a fixed-rate term on your mortgage it's predictable. Most people buying homes today know that a fixed-rate is the way to go. This means your payment amount is fixed for the life of the term. If your mortgage payment is $500 today, then it will still be $500 a month in 10 years. This allows for people to budget and make solid financial plans. The sub-prime crisis meant many homeowners with adjustable rate mortgages saw their monthly payments rise and then rise some more. Homeownership, though, generally comes with a predictable table of expenditures. Even the big purchases are predictable. You know most roofs last just 15 years (or so). You know that each year you'll need to pay for the gutters to be cleaned, and so on.

4. Ownership: Okay, this is a given. Homeownership means you "own" your home. That comes with some incredible perks, though! You can renovate, update, paint, and decorate to your heart's desire. You can plant trees, install a pool, expand the patio, or do holiday decorating that would rival the Kranks (if the HOA allows!). The bottom line is this is your home and you can personalize it to your taste. Most renters are stuck with the same beige walls and beige carpet that has been standard apartment decor for 20 years. Now is your chance to let your home speak!

5. Great Deals: It's a great time to buy. Interest rates are at historic lows. We're talking 4.0 percent instead of 6.0 or higher. This means big savings for today's buyers. Home prices have also taken a dip since the recession, which means homes are more affordable than ever. If you have steady income and cash for a downpayment, then be sure to talk to your local real estate agent about what homes in your area could be a fit for you.

Mortgage applications increase by 4.9%

2011-11-02T19:15:00Z

Mortgage applications rose 4.9% last week as refinancing activity and home purchases both increased, an industry trade group said.

The Mortgage Bankers Association said the refinance index climbed 4.4% from the previous week, while the seasonally adjusted purchase index jumped 6.4%.

Refinancing applications accounted for 77.3% of all mortgage applications, which is essentially unchanged from 77.6% a week earlier.

Activity related to the adjustable-rate mortgage increased to 5.9% of total applications, up from 5.8%.

Investors accounted for 6% of mortgage application activity in September, which is a 5.7% increase from August.

"This change was led by an increase in the Mountain region," the MBA wrote. "In addition, the share of purchase mortgages for second homes decreased to 5.8 percent in September from 6% in August."

The average 30-year, fixed-rate mortgage with a loan balance of $417,500 or less remained unchanged at 4.33%. Meanwhile, the average contract interest rate for the 30-year, FRM with jumbo loan balances increased to 4.68% from 4.64%.

The average interest rate on a 30-year, FRM backed by the FHA fell to 4.11% from 4.12%, while the 15-year, FRM increased to 3.62% from 3.61%.

In addition, the average contract interest rate for 5/1 ARMs increased to 3.11% from 3.08%.

IT'S TIME TO BUY THAT HOUSE!

2011-10-21T15:55:00Z

U.S. house prices have plunged by nearly a third since 2006, and homeownership rates are falling at the fastest pace since the Great Depression.

The good news? Two key measures now suggest it's an excellent time to buy a house, either to live in for the long term or for investment income (but not for a quick flip). First, the nation's ratio of house prices to yearly rents is nearly restored to its prebubble average. Second, when mortgage rates are taken into consideration, houses are the most affordable they have been in decades.

Two of the silliest mantras during the real-estate bubble were that a house is the best investment you will ever make and that a renter "throws money down the drain." Whether buying is a better deal than renting isn't a stagnant fact but a changing condition that depends on the relationship between prices and rents, the cost of financing and other factors.

But the math is turning in buyers' favor. Stock-oriented folks can think of a house's price/rent ratio as akin to a stock's price/earnings ratio, in that it compares the cost of an asset with the money the asset is capable of generating. For investors, a lower ratio suggests more income for the price. For prospective homeowners, a lower ratio makes owning more attractive than renting, all else equal.

Nationwide, the ratio of home prices to yearly rents is 11.3, down from 18.5 at the peak of the bubble, according to Moody's Analytics. The average from 1989 to 2003 was about 10, so valuations aren't quite back to normal.

But for most home buyers, mortgage rates are a key determinant of their total costs. Rates are so low now that houses in many markets look like bargains, even if price/rent ratios aren't hitting new lows. The 30-year mortgage rate rose to 4.12% this week from a record low of 3.94% last week, Freddie Mac said Thursday. (The rates assume 0.8% in prepaid interest, or "points.") The latest rate is still less than half the average since 1971.

As a result, house payments are more affordable than they have been in decades. The National Association of Realtors Housing Affordability Index hit 183.7 in August, near its record high in data going back to 1970. The index's historic average is roughly 120. A reading of 100 would mean that a median-income family with a 20% down payment can afford a mortgage on a median-price home. So today's buyers can afford handsome houses—but prudent ones might opt for moderate houses with skimpy payments.

For example, the median home in the greater Phoenix market, including houses, condos and co-ops, costs $121,700, according to Zillow.com. With a 20% down payment and a 4.12% mortgage rate, a buyer's monthly payment would be about $470. Rent for a comparable house would be more than $1,100 a month, according to data provided by Zillow.com.

Of course, all of this assumes mortgages are available—no given now that lending standards have tightened. But long-term data on down payments and credit scores suggest conditions are more normal than many buyers think, according to Stan Humphries, chief economist at Zillow. "If you have good credit, a job and a down payment, you can get a mortgage," Mr. Humphries says. "There's more paperwork and scrutiny than five years ago, but things are pretty much like they were in the '80s and '90s."

Not all housing markets are bargains. Mr. Humphries says Zillow has developed a new price/rent ratio that uses estimates for each individual property rather than city medians, to better reflect the choices facing typical buyers. A fresh look at the numbers suggests Detroit and Miami are plenty cheap for buyers, with price/rent ratios of 5.6 and 7.7, respectively. New York and San Francisco are more expensive, with ratios of 17.6 and 17.2, respectively. The median ratio for 169 markets is 10.7.

For investors seeking income, one back-of-the-envelope way of seeing how these numbers stack up against yields for other assets is to divide 1 by the price/rent ratio, resulting in a rent "yield." The median market's rent yield is 9.3% and Detroit's is 17.9%.

Investors would then subtract for taxes, insurance, upkeep and other expenses—costs that vary widely. But suppose total costs were 4% of the purchase price. That would still leave a 5.3% rent yield in the typical market. With the 10-year Treasury yield at 2.2% and the Standard & Poor's 500-stock index carrying a dividend yield of 2.1%, rents for residential housing in many markets look attractive.

A few caveats are in order. First, not all transactions are average ones. Even in low-priced markets, buyers should shop carefully. Second, prices could fall further. Celia Chen, a senior director at Moody's Analytics, expects prices to drop 3% before bottoming early next year and rising slowly thereafter. "If the economy slips back into recession, however, we could easily see a 10% drop," Ms. Chen says.

And property "flipping" can be dangerous even when prices are rising. That is because, absent a real-estate boom, house price gains simply aren't that exciting. Research by Yale economist Robert Shiller suggests houses more or less track the rate of inflation over long time periods.

Houses aren't the magic wealth creators they were made out to be during the bubble. But when prices are low, loans are cheap and plump investment yields are scarce, buyers should jump.

—Jack Hough is a columnist at SmartMoney.com.

Top 6 reasons mortgage applications are rejected

2011-10-11T21:36:00Z

Top 6 reasons mortgage applications are rejected

Mood of the Market

BY TARA-NICHOLLE NELSON, MONDAY, OCTOBER 10, 2011.

Inman News™

zentilia/Shutterstock

Half of refinance applications are abandoned or rejected, as are 30 percent of purchase mortgage applications, according to the Mortgage Bankers Association. All told, the Federal Financial Institutions Examination Council (FFIEC) says that well over 2 million mortgage applications were rejected last year.

Want to avoid falling into that number? It's tough -- especially in light of the fact that mortgage lenders have become increasingly restrictive in terms of their lending guidelines since the housing market crash.

Here, as a cautionary tale and primer on what to expect, are the top six reasons mortgage lenders reject applications.

1. Income issues. Most failed applications falling into this category have income too low for the mortgage amount they are seeking; often, a spouse's credit issues can create this problem, too, as the income the spouse plans to actually chip in toward the mortgage cannot be considered by a lender.

But increasingly, the recent vagaries of the job market are also causing this issue, as people who have changed their line of work or have changed from salaried employee to freelancer over the last couple of years can also have their home loan applications rejected based on income.

2. Muddled money matters. If the mortgage for which you're applying plus your monthly payments on credit card, car and student loan debts will comprise more than 45 percent of your total income, you could have problems qualifying for a home loan. You might also run into problems if you rely too heavily on bonuses, overtime, cash wages or rental income -- all of these can be difficult or impossible to get a mortgage bank to consider, and if they do, they might not take all of it into account.

3. Credit issues. Today, the mortgage-qualifying FICO score cutoff falls somewhere between 620 and 660, depending on which lender and which loan type you seek. More than one-third of Americans, by some numbers, have credit scores too low to qualify for a home loan. Even if your credit score is high enough to qualify, if you have any late mortgage payments, a short sale, a foreclosure or a bankruptcy in the last two years, loan qualifying could be difficult to impossible.

4. Property didn't appraise. Since the whole industry had its hand (among other things) smacked for allowing home values to skyrocket in a very short time, appraisal guidelines have tightened up -- some would say, even more than overall mortgage guidelines. So, it is increasingly common to have the property appraise for a price lower than the sale price negotiated between the buyer and seller.

This is especially common in the refinance realm, as well over a quarter of U.S. homes are now upside-down, meaning the mortgage balance owed is greater than the value of the home. (If you're trying to refinance an upside-down mortgage, consider the FHA Short Refi program -- contact your lender or get referrals to any mortgage broker who makes FHA details to apply.)

5. Condition problems. With all the distressed properties on the market, and with most nondistressed sellers barely breaking even, more home-sale transactions than ever are falling apart due to condition problems with the property. Many lenders will not extend financing on homes where the appraiser points out problems like cracked or broken windows, missing kitchen appliances, electrical problems, or wood rot.

And in the world of condos and other units that belong to a homeowners association, if more than 25 percent of units are rented (rather than owner-occupied) or more than 15 percent are delinquent on their HOA dues, new applications for refinance or purchase mortgages on units in the development are likely to be rejected.

6. Technical difficulties with application. The days when lenders just took your word for it are long, long gone. Applications with incomplete or unverifiable information are doomed.

If any of these mortgage loan application glitches arise in your homebuying or refinancing process, it's critical that you connect with your mortgage professional, be it your banker or mortgage broker, to determine what course of action to take.

In some cases, it might be as simple as buying a stove you find at Craigslist and installing it before escrow closes; but with income issues your mortgage pro will need to help you determine whether it makes sense to pay some bills down, get a co-signer, or even wait six months so your income documentation will qualify.

CASHING IN ON RENTAL PROPERTY

2011-09-30T22:53:00Z

Cashing in on rental property

By Jeff Wallach @Money September 2, 2011: 6:07 AM ET

(MONEY Magazine) -- Most of the news lately about real estate has been dismal: Home prices are swooning, foreclosures ballooning.

There is, however, one bright spot: the rental market, where demand is up and rents are rising. That's partly because those foreclosures have turned more than 4 million former homeowners into renters, but also because many other prospective homeowners, worried about losing their jobs or housing prices falling a lot further still, are reluctant to buy now.

As with many investments, the best time to get in is when most others are sitting on the sidelines. To figure out whether you can benefit by investing in rental property, here's what you need to know.

THE CASE FOR BUYING NOW

Many factors make this a great time to invest. Mortgage rates are at a 40-year low, and homes in many areas are ultra-cheap. Meanwhile, demand for rentals has risen in more than 500 cities, according to recent Census data. That, in turn, has enabled landlords to charge more. Hotpads.com, a real estate research firm, reports that rents nationwide jumped 11.6% in 2010, to $1,320 a month. You'll need that rental income to tide you over until home prices bounce back; in fact, the typical investor today plans to hold for 10 years, according to a survey by the National Association of Realtors.

If you can hang on that long, you've got a good shot at solid gains, especially if you're financing the home purchase. "Whereas leverage is dangerous when buying stocks, it can be a good long-term strategy with real estate," notes real estate investor and Columbia University adjunct finance professor Marshall Sonenshine.

The big catch: "Can you afford to hold the property that long and not need the equity for your kid's college fund?" says Sonenshine. Or whatever other pressing need might crop up.

You'll also face some tough financing rules. Most banks now require a down payment of at least 20% to 25% and evidence you have enough cash to cover six months' worth of mortgage, tax, and insurance payments.

HOW TO FIND A GOOD DEAL

Investment real estate is like produce: It's best bought locally. "Buy something you can get to in 10 minutes," says Seattle real estate investor Bill Snyder.

Familiarity with the neighborhood also limits nasty surprises like a noisy bar or a nearby development competing for renters.

Work with a local realtor who has experience with rentals and can help you assess how attractive a given home will be to tenants.

And while prices on multifamily dwellings haven't dropped as much as they have on single-family homes, don't ignore plexes: Intake from a few rents instead of just one will boost your cash flow; a single vacancy won't hurt as much; and you could benefit from economies of scale for things like appliances and painting. But stick to buildings with four units or fewer to avoid stricter financing requirements, such as a bigger down payment and higher mortgage rates.

Once you've identified candidates, crunch the numbers. The goal: to make sure your rental income will at least cover your loan payments, plus a 20% cushion to handle repairs, vacancies, and property management.

To figure out what you'll garner in rent, ask sellers for recent leases, says Snyder, and double-check their numbers by perusing sites like Rentometer and Craigslist for similar rentals in the neighborhood.

Assume your mortgage rate will be at least a half-point higher than rates on owner-occupied properties. Factor in insurance and property taxes, and bank on a 5% vacancy rate. Otherwise, "one empty month can kill you," says Ellie Berlin, a broker with Houlihan Lawrence in Larchmont, N.Y.

KNOW WHAT YOU'RE IN FOR

Brush up on your people skills: Owning rentals also means responding to tenant complaints, like the 2 a.m. phone call about a broken toilet. Want to palm off the grunt work? You can hire a handyman (around $45 an hour) or a management company (8% to 10% of monthly income plus a half-month's rent for filling vacancies), but the luxury will eat into cash flow.

To find your own tenants, creative ads on Craigslist are your best bet. Run credit and reference checks (National Tenant Network, at ntnonline.com, can help). And invest in small touches to make your place stand out, such as cool lighting fixtures or antique door hardware. Those will pay off when it's time to sell too.

Bank's REO Inventory down by 17%

2011-09-20T18:38:00Z

Banks held about 476,000 homes that they repossessed from delinquent mortgage borrowers as of the end of July, according to Barclays Capital.

That tally represents a 17 percent contraction from 574,000 REOs on the books just 10 months earlier, in September of 2010, just as the robo-signing scandal began grabbing headlines.

At the same time, the research firm estimates there were 1.57 million home loans 90-plus days delinquent but not yet in foreclosure at the end of July of this year, and another 1.91 million already in the foreclosure process.

Barclays says the rise in processing times has been driven almost entirely by the time that loans spend in delinquency and foreclosure. The average period that loans spend in REO has risen only modestly since 2007, suggesting that any lengthening in disposition timelines has been a function of weaker demand for homes than of processing delays, Barclays explained.

While processing timeframes have been trending up since 2007 as a result of the industry’s modification efforts and the deluge of delinquent loans, the research firm notes that timelines increased even more dramatically once mortgage documentation issues were uncovered in late 2010.

According to Barclays’ analysis, the average number of months a loan has spent in foreclosure has climbed from around 10 months just before October 2010 to more than 12 months today.

The firm’s analysts point out that whether a loan is located in a judicial or non-judicial state has a “considerable impact” on the amount of time the loan is likely to remain in the foreclosure process. Still, even within the judicial state population, loans in certain areas are showing much longer processing delays.

For example, Barclays’ research shows that among the judicial foreclosure states, New York, New Jersey, and Florida all display longer-than-average foreclosure delays, with defaulted borrowers in New York currently remaining in the foreclosure bucket for an average of around 17 months.

Although most non-judicial states process foreclosures relatively quickly because servicers are not required to obtain court approval before re-possessing delinquent properties, Barclays says even here, there is significant variation in processing times.

The company’s report points to Massachusetts and Washington, D.C. as exhibiting extended processing delays. In particular, subprime loans in Massachusetts currently remain in the foreclosure bucket for an average of over 10 months.

Barclays also found that servicers are more likely to offer loan modifications in traditionally slow foreclosure states, and empirical evidence indicates that servicers are a little more generous in their loan modification terms in slow foreclosure states.

The company says debt forgiveness modifications have historically been slightly more prevalent in states where the foreclosure timeline has extended.

“We found that 4-5 percent of loan modifications executed in slow foreclosure states in 2011 have involved some level of principal forgiveness, compared with 2-3 percent in fast foreclosure states,” Barclays said in its report.

Barclays notes that another external factor that has historically driven processing delays on delinquent loans has been the servicer managing the loan.

The company’s analysis shows that Ocwen and Wells Fargo have experienced a much more modest rise in their processing times relative to other servicers, particularly when it comes to servicing subprime and Alt-A loans.

Barclays says it is also notable that prior to 2008, there was very little difference in foreclosure processing times between servicers as fewer distressed loans needed to be serviced.

“With the large number of borrowers that have become delinquent in the past few years, some servicers have likely been overwhelmed with the volume of problem loans they have had to manage,” according to the research firm’s analysts.

Although timelines have significantly increased for all states and sectors, Barclays says some servicers appear to have implemented improvements to their foreclosure processes recently.

Notably, loans serviced by Countrywide and Citigroup have recently shown a pickup in delinquency to foreclosure roll rates, according to Barclays.

“Although there may be a lag in the timing of when different servicers and states start to see improvements in timeline rolls, we hope to see further improvements from other servicers in the coming months,” the research firm said.

Fixing the Housing Crisis would create One Million Jobs Annually

2011-08-25T12:04:00Z

Fixing the Housing Crisis Would Create One Million Jobs Annually

By Steve Cook

By writing down all underwater mortgages to market value, the nation’s banks could pump $71 billion per year into the economy, create more than one million jobs annually and save families $6,500 per year on mortgage payments.

That’s the bottom line in a new report by The New Bottom Line, a nationwide campaign representing 1,000 faith-based and community organizations seeking to hold Wall Street accountable and find solutions for struggling and middle-class families.

Grassroots organizations across the country aligned with The New Bottom Line campaign are calling on State Attorneys General who are investigating the banks for foreclosure fraud to stand firm for a settlement agreement that both includes large-scale principle reduction for underwater borrowers and does not release the banks from claims beyond the robo-signing scandal.

“Homeowners across the nation are struggling to pay their boom-era mortgages with their recession-era salaries and the economy is suffering for it. Writing down the principals and interest rates on all underwater mortgages to market value would serve as the second stimulus that America so desperately needs, only without added costs to taxpayers,” according to the report entitled “The Win/Win Solution: How Fixing the Housing Crisis Will Create One Million Jobs.”

The plan would lower homeowners’ mortgage payments by an average of more than $500 per month or $6,500 per year. Six billion dollars per month that is currently going to mortgage payments would instead go toward buying groceries, school supplies, and other household necessities.

As consumer demand picked up, businesses would start hiring again. For example, the plan would inject an annual stimulus of $20.5 billion in California and 300,000 jobs per year; $1.64 billion in Ohio and 24,000 jobs; and $12 billion in Florida and almost 180,000 jobs.

Last year, the nation’s top six banks paid out more than twice the cost of the plan ($71 billion per year) in bonuses and compensation alone ($146 billion in 2010), the report says. Currently, the nation’s banks are sitting on a historically high level of cash reserves—$1.64 trillion.

IRS's top 10 tax tips for home sellers

2011-08-21T03:55:00Z

Real Estate Tax Talk BY STEPHEN FISHMAN, MONDAY, AUGUST 15, 2011. Inman News™

From time to time the IRS releases tips designed to help people with their taxes. Some of these are quite useful. Last week the agency released "Ten Tax Tips for Individuals Selling Their Home," (IRS Summertime Tax Tip 2011-15). As a real estate agent or broker, it is not your job to give home sellers tax advice. Indeed, it is advisable not to, since you could end up getting sued if you give wrong advice. Instead, refer sellers to this list of IRS tips. It's a good starting place for them to begin to understand this often complex area of tax law. You could even print it out and hand it to anyone who asks you about these issues. Article continues below Advertise with Inman Here are the IRS's top 10 tax tips for home sellers:

1. In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale. 

2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases). 

3. You are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. 

4. If you can exclude all of the gain, you do not need to report the sale on your tax return. 

5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses. 

6. You cannot deduct a loss from the sale of your main home. 

7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude. 

8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time. 

9. If you received the first-time homebuyer credit and within 36 months of the date of purchase, the property is no longer used as your principal residence, you are required to repay the credit. Repayment of the full credit is due with the income tax return for the year the home ceased to be your principal residence, using Form 5405, First-Time Homebuyer Credit and Repayment of the Credit. The full amount of the credit is reflected as additional tax on that year's tax return. 

10. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive refunds or correspondence from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.

Better credit score doesn't guarantee cheaper loan

2011-08-09T15:31:00Z

By Jack Guttentag, Monday, August 8, 2011.

One of the unusual features of the U.S. mortgage market is that borrowers are obliged to select a lender before they know the price. They have a price quote from the lender they select, and the quote may be instrumental in their selection decision, but the price is preliminary. It is not final until it is locked by the lender.

Before the crisis, it was common to lock on the spot, which meant locking the quoted price. Today, that is the exception, reflecting tighter underwriting requirements and the increased risk to lenders of closing a loan that does not conform exactly to the rules. Locks are usually delayed for some days, sometimes for weeks.

Delays in locking mean that the lock price can differ from the price quote on which the borrower made a selection decision. The lock price can be higher or lower, but more often than not it is higher. These articles will explain why.

Article continues below

One reason the lock price can differ from the quoted price is that market conditions change. Mortgage prices are reset every morning, and sometimes during the day. Until the loan is locked, the price will change with the passage of time.

Because the market price is as likely to be lower than the quoted price as to be higher, borrowers should benefit from market-price changes as often as they are hurt. It doesn't quite work out that way, however, because when prices decline, the lender may not pass it on -- instead, it may lock at the previously quoted price. The lender can usually get away with this because the borrower is getting what was expected.

The lender may feel justified in not passing through price reductions because when the price rises by a small amount, the lender may absorb it by taking a smaller markup. The amount involved is not worth a hassle with the borrower. If the price rise is too large to absorb, however, the lender will require the borrower to pay it. On balance, therefore, borrowers are disadvantaged by market-price changes prior to a lock.

The quoted price can also change because the lender has not been able to verify one or more pieces of information on which the price depends, and has corrected them. These corrections may be reported to the borrower informally by the loan officer. They will also be contained in the documents the borrower receives within three days of receipt of the loan application. The documents include a corrected loan application, a credit score disclosure, and a Good Faith Estimate (GFE).

The critical items that may change are the credit score, property value and loan amount.

The credit score used to price a mortgage is the one received by the lender, not the one obtained by the borrower. There are a number of scoring models from which lenders make a choice. Each of the three major credit repositories has its own model, with multiple versions of each. Usually, lenders pull scores from three models and use the middle one, or they pull two and take the lower one.

The different models generate different scores, but usually the differences are not large. If one model score is 750, another won't be 650, but it might be 740. Even a small difference, however, might be enough to affect the price.

The impact of credit score on price is based on score ranges that are 20 points wide on the most widely used FICO score models. The ranges are 620 to 639, 640 to 659, 660 to 679, and so on. This means that if the score reported by a borrower is near a break point, it takes only a small downward correction to drop him into a lower score bracket that could raise the price. An example would be a shift from 620 to 619. By the same token, if the score obtained by the borrower was 639, an increase to 640 would shift her into a higher score bracket that could lower the price.

In principle, credit-score corrections by the lender (like market-price changes) should lower the mortgage price as often as they raise the price. I am skeptical that this is the case, however, partly because borrowers are more likely to overestimate their score than to underestimate it.

Further, I am confident that some lenders do not pass on price reductions from an upward revision of the credit score when they don't have to. Few borrowers are alert enough to catch it, especially if the lock price is the same as the price they had been quoted.