By Joel Persinger
King Solomon once wrote that “plans fail for lack of council, but with many advisors they succeed”. In the constantly changing environment of today’s economy and real estate market, a truer statement could not be found. Just when it seems that some new tax law, relief bill, lending product or government action has solved all the problems that the real estate market is facing, some expert sifts through the details and finds that the fix doesn’t apply to everyone. Often times the "everyone" it doesn’t apply to includes you and me. Hence the reason for getting lots of advice.
The problem I have run into recently is that some folks unwittingly seek advice from people who are not qualified to give it. This is one of the issues that King Solomon was trying to deal with when he suggested the use of “many” advisors. In the past, my wife and I have gotten excellent financial advice from people whose kids (we couldn’t help noticing) were disasters looking for places to happen. While we were grateful for the terrific financial advice, there was not the chance of an ant on a New York City sidewalk during rush hour that we would ever have asked those same people for advice about raising our children.
Keeping this in mind, it should be noted that real estate agents have a limited ability to give quality advice when it comes to… well… real estate. For example: in most cases, real estate agents are not attorneys, tax professionals, CPAs or builders. Therefore, although they may be great sources for advice about the process of selling or buying a home, the vast majority of real estate professionals are not the best people to ask about legal, tax or construction issues. In fact, it has been my experience, particularly where legal and tax issues are concerned, that most real estate agents know just about enough to be dangerous and not one bit more. Frankly, I can’t say that I’m much different. Even though I started in real estate in 1990, am the CEO of my firm, manage several agents and pride myself on keeping up with what’s happening in the real estate industry, I am by no means qualified to give legal or tax advice.
In a market in which many folks are facing the loss of their homes through foreclosures or having to sell their homes in other than ideal circumstances, it is of vital importance that they know where to get the advice they need. When it comes to determining the risks of legal action, estimating potential damage to credit ratings or preparing for the possible tax consequences of losing a home, your real estate agent, no matter how much you may like and trust that person, is most likely not qualified to offer advice. So, as your real estate dude, the best advice I can give you about getting advice is this: first, make sure the person from whom you are soliciting advice is qualified to give it, and second, make sure you have selected an advisor who will tell you the truth, not just tell you what you want to hear. If you follow these simple rules, the advice you receive is more likely to be the advice that you need.
Monday, January 21, 2008
Monday, January 14, 2008
B of A buys Countrywide Home Loans. Is that good?
By Joel Persinger
It has long been suspected among those in the housing and mortgage industry that Countrywide Home Loans has had one foot in the grave and the other on a banana peal. As far as many were concerned, it was only a matter of time before the company slipped and fell into its tomb, never to be seen or heard from again. In fact, it was only about a week ago that there was wide spread speculation that Countrywide was on the verge of filing bankruptcy.
It all began when the sub-prime lending market started going to pot. The company was quickly overwhelmed by the sudden influx of home-loan delinquencies and foreclosures followed by a loss of investor funds. Money which had previously been available from government agencies and investment firms through the secondary money market began to dry up. This meant that Countrywide did not have money with which to fund new loans and had to incur additional debt in order to stay in business. According to MarketWatch.com, “The company borrowed more than $10 billion from banks and started funding a lot of its loans with retail deposits from its thrift unit, Countrywide Bank. It also borrowed a lot of money from the government through the Federal Home Loan Bank of Atlanta… But those lifelines began dwindling in recent months.” This left Countrywide stripped of support from investors. Stock prices came crashing down by over 80% in the last year, leaving many investors wondering why they had ever chosen to invest in the company in the first place. The only answer seemed to be some sort of “bail-out.”
This past week, Bank of America came to the rescue by purchasing Countrywide Home Loans for an estimated $4 billion in stock. That is less than one third of Countrywide’s estimated book value. It appears to be quite a deal for B of A. But, it is important to remember that along with Countrywide’s assets come its liabilities. Among the baggage that B of A will have to contend with are the many Countrywide loans which have gone bad as well as the tsunami of sub-prime mortgage litigation which may be heading Countrywide’s way.
All that having been said, this seems to be the right acquisition at precisely the right time. B of A swooped in and purchased Countrywide for a song and can easily solve the company’s funding problems. Bank of America’s retail deposit base is the largest in the United States. There will obviously be some bumps in the road for Bank of American, but all in all, this should bode well for all of the parties involved, particularly homeowners and the mortgage and housing industry as a whole. Countrywide is a huge player in the home lending industry. When huge players go down in flames just about everybody gets burned to one degree or another. Keeping the company viable by selling it to a giant like B of A can be nothing but positive.
It has long been suspected among those in the housing and mortgage industry that Countrywide Home Loans has had one foot in the grave and the other on a banana peal. As far as many were concerned, it was only a matter of time before the company slipped and fell into its tomb, never to be seen or heard from again. In fact, it was only about a week ago that there was wide spread speculation that Countrywide was on the verge of filing bankruptcy.
It all began when the sub-prime lending market started going to pot. The company was quickly overwhelmed by the sudden influx of home-loan delinquencies and foreclosures followed by a loss of investor funds. Money which had previously been available from government agencies and investment firms through the secondary money market began to dry up. This meant that Countrywide did not have money with which to fund new loans and had to incur additional debt in order to stay in business. According to MarketWatch.com, “The company borrowed more than $10 billion from banks and started funding a lot of its loans with retail deposits from its thrift unit, Countrywide Bank. It also borrowed a lot of money from the government through the Federal Home Loan Bank of Atlanta… But those lifelines began dwindling in recent months.” This left Countrywide stripped of support from investors. Stock prices came crashing down by over 80% in the last year, leaving many investors wondering why they had ever chosen to invest in the company in the first place. The only answer seemed to be some sort of “bail-out.”
This past week, Bank of America came to the rescue by purchasing Countrywide Home Loans for an estimated $4 billion in stock. That is less than one third of Countrywide’s estimated book value. It appears to be quite a deal for B of A. But, it is important to remember that along with Countrywide’s assets come its liabilities. Among the baggage that B of A will have to contend with are the many Countrywide loans which have gone bad as well as the tsunami of sub-prime mortgage litigation which may be heading Countrywide’s way.
All that having been said, this seems to be the right acquisition at precisely the right time. B of A swooped in and purchased Countrywide for a song and can easily solve the company’s funding problems. Bank of America’s retail deposit base is the largest in the United States. There will obviously be some bumps in the road for Bank of American, but all in all, this should bode well for all of the parties involved, particularly homeowners and the mortgage and housing industry as a whole. Countrywide is a huge player in the home lending industry. When huge players go down in flames just about everybody gets burned to one degree or another. Keeping the company viable by selling it to a giant like B of A can be nothing but positive.
Monday, December 31, 2007
Forecasts for real estate in ‘08
By Joel Persinger
One of the many interesting things that happened in the real estate business this December was the “Eighth Annual Residential Real Estate Conference” presented at the Burnham-Moores Center for Real Estate at the University of San Diego. This year it was billed as “Outlook 2008.”
Several hundred industry leaders representing mortgage banking firms, banks, credit unions, real estate brokerages, home builders, developers and the like, attended this early morning symposium to hear the forecasts and fortune-telling of various economists and other industry leaders. This was followed by regional predictions offered by the current graduate students and a round table question and answer period involving a panel of experts. The end result was a rather fascinating examination of the previous year’s business statistics and a host of expert predictions regarding the coming year, not one of which seemed to agree with any of the others to any great extent. This is hardly surprising. Any time you get twenty “experts” to come together and opine, you are certain to get at least twenty different opinions. As my grandfather used to say, “A camel is nothing but a horse that was designed by a committee.”
All the same, there were some general agreements and not just a few interesting little tidbits of information that came out of it. Among them was the consensus that the recent downturn in the San Diego real estate market is quite different than that which occurred in the early 1990’s. Deputy Chief Economist for the California Association of Realtors Doctor Robert Kleinhenz, Ph.D. was most eloquent in his defense of this assertion when he clarified the differences in the basic economies of the two periods and the underlining causes of the downturns. According to Dr. Kleinhenz, the housing slump of the 1990’s was chiefly the result of high paying jobs leaving the County as the companies which offered them moved to other states. I was practicing real estate at the time and vividly remember the mass migration of aerospace jobs from San Diego to Denver, Colorado during that period. Aerospace was one of many industries that left town. The result was a staggering drop in home prices during a time when interest rates were quite high. The real estate market simply came to a halt.
By contrast, today’s San Diego economy is far more vibrant and the causes of today’s real estate slump are quite different. Unlike previous real estate downturns which were caused by other forces in the economy, Dr. Kleinhenz demonstrated that, for the first time that he could discover, our current downturn has actually come about in reverse. In the past, the real estate market has slowed as a result of other disruptions in the economy. This was the case in the 1990’s. However, for the first time according to Dr. Kleinhenz, the real estate market was driven to its knees by itself. There was universal agreement between the presenters at the conference that the current sharp decline in housing sales was most radically affected by the lending industries decision to tighten underwriting standards in the second quarter of 2007, making it much more difficult for borrowers to acquire loans.
This general consensus was that lenders may loosen their underwriting standards somewhat this coming year and that changes in the law will have some positive affect on lending as well. The economists’ predictions were that prices will continue to decline slightly for the first half of 2008 and that the market, while still remaining slow, will begin to turn around in the second half of the year. It should be noted that the students who presented agreed. This is perhaps the most important piece of information, since from year to year the students appear to have been more accurate in their forecasts than anyone else. Either way, this is not nearly the gloomy picture of the coming year that many have painted. If 2008 turns out to spell the end of real estate’s downward slide and begin its recovery, it could be a happy new year after all.
One of the many interesting things that happened in the real estate business this December was the “Eighth Annual Residential Real Estate Conference” presented at the Burnham-Moores Center for Real Estate at the University of San Diego. This year it was billed as “Outlook 2008.”
Several hundred industry leaders representing mortgage banking firms, banks, credit unions, real estate brokerages, home builders, developers and the like, attended this early morning symposium to hear the forecasts and fortune-telling of various economists and other industry leaders. This was followed by regional predictions offered by the current graduate students and a round table question and answer period involving a panel of experts. The end result was a rather fascinating examination of the previous year’s business statistics and a host of expert predictions regarding the coming year, not one of which seemed to agree with any of the others to any great extent. This is hardly surprising. Any time you get twenty “experts” to come together and opine, you are certain to get at least twenty different opinions. As my grandfather used to say, “A camel is nothing but a horse that was designed by a committee.”
All the same, there were some general agreements and not just a few interesting little tidbits of information that came out of it. Among them was the consensus that the recent downturn in the San Diego real estate market is quite different than that which occurred in the early 1990’s. Deputy Chief Economist for the California Association of Realtors Doctor Robert Kleinhenz, Ph.D. was most eloquent in his defense of this assertion when he clarified the differences in the basic economies of the two periods and the underlining causes of the downturns. According to Dr. Kleinhenz, the housing slump of the 1990’s was chiefly the result of high paying jobs leaving the County as the companies which offered them moved to other states. I was practicing real estate at the time and vividly remember the mass migration of aerospace jobs from San Diego to Denver, Colorado during that period. Aerospace was one of many industries that left town. The result was a staggering drop in home prices during a time when interest rates were quite high. The real estate market simply came to a halt.
By contrast, today’s San Diego economy is far more vibrant and the causes of today’s real estate slump are quite different. Unlike previous real estate downturns which were caused by other forces in the economy, Dr. Kleinhenz demonstrated that, for the first time that he could discover, our current downturn has actually come about in reverse. In the past, the real estate market has slowed as a result of other disruptions in the economy. This was the case in the 1990’s. However, for the first time according to Dr. Kleinhenz, the real estate market was driven to its knees by itself. There was universal agreement between the presenters at the conference that the current sharp decline in housing sales was most radically affected by the lending industries decision to tighten underwriting standards in the second quarter of 2007, making it much more difficult for borrowers to acquire loans.
This general consensus was that lenders may loosen their underwriting standards somewhat this coming year and that changes in the law will have some positive affect on lending as well. The economists’ predictions were that prices will continue to decline slightly for the first half of 2008 and that the market, while still remaining slow, will begin to turn around in the second half of the year. It should be noted that the students who presented agreed. This is perhaps the most important piece of information, since from year to year the students appear to have been more accurate in their forecasts than anyone else. Either way, this is not nearly the gloomy picture of the coming year that many have painted. If 2008 turns out to spell the end of real estate’s downward slide and begin its recovery, it could be a happy new year after all.
New Tax Law Helps Distressed Homeowners
By Joel Persinger
One of the many wonderful things about Christmas is the fact that our leaders in both the Congress and the Whitehouse would like to be able to go home for the holidays. But, they have to get their work done before they can go. Consequently, they actually put their noses to their respective grindstones and get some things done. There’s nothing like a deadline to spur someone on to greatness. This Christmas season is no different.
As reported by the California Association of Realtors, on December 20th, just in time for Christmas, President Bush signed into law a measure that gives tax breaks to homeowners who have mortgage debt forgiven. This is a fabulous Christmas present for all those who are forced to sell their homes because of financial hardship, yet owe more on their homes than the houses are presently worth.
Under preexisting law, when a homeowner sold a home for less than the balance owed on the loan, the lender would send that homeowner a 1099 for the difference between the amount the lender received as a result of the sale and the balance due on the loan. If the homeowner had a loan balance due of $500,000 and was only able to sell the home for $400,000 the lender would likely receive somewhere in the neighborhood of $375,000 after all the costs of sale were subtracted. Preexisting law required the lender to send the homeowner a 1099 for the difference; in this case $125,000. The homeowner would then be required to pay taxes on the $125,000 as if they had actually received that money. Many such folks are already bailing like mad to keep their financial ships afloat to begin with. A tax liability of this magnitude would likely put a hole in their boats that would sink them financially for years.
As of the signing of Mortgage Forgiveness Debt Relief Act of 2007, the problems created by the “phantom tax” have been effectively eliminated for many distressed homeowners. This paves the way for many more sales to be completed without the need for lenders to foreclose. Previously, the main obstacle preventing homeowners from selling prior to foreclosure has been the fear that they will end up swamped in tax liability. As a result, many have chosen to simply walk away from their homes in the hope that the non-judicial foreclosure process might prevent their lender from sending them the 1099. It has been a choice of the lesser of two evils; sell the home for less than what is owed and suffer the tax consequences or allow the lender to foreclose and suffer the greater damage to the homeowner’s credit score. The change in the law will allow the homeowner to sell the home without the income tax consequences, rescue some of their credit rating by doing so and walk away rightfully feeling that they have done their level best to do what is right. It may also stem the tide of foreclosures which have been predicted this coming year.
As with any new law, there are rules that must be followed and limitations as to its application. For example: the law applies to loans secured by a qualified principle residence (qualified principal residence indebtedness is that which was incurred in acquiring, constructing, or substantially improving a residence), so your rental property is not going to be covered. There are other restrictions as well. So, getting good tax advice is a must. Still, for those who will be helped by the new law, it is most likely the best gift they will find under their tree this year.
One of the many wonderful things about Christmas is the fact that our leaders in both the Congress and the Whitehouse would like to be able to go home for the holidays. But, they have to get their work done before they can go. Consequently, they actually put their noses to their respective grindstones and get some things done. There’s nothing like a deadline to spur someone on to greatness. This Christmas season is no different.
As reported by the California Association of Realtors, on December 20th, just in time for Christmas, President Bush signed into law a measure that gives tax breaks to homeowners who have mortgage debt forgiven. This is a fabulous Christmas present for all those who are forced to sell their homes because of financial hardship, yet owe more on their homes than the houses are presently worth.
Under preexisting law, when a homeowner sold a home for less than the balance owed on the loan, the lender would send that homeowner a 1099 for the difference between the amount the lender received as a result of the sale and the balance due on the loan. If the homeowner had a loan balance due of $500,000 and was only able to sell the home for $400,000 the lender would likely receive somewhere in the neighborhood of $375,000 after all the costs of sale were subtracted. Preexisting law required the lender to send the homeowner a 1099 for the difference; in this case $125,000. The homeowner would then be required to pay taxes on the $125,000 as if they had actually received that money. Many such folks are already bailing like mad to keep their financial ships afloat to begin with. A tax liability of this magnitude would likely put a hole in their boats that would sink them financially for years.
As of the signing of Mortgage Forgiveness Debt Relief Act of 2007, the problems created by the “phantom tax” have been effectively eliminated for many distressed homeowners. This paves the way for many more sales to be completed without the need for lenders to foreclose. Previously, the main obstacle preventing homeowners from selling prior to foreclosure has been the fear that they will end up swamped in tax liability. As a result, many have chosen to simply walk away from their homes in the hope that the non-judicial foreclosure process might prevent their lender from sending them the 1099. It has been a choice of the lesser of two evils; sell the home for less than what is owed and suffer the tax consequences or allow the lender to foreclose and suffer the greater damage to the homeowner’s credit score. The change in the law will allow the homeowner to sell the home without the income tax consequences, rescue some of their credit rating by doing so and walk away rightfully feeling that they have done their level best to do what is right. It may also stem the tide of foreclosures which have been predicted this coming year.
As with any new law, there are rules that must be followed and limitations as to its application. For example: the law applies to loans secured by a qualified principle residence (qualified principal residence indebtedness is that which was incurred in acquiring, constructing, or substantially improving a residence), so your rental property is not going to be covered. There are other restrictions as well. So, getting good tax advice is a must. Still, for those who will be helped by the new law, it is most likely the best gift they will find under their tree this year.
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