Real Estate News and Commentary

October 30, 2009October 5, 2019

Looming rental crisis

Renting is not just for those who are unprepared to own a home. These days, many individuals and families are finding that they are seeking rentals because they are being evicted by their foreclosing lenders.

Some have called the influx of renters a crisis in the making, but the extent of the crisis is not yet clear. Many seeking a rental are finding that it is not as easy as they thought; they are finding that applying for a rental is much like applying for a mortgage.

If you plan to apply for a rental (home or apartment) be prepared to provide your personal information to the landlord/management company. Much like mortgage underwriters, landlords and management companies want to make sure you have the ability to pay the monthly rent and through the term of the lease. In addition to collecting your income and employment information, they may also require references from employers and/or previous rentals. Additionally, they will check your credit report to see if you have a history of paying your bills on time.

Before applying for your rental, be prepared by having a month’s worth of pay stubs as proof of your income (self employed individuals may need to provide other forms of income verification) as well as communicating with your employer that they may be called upon to verify your income and employment history. If you’re unaware of your credit standing, be prepared by ordering a free copy of your credit report in case you may need to explain any reported derogatory information.

Additionally, along with your application you should have your first month’s rent and security deposit available. The security deposit is provided as a safeguard against damages to the home and can be equivalent to the first month’s rent or more depending on the terms of the lease and/or additional circumstances (such as pets).

Although the recent decline in home sales has made the rental market competitive, there are rentals available – but you may have to act quickly. If you waiver in your decision or just not prepared, you may lose your rental. For a wealth of information on renting, you can turn to the Montgomery County Department of Housing and Community Affairs (www.montgomerycountymd.gov/dhctmpl.asp). The DHCA offers online resources for landlords and tenants, including a rental guide and rental listings.

Many who have had recent foreclosure are finding that not all landlords/management companies are open to allowing them to rent due to their credit issues. However, some former home owners are finding that some landlords/management companies are flexible in accepting renters with past credit issues; these “understanding” landlords/management companies may require additional deposits as security.

Although there are many recently evicted home owners who are finding rentals, some are having trouble and are at risk of becoming homeless; after all, they may be financially challenged and may not have enough money for rent and security deposits. If you are or know someone who is at risk of becoming homeless, consider contacting the Montgomery County Coalition for the Homeless (301-217-0314). The Montgomery County Coalition for the Homeless is described as a non-profit and community-based organization, and a leading provider of permanent and transitional housing, emergency shelter and supportive services for people experiencing homelessness.

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 October 12, 2009. Copyright © 2009 Dan Krell

October 15, 2009October 5, 2019

Pending optimism for housing market

Last week, the National Association of Realtors (NAR) announced that pending home sales are up for the seventh straight month. The October 1st press release indicated that the number of signed contracts increased to the highest level since March of 2007; the August pending home sales index is up 6.4% from July and up 12.4% from August 2008 (Realtor.org).

Not to be confused with the existing home sale index, (which calculates the actual number of closed transactions as well as median home prices), the pending home sales index reports activity that is based on the number of signed contracts in any given month; the index is used to compare monthly home buyer activity.

Alone, the pending home sales index doesn’t say much other than that home buyers are interested in getting into the market. However, when combined with the recent existing home sales index, which recently reported that August home sales slightly decreased compared to July of this year (but still remained above the August 2008 sales figures); the story that emerges is one we are not used to hearing.

Although it may be true that some home buyers are being turned down for loans due to a rapidly changing mortgage industry, however, the disparity between the indices may also indicate that the state of the present market is based on delayed home sales. Until about a year ago, it was unusual for anyone to write an offer that had a closing date of forty five days or more. During the real estate boom earlier this decade, a home seller would almost certainly pass over your offer if you could not settle in thirty days or less. However, since a large number of distressed properties have penetrated the market, multi month closing delays and even unsuccessful closings (sometimes banks foreclose before a successful close of a short sale) have become common and sometimes expected. Lawrence Yun, NAR Chief Economist, stated in the October 1st press release that, “The rise in pending home sales shows buyers are returning to the market and signing contracts, but deals are not necessarily closing because of long delays related to short sales…”

Pending sales are also outpacing home sales here in Montgomery County (as reported by the Greater Capitol Association of Realtors, Homes Sales Statistics for Single Family Homes; August 2009); however sales indicators show an overall increase from 2008. Home sales increased 24.8% in August 2009 as compared to August of 2008, however decreased approximately 16% from July 2009.

The missed story, however, may actually be the shrinking local home sale inventory. Although, national home inventory is slowly decreasing, local inventory of homes for sale has decreased significantly from last year (as reported by the Greater Capitol Association of Realtors, Homes Sales Statistics for Single Family Homes; August 2009). Single family homes available for sale in Montgomery County decreased about 47% comparing the inventories of August 2009 to August 2008!

Although a shrinking inventory often means increased home buyer competition, don’t expect another historic seller’s market anytime soon. An expiring home buyer tax credit combined with an expected new wave of foreclosures and a changing mortgage industry may have a significant effect on the market. But for now, pending optimism remains for a stable real estate market.

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.

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).