Does the congress have the “Big Fix?”

By Joel Persinger

This past week the U.S. Senate passed S. 2338, the FHA Modernization Act. It did so to great fanfare. The California Association of Realtors even sent out a broadcast email to all of its members boldly stating, “Senate Passes FHA Loan Limit Increase! Big Win for California REALTORS!” This was supposed to be the panacea, the cure-all pill for what ails the housing and mortgage markets. Since the bill passed, my phone has been ringing off the hook with people calling to pump me with questions about what this is going to accomplish and how soon the market will turn around as a result of the Senate’s amazing achievement.

Politicians are a funny breed, and when you put a bunch of them together and ask them to solve a problem they have a very strange way of going at it. Committees are formed, hearings are held, talking points are issued, blustery speeches are given and promises are made all in the name of fixing the problem, which quite often was created by the politicians in the first place. Take the current state of the housing and mortgage industry, for example. Some years back, the congress decided that everyone in this country was entitled to own a home regardless of whether they could actually pay for it. So, the political folk put pressure on the mortgage industry to find ways to lend money to people who otherwise would never have a prayer of getting a loan. Thus, the sub-prime lending market was born.

Many years later we have a collapsed sub-prime market and a great many politicians who have been making blustery speeches expressing their shock and dismay at the fact that the evil mortgage industry has put so many people’s lives in unbelievable turmoil. Those greedy lenders have been making ridiculous loans to low income people who had no way of paying them back; never mind the fact that lenders would never have done it if congress hadn’t pushed them to do so. So, they march into the hallowed halls of congress, form committees, hold hearings, issue talking points, make blustery speeches and promise to fix the problem that the evil mortgage companies have caused.

I realize that by pointing out the classic role reversal on the part of congress I may appear to have become a cynic in my middle age, but there are some things that government simply doesn’t do well and fixing the problems it creates is one of them. By way of illustrating my point, let’s look at just one of the many issues plaguing the FHA Modernization Act which the Senate just passed. On the one hand, the Senate has expressed its concern that so many borrowers with no money were previously able to get loans. But, according to Shanne Sleder at Clarion Mortgage the bill that the Senate just passed by an overwhelming majority vote would reduce the amount of down payment that a borrower is required to have in order to get an FHA loan from 3% to 1.5%. This directly contradicts the Senate’s stated intent by lowing the bar, effectively allowing people with less money to get a loan. As Albert Einstein once said, “The problems that exist in the world today cannot be solved by the level of thinking that created them.”

Hope for the best. Prepare for the worst.

By Joel Persinger

The holidays have seen the government begin to wrestle with the on-going problems in the lending and housing market. Congress has been working on several bills, the President has proposed fixes for the mortgage industry and talking heads on television have thrown opinions around like snow balls in Julian. Even the Presidential candidates have started weighing in, promising the moon and the stars and anything else that might help their campaigns garner increases in the polls.

The most recent attempt to save the struggling housing market is the plan announced last week by President Bush. After meeting with mortgage industry leaders, the President announced a plan that would potentially save sub-prime borrowers whose loan rates are about to adjust upward from the “teaser” rates they currently enjoy to much higher interest rate. Without such relief, many people’s mortgage payments could almost double, potentially placing them in the position of having to walk away from their homes. Foreclosures would rise and the housing market would slide deeper into a slump.

In case you haven’t read the news about it, here are the basics. According to the Whitehouse, the plan is meant to help some 1.2 million distressed homeowners by freezing the current low interest rates for some distressed homeowners for a period of five years. There are some limitations: anyone who is 30 days late on their payment or has ever been 60 days late is excluded. Likewise, anyone whose loan adjusts prior to January 1, 2008 or is judged by the lender to be capable of paying the loan at the higher rates is also out of luck. Still in all, it appears to be a decent plan, at least in theory.

The issue at hand is the secondary mortgage market. After they have lent money to homeowners, lenders sell the loans to investors by packaging them into mortgage-backed securities. This means that anyone who has mortgage-backed securities as part of their investment portfolio (401K, money market fund, retirement fund, etc.) quite possibly owns part of these loans. So, how do you solve the problem presented by the fact that big wigs in the mortgage industry have apparently agreed to accept less interest on investments, which in many cases, they no longer own? It seems logical to me that the folks who own these loans just might not agree with the idea of getting less return on their investment, particularly when the big mortgage companies made their money when the sold the loans in the first place. Many in the industry are expecting a number of law suits to be file surrounding this issue which could delay the implementation of the plan.

How this will all flesh out nobody really knows, so the bottom line question in my mind is, “What can you and I do about it?” The simple answer is, if you are in some financial trouble or about to be when your loan adjusts, the only advice I can give you is to hope for the best. Things just might turn out all right. But, just in case the result is not quite what we’ve hoped for, it’s always best to plan for the worst by getting solid advice from professionals you trust. That way you won’t be caught sleeping.

The Professionals Only Market

By Joel Persinger
YourRealEstateDude.com

This past week I had occasion to bump into a few Realtors I know. Without exception each one asked me, “How’s business”. One fellow went on for quite some time about his single client who has, according to him, been quite a challenge. He expressed his frustration at having no choice but to work with a client who is a stinker simply because she’s the only client he has. Then he finished his lament with, “I keep wondering if this is only happening to me.” What I found most interesting was that each and every one of these folks expressed the same lament in almost exactly the same words, “It’s not that I don’t have any business, I just don’t have any business that will close escrow.”

So, why do so many real estate people have plenty of clients who want to sell or want to buy, but few, if any who can actually achieve it? The answer is simple. This has become a “Professionals Only” market.

In the terminology of “business” TV news shows, the current real estate climate is called a “down market” or “slump”, etc. Lenders have experienced serious losses due to loans going bad and have tightened the requirements that borrowers must meet in order to get a loan as a result. Sellers have to compete with thousand of “foreclosure” properties being sold by banks. Banks price these properties low so that they will sell fast. This drives prices down, often to the point that the average seller can no longer afford to sell. Thus, fewer people can buy and fewer people can sell. The situation gets worse when we consider the number of distressed sellers in the marketplace who owe more on their home than the property is currently worth. There are also those folks who are frozen in place because they can’t sell their current home in order to move up to a larger one or downsize into a smaller one. No matter how you look at it, the bottom line is that it is much harder to buy or sell in this market than it was before.

When times are good and properties are selling like hot cakes everybody who has a desire for fast cash races down to the Department of Real Estate to get a real estate license. Suddenly the market is flooded with thousands of new real estate agents, most of whom have no idea what they’re doing. Real estate firms, anxious to get their piece of the fast market pie, lower their hiring qualifications so much that just about anyone who can fog a mirror and has a real estate license can hire on. The result is a market full of inexperienced, opportunistic agents.

By contrast, our current market is agonizingly slow. Inexperienced, opportunistic agents don’t thrive in such markets because there is no easy money to be had. They have never actually established a business or built lasting relationships with their clients. Instead, they simply grabbed the business that fell into their laps during the good times. Neither do they know what to do in order to help any clients they may have now. Thing have become more difficult and complicated. Some of these opportunistic folks may hang on for a while, but most will leave the business before long leaving only the career minded, professional agents behind to serve.

So, if you are one of the clients hoping to sell or buy, where does this leave you? In my humble opinion, it’s time for you to leave the amateurs behind and look for a seasoned agent who has lived through times like these before. This is a “Professionals Only” market. Hire a professional. There are plenty of them out there.

Making the choice between “Short Sale” & Foreclosure

By Joel Persinger

As the prices of San Diego County homes have come down and low introductory interest rates on many home loans have gone up, some San Diegans have found themselves owing more on their homes than the properties are worth. This has given rise to a sharp increase in foreclosures as home owners find it difficult to cope with the increase in their mortgage payments and see little incentive in holding on to homes that aren’t worth what’s owed on them. In addition to foreclosures, this has also brought about a rash of what are called, “Short sales”, and with them the age old question posed by sellers, “Should I try to sell it or just walk away?” While there is often no clear answer, the question did spark a debate among my agents during the weekly training meeting at my office this past week. But, before I share the highlights of that discussion, a short explanation of foreclosures and short sales is in order.

Foreclosure is the more commonly understood of the two terms. Essentially, it refers to the process by which a lender reclaims a property when a borrower has failed to make the required payments on the loan. The lender goes through “foreclosure” in order to sell the property for the purpose of recouping the money lent to the borrower.

By contrast, a short sale is an action taken by the borrower in order to avoid foreclosure. In this case, the borrower (or homeowner) attempts to sell the home in order to satisfy the loan. However, the value of the home has decreased to the point that the value is no longer sufficient to pay off the loan. If the homeowner places the property on the market and succeeds in finding a buyer at the home’s current market value, the lender will lose money on the deal. In this case, the lender would have to agree to take a loss for the difference between the amount of proceeds from the sale and the loan balance. If the lender accepts the deal, the property will have been sold “short” of the amount owed. Thus, it is called a “Short sale.”

The individual situation often dictates which option a homeowner will elect to take. It should be noted that there are pros and cons to each. In the case of short sales, while I have no way of confirming the assertion, I have heard many people claim that a short sale will not cause quite as great a ding on your credit report as will a foreclosure. This is often why homeowners will choose this path. However, a short sale requires a great deal of effort and significant disclosure of information. Among other things, the lender will require that the homeowner provide tax and financial records, draft a “hardship letter” explaining why the payments cannot be made and demonstrated a diligent effort to sell the property for the highest possible amount. By contrast, foreclosure is somewhat easier, in that you simply stop making payments and walk away from the property. Additionally, a foreclosure may not have the income tax ramifications of a short sale. In the case of a short sale, it is quite common for lenders to send the homeowner an IRS form 1099 for the amount of the lender’s loss. No such form is issued in the case of a foreclosure. However, as mentioned before, foreclosure may have a much worse effect upon the borrower’s credit rating.

If you find yourself in the unenviable position of having to choose between foreclosure and selling your home in a short sale, the best advice I can give is that you seek competent professional counsel prior to making any decision. At minimum, you should speak to both a tax advisor and an attorney. And make sure that both are knowledgeable and experienced.