Unless you have a large down payment, this increase in the loan limit will not allow you to use these GSE loans to buy a single family home on the Peninsula.  However, if you are buying a condo or townhouse, you may be able to use them.  The jumbo loans are priced much higher than they have been in the past, so avoiding the jumbo loans by using a conforming GSE loan.  For example, in the past, jumbo loans had an interest rate that was 1/8 to 1/4 percent higher than a conforming loan.  Now, jumbo loans are around one percent higher.  So, homes that can be bought with this lower interest financing will result in much lower monthly payments, which will make their purchase more attractive.

The other effect on Palos Verdes real estate will be that homes in other areas will be easier to sell.  So, buyers who are moving from these areas to the Peninsula will have an easier time selling their homes, an d homes on the Peninsula may have an easier time selling.  Since jumbo loan rates are way above what they should be, allowing the use of loans with more reasonable interest rates will help the real estate market in much of California. 

Ok, Who decided that moving with children was a good idea?  As a Realtor myself, I see families pack up their family (and lives') belongings everyday and move them to a new house.  It looks like an easy task from the outside.  We, the agents, just get the paperwork signed and the family packs their belongings...Right?

Now is the time to contact your Senator and explain the obvious: THE PROBLEM IS REAL ESTATE LOANS, STUPID! 

The main source of the economic problems, and possible recession, is the lack of availability of real estate financing.  The exotic loans that used to allow a segment of the market to buy homes do not exist any more.  The standards for qualifying for nearly all loans have been raised, a second shrinking of mortgage funding.  With the increase in housing prices in many areas, conventional loans that are limited to $417,000 or less do not allow "regular folks" to buy a home in those areas.

The House bill would allow the limits on the conforming loans that "regular folks" need to go up.  This would allow more people to buy houses in the areas hardest hit by foreclosures.  The National Association of Realtors projects that this increase would prevent about 200,000 foreclosures nationwide.  Decreasing foreclosures would help consumer confidence, not only in the housing market but in the economy in general.

It is hard to imagine any reason for the action by the Senate.  The problem is a sudden decrease in the availability of real estate financing.  Why not deal with that problem by providing a short term increase in that financing?

The House bill would increase the availability of loans, and cost the consumer nothing.  The Sentate is concentrating on giving money from the US Treasury to taxpayers, and proposing amendments to give money to recipients of Social Security, both of which will eventualy cost taxpayers.  The money given to consumers will be used to buy consumer goods at WalMart and Best Buy.  We need something that will allow consumers to buy houses.  Also, the increase in loan limits is temporary, so that it is not a long term authorization which means any potential problems are limited in duration.

This difference between the House of Representatives and the Senate gives you a better appreciation for our form of government.  The Founding Fathers wanted to have a body in the legislature that was more in touch with the people, and they created the House of Representatives.  The Senate has only two members from each state, and focuses on larger pictures, but is less in touch with what is happening with "regular folks".

The National Association of Realtors is making an effort to have Realtors contact Senators to point out this mistake.   It would be even more important for consumers who are not Realtors to contact their Senators, so that the national importance of this mistake is felt, and the Senators cannot dismiss this as a self serving effort by Realtors.

This increase in the conforming loan limits is particularly important for Palos Verdes real estate, and all of the real estate in the South Bay.  A loan of $417,000 will not buy much in this area, unless you have a huge down payment.  So, increasing these limits will allow more San Pedro real estate and Torrance homes to sell, which may allow some families to move to Palos Verdes homes.

Please contact your Senator and ask the Senate to face the problem head on.  Since the problem is a decrease in real estate financing, provide a temporary increase in that financing.

In the first response,  major banks cut their Prime Rate, the rate that their best borrowers get, from 6.5% to 6%.  The second was an immediate improvement in the stock market, that had been down before the announcement, trading immediately went from negative territory to positive.

The decrease in the Prime Rate affects many homeowners who have Home Equity Lines of Credit (HELOC).  Many of these loans have an interest rate that floats with the prime rate.  So, this decrease will reduce the monthly payments on those loans.  This will have a positive effect on Raleigh Real Estate, as it will enable more families to afford their mortgages and stay out of financial trouble.  It may not directly lower the number of homes going into foreclosure, but it will help.

The decrease in the two interest rates by the Federal Reserve may also further reduce interest rates, eventually but today they went up.  More on that later.  Even though the federal interest rates went down by 1/2 percent, do not expect mortgage rates to go down that much.  There are a great number of factors calculated in setting the interest rate on a 30 year loan, and the changes made by the Federal Reserve are to the rates on extremely short term loans that banks take out in order to maintain the proper amount of liquidity. 

It is not unusual for the interest rates on 30 year mortgages to anticipate what the Federal Reserve will do, so they went down last week.  Immediately after the announcement, they went up, but just slightly as you have to be well tuned in to even notice.  The rate before on a fixed 30 year conforming loan was 5.5%.  The rate on the same loan after was 5.5%.  The part that went up is the cost of the loan to originate.  The rates went up so slightly that the interest rate offered the customer did not change, but the cost of a $200,000 loan increased by about $250.  Most lenders will absorb that cost, so it looks to the consumer like the rate is the same, but it actually went up.  Doesn't it seems odd that a cut in the Federal Reserve rates designed to make loans more affordable would result in an increase in the cost of a 30 year mortgage?  But, if you understand that the market tries to anticipate the move of the Federal Reserve, then corrects when it actually announces its move, it will make more sense.   It is like they say in the Stock Market, "Buy on rumor, sell on news".

So, will this help Palos Verdes real estate?   Only indirectly, as the cost of a conforming mortgage did not change much, and most of our sales involve Jumbo loans that are larger than the $417,000 limit for conforming loans.  The economy will be better, the prime interest rate will be better, the HELOC payments geared to the prime rate will be better, so there may be fewer foreclosures. 

In general, South Bay real estate is in good condition, much better than the rest of California, and it will stay in good condition or improve.

Please let me know what you think by making a comment.

I do not question that the housing and finance market statistics that are reported can be defended as accurate.  However, you have to understand that the choice of the statistics to use creates the spin that supports a particular conclusion.   Are there serious problems in the mortgage industry today?  Yes.  Are the supply and demand of the real estate market different from two years ago?  Definitely, in many areas it has shifted in favor of the buyers, in some others it has shifted in favor of the sellers.  Does the bad news about financing and real estate overwhelmingly outweigh the good news?  That depends on who is spinning the figures.  If you look at the media, it is doom and gloom.  If you look at the facts and figures, there is a lot of good news. 

The following information was researched by Tom and Louise Hranicka of the Outer Banks in North Carolina to try to give a sense of balance and perspective to the news reports.

The Mortgage Market

The primary topic in the mortgage industry reports is “sub-prime” loans.  Those loans have severe problems in a relatively few states.  Sub-prime Adjustable Rate Mortgages (ARMs) are at the core of the problem, as the payment can adjust to push a marginal borrower into a financial abyss.  Not all sub-prime loans were made to borrowers with poor credit.  In many resort areas, a substantial number of well-qualified applicants voluntarily chose sub-prime loans over traditional loans for a variety of reasons, primarily the ease and speed of getting the loan.  Here are the facts: 

• Just over 13 percent of all mortgages are classified as sub-prime by the Mortgage Bankers Association.  About 11 percent of the sub-prime loans are more than 90 days delinquent or in the process of foreclosure.  Do a quick calculation and you will discover that nearly 89 percent of the sub-prime loans are paid on time or they are less than 90 days delinquent.  With some more calculations, you can report that the delinquent sub-prime loans are 1.43 percent of all loans.  Could you sell a newspaper with that figure?

• In reviewing the mortgage market, the Mortgage Bankers Association just reported that the delinquency rate for all loans during the 3^rd Quarter of this year was 5.59 percent. Loans that are in the process of foreclosure added another 1.69 percent for a total of 7.28 percent.  Phrased another way, 92.7 percent of all mortgage loans were not delinquent or in the process of foreclosure.  Is the glass 8% empty or 92% full?

• Delinquency and foreclosure problems seem to be at their worst in states that had the highest levels of speculation during the boom years along with the states in the Midwest with significant unemployment. Florida, California, Michigan, Ohio, and Indiana are leading this trend.
• Once again, all real estate is local, so that even though parts of California have dramatic amounts of foreclosures, the South Bay has a strong real estate market.  For Palos Verdes real estate through November, 2007 the supply of homes for sale was so low that it would take less than six months to sell the entire supply, even at the lower rate of sales.  This is the definition of a market that favors the sellers.  But, the media coverage did not mention anything like that, just the decrease in the number of sales.  When a news story says that sales are down 26%, they are reporting that the number of sales has decreased by 26%, but the buyers think it means that the prices are down by 26%.  In fact, through November, the median price for Palos Verdes real estate increased, with an increase of $100,000 from January to November. 

• The relative magnitude of the mortgage market issues also needs to be appreciated.  According to the Mortgage Bankers Association, “While subprime ARM delinquencies and foreclosures are climbing in all states, in most states the actual number of loans involved is fairly modest.  For example, the number of subprime ARM foreclosure starts in California during the third quarter equaled the starts in 35 other states combined.”  Even in California, the number of foreclosures in property along the coast is small. 

• According to the U.S. Census Bureau’s 2005 housing survey, there were 74,931,000 occupied residential units in the country. One-third of these properties (24,776,000) were owned free and clear with no mortgage debt, so they have no chance of foreclosure and are not included in the statistics on loans in default.

• For the second home market, a survey done this year by the National Association of Realtors estimated that 25 to 30 percent of vacation and investment properties were free and clear of any loan.  Again, these homes are worry free and not included in the statistics concerning foreclosures.

Financing Availability & Interest Rates

Lenders are making conventional loans to qualified buyers in the same manner that they always have, just with a little more review.  These loans, which are underwritten using traditional standards, are being made largely without any interruption.   In fact, the number of loan applications jumped in the last three weeks, as interest rates are so low.  The mortgage market has changed, and for conventional loans, it has only changed slightly.   So, our mortgage market has not shut down, and the changes that are occurring are generally positive in nature.

• Even for conventional loans the underwriting process has become more detailed.

• Borrowers with limited or no equity in their properties who are trying to refinance their adjustable rate mortgages are having difficulty finding new financing, but special programs for FHA are available to rescue some of these borrowers. 

• Interest rates are some of the lowest in history, making monthly payments less so properties are more affordable if the buyers are smart enough to catch them before the rates go up. 

• Currently, the interest rate offered through a major lender for 30-year fixed rate conforming loans (loan amounts of $417,000 or less) is 5.5 percent with no points. A point equals one percent of the loan amount, and "no points" means this is one of the least expensive loans to originate.  If you give the lender some "points", the interest rate goes down.  The interest rate for jumbo loans (loan amounts in excess of $417,000) was 6.25 percent with the payment of one point.

I do not mean to imply that there are no problems in the mortgage and real estate industries.  Quite the opposite is true, yet the facts show that, for the most part, the situation is much more positive than what you see in the news.

As you watch T.V. or read the paper, keep a few things in mind.  First, real estate goes through cycles, and a house is a long-term investment.  The news reports focus on the latest short-term crisis.   Second, every real estate market is local.  While there can be no denying that events in the outside world have some effect on the South Bay and Palos Verdes real estate market, our market is so different from the national real estate market that for nearly all of 2007 our real estate market had a Sellers Market (where there is not enough supply to satisfy the demand).  Third, as today's proposed economic stimulus package illustrates, our government is not going to sit by and let a recession occur, particularly when elections are less than a year away.

By now, I think you can hear the story I am trying to tell.  As the old saying goes, no matter how thin you slice it, there are always two sides.   Particularly with "write the story with the conclusion in mind" journalism, it is difficult to see all sides of an issue.  But, if you do the research and look at the facts for your area, consult with an experienced Realtor who knows the local market, and don't blank out the positive aspects in what is otherwise being presented as a story written to come to a pessimistic conclusion, you will discover some amazing opportunities. 

You decide – is the glass 8% empty or 92% full?

I would love to hear your opinion, as I enjoy comments on my posts. 

Last week, an agreement was reached between the leaders of the House of Representatives and the White House to raise the Conforming Loan limit.   Some of the people involved in the agreement must not have taken good notes, as House Republican Leader John Boehner said they were raising the limit to $625,000 while House Speaker Nancy Pelosi said the limit would go up to $729,750, so the conforming loan limit for GSE's (Government Sponsored Entities)could be one or the other or someplace in between.  They were on the same page when they said that the FHA loan guarantee program would be expanded to a new limit of $725,000.  The increase in the conforming limit was supposed to be for one year, while the increase in the FHA guarantee would be permanent.

However, they forgot this thing called two house legislature, an idea that Thomas Jefferson, Ben Franklin and James Madison thought was important.  What about the Senate?   Senator Richard Shelby of Alabama, a prominent member of the Senate Banking Committee, wants to tie the increase to the passage of legislation to increase the oversight of the GSE's.  That may work out, as the House of Representatives has already passed HR 1427, a bill that would provide for that increase in oversight.  Senator Chris Dodd of Connecticut, the chairman of the Senate Banking Committee, has stated he will support passage of legislation that would reform the oversight of GSE's and expects it to pass later this year.  So, if the Senate passes legislation similar to HR 1427, the oversight may come into effect, and maybe all parties will follow through with the increase in the loan limits. 

But, Senator Dodd wants to go farther by creating the Federal Homeownership Preservation Corporation, and fund it with $20 billion to purchase loans from lenders, allow homeowners to refinance into fixed rate government backed mortgages.  This proposal is designed to prevent foreclosures and allow more homeowners to keep their homes.   However, the White House does not want this added to the Stimulus Package, which is what Senator Dodd would like to do.

What will the White House do?  In the State of the Union Message tonight, President Bush urged the Congress to pass the legislation that would reform Fannie Mae and Freddie Mack, and modernize FHA.  He did not include anything about increasing the Conforming Loan limit.  He also urged the Congress not to add additional costs to the Stimulus Package, indicating he would oppose Senator Dodd's efforts to ceate the Federal Homeownership Preservation Corporation.  So, will the loan limit increase go into effect, or will it get bogged down in confrontation over the items in the Stimulus Package and reform of the GSE's and FHA?

If the Senate will get the oversight it wants and the White House gets the Stimulus Package it wants, then maybe  the House will get the increase in the limits it wants.  What will the nation get?

The National Association of Realtors estimates that if the limit of conforming loans is raised to $625,000, it will prevent between 140,000 and 210,000 foreclosures, as well as have a positive effect of 2 to 3 percent on home prices.   Those who oppose this legislation say it will  weaken the ability of the GSE's to help low and moderate income families.  Others warn that if this legislation passes and the conforming loan limits were increased, then it would increase the risk to the taxpayers just to benefit the wealthy.

Palos Verdes real estate and Manhattan Beach homes would benefit from this increase in the Conforming Loan limit, even if it is not enough to directly buy most of the Peninsula homes.  Torrance homes, Lomita real estate, San Pedro houses and Redondo Beach condos and townhouses can be purchased with these increased loan limits, which would allow people from those South Bay areas to move to the Peninsula or Manhattan Beach.  Also, the size of a downpayment to purchase a Palos Verdes home or Manhattan Beach townhome with a conforming loan would be more possible.

If the biggest problem with the economy is the lack of financing for real estate, you would hope that the politician would pass some legislation that would provide for more real estate financing, particularly for states like California and Florida, where most of the foreclosures are occuring.  It is only logical that if what we need is more financing for these areas that the politicians would provide that.   But, logic and government frequently do not coincide.  Lets hope they do this time. 

I enjoy your opinions, so feel free to comment.   

The Mortgage Forgiveness Debt Relief Act of 2007 was just signed into law eliminating the income tax for some sellers whose sales close between January 1, 2007 and January 1, 2010.   There are several requirements:

1. The property sold must be your principal residence, as defined in section 121 of the Internal Revenue Code.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

2.  The debt that is forgiven must be  "Qualified Principal Residence Indebtedness", i.e. the money used to acquire a principal residence.

3. There is a limit of Two Million Dollars for the amount of non-taxable Debt Forgiveness, a limit that will not affect anyone in the Triangle.

These rules raise some questions. The biggest one is what is Qualified Principal Residence Indebtness.   The law says "For purposes of this section, the term `qualified principal residence indebtedness' means acquisition indebtedness . . . with respect to the principal residence of the taxpayer."  So, if you refinanced the house for more than what you owed and took money out to spend on other things, that additional amount is not covered by this law.  For example, you had a loan of $500,000 when you bought the house.  You refinanced it with a loan of $700,000, and used the additional money to pay off your other debts.  If you sell the home and pay $650,000 instead of the $700,000 debt,  this new law does not protect you from paying income tax on the $50,000 that was "short".  If you take out a mortgage to buy the house, refinance it for the amount owed on that mortgage (and no more), then your payment to pay off the mortgage is $50,000 short, you will not pay tax on that amount.

Another question is do you need to have lived there for 2 years out of the five years before your home is sold, as that requirement exists to establish a home as your principal residence in order to avoid paying tax on the gain when you sell your primary residence.   It does not make sense to impose that requirement based on the purpose and intent of the legislation, but there is a lot of the Internal Revenue Code that does not make sense.

One more question is what happens if you refinance the home and use the additional funds to remodel the home.  Normally, that would increase your basis in the home, so it would decrease your tax liability if you sold the house.  So, it would be logical to allow this type of refinancing to be subject to the protection of the new law.  Again, it is hard to rely on logic when dealing with the IRS, so I hope there are some regulations developed to interpret this situation.

The amount of forgiven debt that is not taxed is subtracted from the basis of your next house, so that when you sell it, you have to recognize more gain on that sale.  For example, you go short by $75,000 when you sell a home, you buy another one later for $600,000.  Your basis is not $600,000, but $525,000 as the $75,000 is subtracted from your basis.  So, when you sell it, you will have $75,000 more gain.  Remember, there is an exemption from tax for $500,000 of gain for a married couple filing jointly, so this amount of additional gain could be covered by this exemption.  Even if it is not, if you make more than $500,000 in gain and have to pay some tax, you should not cry too much.

One other good thing this law did was to extend the deduction for the payments for Mortgage Insurance to at least 2010.  We used to avoid Mortgage Insurance in sales that did not have 20% down payment, as it was not deductible.  Now it is.

It is hard to find the text of the law, but here is a link to how it looked when it passed, so you can read it for yourself. http://tinyurl.com/2qdnwj .   This law is so new, and in need of interpretation, that if you find yourself in this situation, you need to consult a tax professional before you sell.

So, for people who bought a home, did not refinance it for more, and sold it for less than they owed, there is no income tax due on the short sale, so long as the sale is less than two million dollars short.  This legislation eliminates one of the most miserable parts of a short sale, as it was obnoxious for a homeowner to loose all their equity, have to sell their house, and then get a tax bill.

If you have any thoughts on this, I enjoy comments.