About Dan Krell

October 9, 2009October 5, 2019

Commercial real estate bubble bust

by Dan Krell &copy 2009
www.DanKrell.com

If Wall Street is considered by some to be the “life blood” of the United States economy, then commercial real estate can be described as the economy’s lungs. If you can take a pulse of the economy by looking at Wall Street’s progress, then you can measure how well the economy “breathes” and thrives by looking at the state of commercial real estate. Even though Wall Street’s markets have somewhat rebounded from last fall’s correction, a bust in commercial real estate can correct Wall Street’s correction with another dip into the recession bin.

Owners of commercial real estate depend on cash flow to service their debt; this means that they depend on their business to pay their mortgages. For owners of retail and office centers, this means that the key to paying their mortgages is to collect the rents from businesses leasing space. When the economy is strong, vacancies are low and lessees pay their rents. As the economy slipped into a recession, vacancies increased and owners of retail and office centers found it more difficult to service their debt.

Commercial real estate financing is much different than residential real estate financing. Unlike residential mortgages, where typical terms are 30 years and underwriting guidelines are standardized for many programs; the terms and conditions of commercial real estate mortgages are often tailored to the risk level of the individual project or property.

Because commercial real estate mortgages are due in shorter periods (usually a balloon note), owners of commercial property are always looking for better rates and terms to improve their cash flow. As liquidity dried up in the last year due to bank fall outs and shake ups, some commercial real estate owners are finding it more difficult to refinance their notes that are coming due.

This double whammy is the reason for many real estate analysts’ predictions of a bursting commercial real estate market. As Lingling Wei and Peter Grant pointed out in their August 31st Wall Street Journal commentary (Commercial Real Estate Lurks as Next Potential Mortgage Crisis), delinquencies in commercial mortgage backed securities (bundled loans sold to investors such as hedge funds and pension plans) rose 600% to a delinquency rate of 3.14% in July 2009 as compared to the same time the previous year.

Wei and Grant also point out that an additional $1.7 trillion worth of commercial mortgage notes are being held by banks. As notes become due, bank losses are also expected to increase because of the inability to re-finance mortgages. Many commercial real estate owners and their lenders are finding that commercial properties are increasingly burdened by vacancies, making it more difficult to service the debt, while commercial real estate values are being driven down due to increasing defaults and foreclosures.

The good news is that like residential real estate, commercial real estate data is regional (depending on local market activity). Local commercial Realtor, Cory Hoffman (of Thur and Associates located in Mclean, VA) was optimistic when he said that “the commercial real estate market will get worse before it gets better…but the Washington D.C. commercial market will not be as hard hit as the rest of the country…” because of the strong government job market and stronger local economy.

This column 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 September 28, 2009. Copyright © 2009 Dan Krell

October 9, 2009October 5, 2019

FHA is taking care of business

by Dan Krell &copy 2009
www.DanKrell.com

After almost being absent in the local real estate market, the FHA (Federal Housing Administration) mortgage is now the mortgage of choice. Due to the almost eradication of “Alt-A” and sub-prime mortgages from the marketplace, home buyers who have little money for down payment and need flexible underwriting have once again turned to FHA. FHA is not only assisting home buyers, but financially challenged home owners are also being assisted through FHA refinance programs. The FHA mortgage has once again become the workhorse of the mortgage industry

The cycle of home buyer’s usage of FHA mortgages makes sense if you look at the explosive availability of “Alt-A” and subprime mortgages (which had lower credit and/or documentation requirements) earlier this decade. The increased usage of these mortgages reduced home buyers’ reliance on FHA to make their purchases. This home buyer behavior is supported by a study that determined a home buyer’s “mortgage debt decision” (between a conventional mortgage and a FHA mortgage) is dependent on their down payment, amount of the monthly mortgage payment, and mortgage insurance payments (Hendershott, LaFayette, and Haurin; 1997; Journal of Urban Economics, 41:2, 202-217).

With the decline of “Alt-A” and sub-prime lending, the number of FHA mortgages originated has recently increased significantly. Nick Timiraos and Deborah Solomon reported (The Wall Street Journal, “Loan Losses Spark Concern Over FHA,” September 4, 2009) that as of the 2nd quarter of this year, FHA’s “market share” increased to 23% as compared to 2.7% in 2006. As the number of FHA mortgages increased, so has the number of defaults; Timiraos and Soloman quoted the Mortgage Bankers Association statistics of 7.8% of FHA mortgages in the 2nd quarter were 90 or more days late or in the foreclosure processes (up from 5.4% a year ago).

As FHA’s risk exposure increases, so does concern over FHA’s capital reserves. In a September 18th press release (HUD.gov/news), FHA Commissioner David H. Stevens announced that FHA will take measures to reduce risk in response to the anticipated result of FHA’s annual actuarial study that may indicate that FHA’s capital reserve is below the congressionally mandated 2%. Although Commissioner Stevens stated,” …the fund’s reserves are sufficient to cover our future losses…the FHA will not require taxpayer assistance or new Congressional action,” he made it clear that “…credit policy and risk management changes are important steps in strengthening the FHA fund, by ensuring that lenders have the proper and sufficient protections.”

In addition to the announcement of adding a Chief Risk Officer, Commissioner Stevens announced changes to credit requirements, appraisal requirements, and streamline refinance procedures. Credit requirements on mortgagees (lenders) will change to ensure that lenders are properly capitalized; changes include increased lender net worth from $250,000 to $1M, and submit audited financial statements from supervised mortgagees.

FHA will adopt language from the Home Valuation Code of Conduct (HVCC), already adopted by Fannie Mae and Freddie Mac, which requires appraiser independence. Due to the volatility of the housing market, the FHA appraisal validity period will be decreased to four months from six months.

To tighten standards on FHA streamline refinancing, new procedures will focus on mortgage seasoning, borrowers’ payment history, collection of credit score, and a stated benefit to the borrower. Additionally, the loan amount will be limited to 125% of the value of the home.

October 1, 2009October 5, 2019

Your credit report = Your permanent record

by Dan Krell &copy 2009
www.DanKrell.com

Did you have a “permanent record” in school? Well, believe it or not, you still have a permanent record; it is called your credit report. Because your credit report can influence more than your ability to get a mortgage, it’s important to ensure that it is accurate.

Many in the credit industry call the credit report a “snapshot” of your credit use; how much credit you take and how you pay it back. In truth, it’s a bit more; it’s a snapshot of your life. The Federal Reserve board of San Francisco (frbsf.org) describes a typical credit report as containing personal identifying information, credit information, public information, and inquires into your credit report. Besides indicating your name (and aliases), birthday and social security number, your credit report may also indicate your current and past addresses, current and past telephone numbers, and current and past employers. Your credit report may also indicate your present and past spouses along with their personal information!

The credit information indicated on your credit report usually includes revolving credit (such as credit cards) and installment loans (which includes mortgages, auto loans, and student loans). The information reported includes the date the account was opened, the amount loaned and/or credit limit, the type of account, any co-signer, and of course your payment history. Additionally, the report also indicates collection activity undertaken to have you repay any unpaid accounts. Collection activity can be reported for charged off credit cards, foreclosure, and for such items ranging from hospital bills to child support.

Public information refers to records kept in the county, state, and federal courts (and is available to the public). Information that may appear in the public records section includes bankruptcies, personal liens, and judgments.

Anyone claiming that they have a legitimate need to see your credit report can order it through one of the credit reporting agencies; these inquiries are listed in your credit report. Besides banks, lenders, and those who extend credit, others who may be able to view your credit report include (but not limited to) employers, landlords, child support enforcement, and government agencies.

Credit reporting agencies such as Equifax (equifax.com), Experian (experian.com), and Tran Union (transunion.com) act as information repositories and collect all the information described above. Besides collecting information about you from creditors and public records, it is possible that credit reporting agencies may accrue information from other sources too. The information that is accrued about you is analyzed to produce your risk score. Each credit reporting agency uses a complex algorithm to compute your score which is widely used in decisions to extend you credit.

Given the amount of information that is processed by credit reporting agencies, it is common for errors to appear. To ensure your credit report information is accurate, you have the right to receive your credit report from each of the credit reporting agencies once a year. You can order your credit report either from annualcreditreport.com or from each of the credit reporting agencies (see above). You can dispute any errors by following the instructions for each credit reporting agency. For additional information on disputing credit report information you can refer to each of the crediting reporting agencies above as well as the Federal Trade Commission (FTC.gov).

October 1, 2009October 5, 2019

What happens to your earnest money deposit?

by Dan Krell &copy 2009
www.DanKrell.com

Nothing confuses home buyers and sellers more, than earnest money. Simply put, earnest money is given as consideration money for the home seller to accept the home buyer’s offer, to take the home off the market and deter the home buyer from defaulting. For a home seller, the larger the earnest money the better; the home seller will surely be happy with a nice chunk of change deposited as earnest money. The home seller views the earnest money deposit as a possible source of compensation for damages in case of buyer default (but is not guaranteed).

Although the amount of earnest money is negotiated between the home buyer and seller, a home seller may sometimes require a minimum amount of earnest money to be held as consideration for the purchase. However, the amount offered as earnest money varies. Factors often taken into consideration when deciding on an amount to offer as an earnest money deposit includes: the price of the home being purchased and the amount of money the home buyer has available.

Many home buyers have the notion that the higher the amount of the earnest money, the more apt the seller would accept the offer. But this is not always the case. During the huge seller’s market earlier this decade, it was not unusual for home buyers to write very large earnest money checks, sometimes up to ten percent of the sales price! Home sellers required these large amounts as consideration and to differentiate the best offer from the many they received. However, as the market cooled, home sellers were happy to receive any offer – even with a modest earnest money amount.

Earnest money is not used much now to differentiate home buyers. The bottom line for many home sellers (especially for foreclosures and short sales) these days includes the net at closing and ensuring the home buyer completes the purchase. Because buying distressed properties can take longer than a usual sale, many home buyers are deciding to offer low amounts for earnest money so as to not tie their money up for several months.

Most often earnest money is given in the form of a personal check that is often held in an escrow account by the buyer’s broker. Sometimes, the seller requests that their broker or title agent hold the deposit. Additionally, the seller sometimes requests the earnest money be in the form of certified funds (such as a cashier’s check or money order); this is to ensure the funds are available.

If the home sale goes as planned, then the earnest money is credited to the home buyer at settlement. However, the fate of the earnest money is often in question when the sale is not consummated. If the home seller feels that the home buyer is in default, the seller will often try to claim the earnest money; but it is not always easy.

There is nothing more contentious than earnest money in a real estate deal that did not close. If you have questions about the disposition of an earnest money deposit, you should always consult an attorney. If the deposit is held by a Maryland real estate broker, the broker can only distribute the earnest money deposit in accordance with Title 17 Maryland Business Occupations and Professions of the Annotated Code of Maryland 17-505.

September 14, 2009October 5, 2019

Options to lower mortgage payments

by Dan Krell © 2009
www.DanKrell.com

If selling your home is not in your near future, you may be indifferent to real estate market trends. But, would you be interested in lowering your mortgage payment?

Several months ago I told you about the government push to modify and refinance mortgages to assist home owners to keep their homes. The Obama Administration’s Making Home Affordable program (makinghomeaffordable.gov) is up and running and gaining momentum!

If you are facing financial challenges and need assistance to lower your mortgage payment, the Home Affordable Modification may be able to help you. To qualify, the mortgage must be on your principle residence, must not exceed $720,750, and must have been received prior to January 1, 2009. Additional requirements include having difficulty in paying the monthly payment due to: having increases in monthly payments, having a reduced income, experiencing hardships that increase your expenses; and/or your mortgage payment exceeds 31% of your gross income.

If you are current on your mortgage but find it difficult to refinance because the mortgage balance exceeds your home’s value, the Making Home Affordable Refinance may be for you. The Making Home Affordable Refinance program allows home owners to refinance mortgages up to 125% of the value of the home. To qualify you must be current on your mortgage, the mortgage must be on a residential building (up to four units) that was bought by Fannie Mae or Freddie Mac. To find out if your mortgage was sold to either Fannie Mae or Freddie Mac, you can either call your servicer or you can check on your own by going to their corresponding websites (loanlookup.fanniemae.com or freddiemac.com).

You can determine if you qualify for the Home Affordable programs through completing a brief questionnaire on the Making Home Affordable website (makinghomeaffordable.gov). If you qualify for these programs, you will need to contact your mortgage servicer and request one of the Home Affordable programs (refinance or modification). The servicer will need your income and asset information (hardship information is also required to process the Home Affordable Modification) to assist them in processing your request. The process will be slow, but making frequent calls to follow the progress is necessary to ensure you don’t miss a step.

What if your mortgage balance is less than your home’s value and your credit is excellent? If you haven’t yet taken advantage of recent mortgage interest rate lows, you might consider an automatic rate reduction loan (ARR mortgage). An ARR mortgage is a loan where the rate automatically lowers as mortgage rates fall. ARR mortgage programs have been around for some time, but haven’t received much press lately because mortgage rates have been relatively low.

Although not many lenders offer ARR mortgage programs, ARC Loan (arcloan.com) has been offering “mortgage management” since 1993. According to the ARC Loan website, the program seeks to take advantage of mortgage cycles to assist their clients in saving money and reducing debt. Because everyone’s needs and situations are different, ARC Loan consultants take the time to provide a personalized analysis to determine if you qualify and if an ARC Loan can improve your financial picture.

Many options now exist to lower mortgage payments for home owners in various financial situations. If you qualify, taking advantage of these programs may lower your monthly payments.