December 2009 - Page 2 of 3 - Real Estate News and Commentary

December 18, 2009October 5, 2019

How the Fed delays the next foreclosure wave

On Wednesday, the Open Market Committee of the Federal Reserve decided to keep the key interest rate unchanged (http://www.federalreserve.gov/newsevents/press/monetary/20091216a.htm). The rationale provided was that although the economy as a whole shows signs of recovery, it continues to be fragile. The OMC cited signs of a recovery as the “abating” unemployment, expanding household spending, and a stabilizing real estate market. The economy continues to be fragile due to tight credit, lower household wealth, and the reluctance for business to hire new employees.

Although there is no direct relationship between the Fed’s key interest rate and mortgage interest rates, the monetary policy of the Federal Reserve’s Open Market Committee does affect investor behavior; a majority of mortgage interest rates are directly related to bond yields that are traded in bond markets around the world.

Since adjustable mortgages have historically been more sensitive to any Fed rate adjustment (up or down) due to the nature of its short term vulnerability, many homeowners with adjustable rates (that are expected to reset in the next several months) are probably unaware that they may have dodged a bullet (in the form of possible negligible rate adjustments).

If you recall, many homeowners in 2006 and 2007 purchased homes with adjustable rate mortgages that had teaser rates as low as 1%. Many of these homeowners may not have been able to afford the homes if they were qualified at the higher fixed rate mortgage. The anticipated foreclosure wave is to include many of these homeowners who cannot afford the higher mortgage payments when rates reset at a higher interest rate. However as interest rates continue to stay relatively low; the anticipated foreclosure wave continues to be delayed as adjustable mortgages resets stay lower than anticipate.

Because many adjustable rate mortgages are due to reset this coming year, financial experts expected the next foreclosure wave to peak between 2010 and 2012. The Fed’s continued monetary policy to maintain the federal funds rate between 0 and ¼ percent as well as continued purchases of mortgage backed securities (albeit at a continued slower pace) will most likely have the indirect effect of abating another wave of foreclosures.

It is unclear what message would be sent if the Fed took another tack on monetary policy; however one could speculate that it may have signaled the beginning of the second foreclosure wave and possibly the beginning of the double dip recession.

This article is not intended to provide nor should it be relied upon for legal and financial advice.

December 14, 2009October 5, 2019

House Flipping makes a comeback

Short sales? Foreclosures? Fugetaboutit! House flipping is the new real estate buzz!

Flipping homes is an investor technique used to quickly sell a home, sometimes rehabilitating the home to current code and standards. Flipping is more prevalent in re-emerging markets (sometimes associated with recessions) because of the real estate investors’ ability to buy homes at wholesale and sell at retail prices. Flipping was also pervasive during the housing boom earlier this decade, when real estate speculators took advantage of the rapidly appreciating market by quickly re-selling homes they purchased almost as soon as they bought them.

Home flipping has been a viable technique included in many real estate investors’ business models. Flipping is not only a means for investors to make money, it has often been a part of neighborhood revitalization. Run down homes, that are often overlooked by home buyers, are made more appealing by modernizing and renovating to code.

Unfortunately, flipping has become synonymous with fraud and scam because of the vilification home flipping received in the mid to late 1990’s (as the result of widespread fraud scams that involved flipped homes). Several cities were known as “ground zero” for flipping scams, Baltimore being one, because of the investors’ ability to purchase homes for very little money.

Although, there is nothing wrong with flipping a home per se; flipping has been rebuked because mortgage fraud was often entwined with the flip in several ways: loan officers falsified income and/or credit information for unqualified home buyers; fraudulent appraisals were used to justify artificially inflated sales prices; and/or “straw buyers” were recruited by the scammers to facilitate the scam. Additionally, flipping scammers often defrauded unknowing home buyers by portraying homes as having renovations, when in fact the renovations were not preformed or of poor quality and not meeting code.

To protect consumers and stem the mounting losses due to illegal flipping, HUD took action. HUD defines “flipping” as, “… a practice whereby a recently acquired property is resold for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser…” (HUD MORTGAGEE LETTER 2003-07). To dissuade the financing of flips, FHA instituted a title seasoning (the time an owner is on title) requirement of at least 90 days; if the sale is between 91 and 180 days, the sales price cannot exceed 100% of the prior sales price.

In the wake of the illegal flipping scams that rocked many Baltimore neighborhoods, then Maryland Attorney General J. Joseph Curran, Jr. launched an initiative to combat deceptive real estate practices that included flipping and predatory lending. The initiative not only sought to prosecute scammers, but to educate home buyers through town hall meetings and a brochure.

The brochure (www.oag.state.md.us/consumer/flipbrochure.pdf) gives five signs that the sales price of the home may not be the value and that sale is a [illegal] flip, including: the seller does not answer questions about price or condition; and, the person “selling” the home is not on title or the home was recently sold.

Since flipping is on the rise, protect yourself by getting all the information. Find out if the seller is being deceptive, as well as how the flip may affect your ability to obtain a mortgage.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of December 14, 2009. Copyright © 2009 Dan Krell

December 12, 2009October 5, 2019

Bethesda street scenes

As a diversion from the business of real estate, here are a few street scenes of Downtown Bethesda; these photos were taken late morning Friday around Woodmont Ave.
( If you like to see more Bethesda, Chevy Chase, or other local areas, let me know! -Dan)

Facing North on Woodmont Ave. (south of Old Georgetown Rd).
Click photo to see larger view

Facing South on Woodmont Ave. (south of Old Georgetown Rd).
Click photo to see larger view

Facing North on Woodmont Ave. (in front of “The Chase”).
Click photo to see larger view

December 10, 2009October 5, 2019

What is DOM; why some agents choose to manipulate the material facts about DOM

“Days on Market,” or DOM is self descriptive – it is basically the number of days a home is “active” on the market. DOM is used by real estate professionals and economists to gauge the market and home inventory. Since real estate is a major component of the United States economy, these statistics are used by economists in examining the condition of the real estate market and the economy as whole.

Home buyers and sellers have also given meaning and significance to DOM. To some home buyers, the belief that an inverse correlation exists between the length of time a home is on the market and the seller’s motivation gives them the justification to make a lowball offer. But is the correlation accurate? If a home has been on the market 120 days when the average is 60 days, the seller maybe more motivated- but not necessarily ready to take a lower offer. Realistically, the high DOM may be an indication of a home that is over-priced to begin with; some sellers may reluctantly reduce the price as time goes along, while some are apt to hold on to the higher price.

In addition to supply and demand, home prices can be correlated to various factors through equilibrium models, such as price and condition, and price and size. As far as I know, no one has discussed an equilibrium model to indicate a correlation between price and DOM; DOM is not only dependant on market conditions but also dependant on variables such as seller’s personality and financial situation.

Just like home buyers, home seller’s assign meaning to DOM based on conjecture rather than sound reasoning. If a home is on the market longer than the average DOM, many sellers tend to focus solely on their real estate agent’s effort (or lack of effort); conversely, some sellers are led to believe they may have sold for too little if the home sells in less than the average DOM.

Real estate agents give credence to the emphasis of DOM placed by home buyers and sellers; and some agents add their own emphasis such that they are compelled to manipulate a material fact about a home. Yes, my local MLS (MRIS) considers DOM a material fact about a home. Manipulating DOM is not only manipulating a material fact, it also appears to be a violation of National Association of Realtor’s Code of Ethics Article 1 (“…REALTORS® remain obligated to treat all parties honestly.”) and Article 2 (“REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property…”).

If the reasoning behind the emphasis for DOM by home buyers and sellers is speculative, and the DOM may be manipulated by the listing agent any way- what’s the big deal anyway? I honestly have never had anyone list DOM as criteria for their home search. Need more information about DOM? Talk to your Realtor about DOM and its significance to your purchase or sale.

This article is not intended to provide nor should it be relied upon for legal and financial advice.

December 9, 2009October 5, 2019

Be your best advocate; get to know RESPA

One of the most important pieces of legislation that home buyers need to be aware of is The Real Estate Settlement Procedures Act (a.k.a. RESPA). Although RESPA has been around since 1974, it’s a wonder that the professionals whom consumers depend on have had trouble understanding the law. And in some cases it’s more of a problem of following the law.

To protect the consumer, RESPA clearly spells out some of the many do’s and don’ts for those in the real industry. According to HUD (HUD.gov), RESPA is a “ …consumer protection statute designed to help homebuyers be better shoppers in the home buying process, and is enforced by HUD…”

Of all the sections of RESPA, Section 9 appears to be the area that gets the least attention. Section 9 prohibits home sellers from requiring home buyers to use a specific title insurance company as a condition of sale. Seems simple enough, right? In an owner occupied resale transaction, a buyer may not encounter such pressure from the seller. However the number of Section 9 complaints from buyers may have increased in the last two years corresponding to the explosion of foreclosures and short sale transactions. Many MLS entries of such sales have remarks such as: “must use ABC title” or “settle with XYZ title,” which are direct or indirect statements that fly in the face of Section 9.

The first thought of a seller who directs the buyer to use a particular title agent may be one of kickbacks and affiliated businesses (which is regulated by RESPA Section 8). However, even if the seller may have a reasonable case to require the use of their title agent as a condition of the sale, the fact is that it is prohibited by Section 9 (caveat notwithstanding).

The reasons for a buyer to choose their own title agent include price and service. If a buyer has the ability to select their own title agent, they can compare prices for title insurance and affiliated services. Additionally, the buyer may also be able to compare title agents on their professional and service reputations. Having the title agent be responsive, file the correct documents, and distribute escrow funds in a timely manner should be taken seriously; title problems may plague you in the future if releases and mortgages are not filed correctly with the County.
Become your best advocate and get acquainted with RESPA. You can visit HUD’s consumer website to get further explanation on Section 9 and other sections of RESPA as well as the complaint process.

If you feel that the seller violated Section 9 and you were forced to use a seller’s title agent as a condition of the sale, consult with an attorney- you may be able to seek damages up to three times the amount you paid for the title insurance.

To enforce RESPA, HUD wants to know about your RESPA complaints by sending an outline of the violation and the violators name, address and phone number (along with your contact information) to the Director, Office of RESPA and Interstate Land Sales, US Department of Housing and Urban Development, Room 9154, 451 7th Street, SW, Washington, DC 20410.