Real Estate News and Commentary

March 18, 2009October 5, 2019

Market outlook: Banking on Bernanke

Confused about where the real estate market is headed? So are the pros. Realistically, the outlook for the housing market depends upon your perspective.

If you are a home owner, the almost 30% reduction in home inventory since last spring is certainly welcome news; the idea of less competition makes home sellers more optimistic about their homes actually selling. However, because they would be upside down (owe more than the sale price) if they were to sell today, many homeowners continue to wait for a more favorable market. Believe it or not, some home buyers have been turned off by bidding wars sparked by the reduced inventories of many low priced distressed homes for sale.

If you are a home buyer, reports of reduced home prices as reported by the increasing Home Affordability Index (HAI) is also good news. The HAI was 166.8 in January- an all time high (the higher the index, the greater the affordability)! Lower home prices combined with low mortgage interest rates make the current housing market the most affordable since the National Association of Realtors began tracking housing affordability in 1970 (Realtor.org).

Although optimists look forward to increased sales in the third and fourth quarter of 2009 due to pent up demand, the future may depend on other mitigating factors as well. Concerns of further sliding home prices and the state of the overall economy have had many potential home buyers keep their wait and see attitude. This sentiment was expressed during the January meeting of the Federal Open Market Committee (FederalReserve.gov), where reports of further concerns of devaluation in the housing market were discussed.

Additionally, many real estate industry insiders are concerned with the new Administration’s budget reducing mortgage interest tax deductions and increased home sale capital gains taxes (which some call an attack on homeownership). Even the ever optimistic Lawrence Yun, NAR Chief Economist, expressed concerns about the Obama’s administration’s move to restrict and lower some of the tax benefits of homeownership

Peter Hong of the Los Angeles Times (March 14, 2009: Plan to cut mortgage interest deduction stirs opposition) reported Yun to say that although the reduced mortgage interest deduction is aimed at two percent of all households, all home owners will be affected. Critics of the Administration’s new tax policies point to lower home prices in the “upper tier” sector, which will affect surrounding market areas and subsequently drive down home prices further in all sectors of the housing market.

Some are concerned about increasing mortgage interest rates due to impending inflation as a consequence of increased government spending. However, some economists point out that inflation fears are overstated because low consumer demand will keep inflation at bay.

Finally, it must be stated that Federal Reserve Chairman Ben Bernanke discussed optimism for the American economy during a recent interview with “60 Minutes” (as reported by Fox News on March 15th). He stated that a recovery could begin as early as next year if banks are stabilized. If what Dr. Bernanke stated comes to fruition, and if the HAI and interest rates remain low, then it is possible that we could see home sales modestly increase by the fourth quarter of this year and rise significantly by spring of 2010.

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 March 16, 2009. Copyright © 2009 Dan Krell

March 17, 2009September 16, 2018

Verify all contractor licenses

If your real estate agent says, “I have a guy to do the work…,” you might want to check if those contractors or handymen are licensed by the Maryland Home Improvement Commission (MHIC). The Maryland Real Estate Commission warns consumers that it is illegal for unlicensed contractors and handymen to do home improvements for a fee.

The Montgomery County Office of Consumer Protection website states that anyone who repairs, maintains, restores, or improves real property (homes) is required to be licensed by the MHIC. The MHIC regulates home improvement contractors, subcontractors and salespersons. If a handyman is altering, remodeling, or making repairs to your home- then the handyman is required to have a license too.

The MHIC issues licenses to contractors who have least two years trade experience; provide proof of financial solvency; and pass a test on the home improvement law and general business competency. Additionally, licensed contractors are also screened for serious criminal convictions and are required to make regular contributions to the Maryland Home Improvement guarantee fund.

If you selling your home, make sure that any completed repairs are performed by a contractor or handyman that is licensed by the MHIC. The Maryland Real Estate Commission and the Montgomery County Office of Consumer Protection (OCP) recommend that you ask contractors and handymen for their MHIC license number to verify their license status and complaint history before they begin working on your home. You can verify MHIC licenses by either calling the MHIC or through their website (www.dllr.state.md.us/license/occprof/homeim.html). Additionally, it is recommended that you check with the OCP (240-777-3636) and the Better Business Bureau (202-393-8000) for any filed complaints against the contractors.

Additionally, verifying that your contractor or handyman is actively licensed prior to any home improvement will ensure that the contractor can obtain the proper permits (if required) as well as protect you from shoddy or incomplete work. The Maryland Department of Labor, Licensing & Regulation (DLLR) has made an effort to have permitting offices require all contractors present their licenses when applying for permits. Additionally, the MHIC investigates all consumer complaints (some complaints result in an award for monetary damages from their guarantee fund); the MHIC will also pursue and aid in the prosecution of violators of the Maryland home improvement law.

Two specific MHIC investigations of consumer complaints last year resulted in a revoked license, a fine and jail time. The first investigation (as reported by WBAL TV in Baltimore on October 21, 2008; wbaltv.com) resulted in a revoked license from a contractor who had numerous consumer complaints of shoddy work (one home owner complained that after he paid the contractor for an addition, the addition was ordered to be torn down for being unsafe). The second investigation (as reported by the DLLR on December 16, 2008) was of the deeds of an unlicensed contractor, which resulted in a $65,000 fine and thirty days in jail.

Even though you trust your real estate agent, the fact that a real estate broker was fined by the Maryland Real Estate Commission last year for allowing the use of an unlicensed contractor (to perform repairs that were listed in a contract addendum) should be motivation enough to check out any contractor before they begin to work on your home.

Original published at https://dankrell.com/blog/2009/03/17/verify-all-contractor-licenses-its-the-law/

By Dan Krell

March 3, 2009September 10, 2018

Nationalize Housing?

real estate Is Nationalized Housing the next step? Probably not.

However, if you would have told me a year ago that there would be discussion about nationalizing private banks; I would have looked at you as if you had two heads! However, recent economic events has many people talking about nationalizing this country’s private banks, including former Federal Reserve Chairman Alan Greenspan (who was reported by the media to say that nationalizing banks temporarily may be necessary).

Given that bank capitalization has been at risk due to devalued and toxic assets, some favor the Government taking over failing private banks to recapitalize and restructure them. The idea of vested Government control and ownership has many pros and cons, and there is no “map” to tell us where nationalizing banks would lead.

How bad is the problem? A recent Financial Times article (Insight: Time to expose those CDOs; February 26 2009) reported that $305B of the $405B Collateralized Debt Obligations of Asset Backed Securities issued between 2005 and 2007 went into default. One third of those CDO’s were from mortgage backed bonds, also called mezzanine CDOs. Although recovery rates for defaulted CDO’s in general are low, it is estimated that the recovery rate for mezzanine CDOs is 5%. In other words, $5,000 is recovered from every $100,000.

Although there is heavy debate of nationalizing banks, some argue that Government stock ownership (as in last week’s 40% purchase of Citigroup) is a form of nationalization such that the Government can apply pressure to accomplish its goals; while others talk of bank nationalization as a socialist inroad. Other critics have argued that the Federal Deposit Insurance Corporation (FDIC) has been essentially nationalizing failing banks for years. Although deposits at failing banks are insured by the FDIC, the FDIC manages the receiverships to liquidate the failing banks’ assets. Not quite the total control of and ownership that nationalization inspires, but the model has been effective in the past by tying up the loose ends of a private bank failure.

A further extension of the bank nationalization would be to nationalize housing. As foreclosures and mortgage delinquencies contribute to the sliding housing market, Government bank ownership could be used to nationalize housing to stabilize home values. Well, not the entire housing market, only the non-performing segment which contributes to the toxic assets losses. By assisting home owners in foreclosure or at risk of foreclosure through direct Government control and ownership might lower foreclosure rates, possibly reduce further real estate market loses and assist those losing their homes.

Rather than the Government entering the mortgage servicing arena, the ideal nationalized housing program (through Government controlled lenders) would allow struggling home owners to pay what they can afford. In return the home owner would give up some (if not all) of the future equity stake in their home when they eventually sell.

Would nationalizing segments of the housing market be the answer to rising foreclosures? Of course not. Nationalizing any industry is a precedent that puts the Government on a slippery slope. Unless the questions of responsibility, ownership, control and intention are clearly defined, the unintended consequences of nationalization can swallow any industry- not to mention home ownership.

Original published at https://dankrell.com/blog/2009/03/03/nationalize-housing/

By Dan Krell

March 3, 2009October 5, 2019

Programs to Help Home Buyers

Tempted by terrific deals but frustrated by lack of financing, many home buyers are holding back from jumping into the real estate market. However, home buyers who qualify for a mortgage find themselves held back because they do not have the funds for their down payment or closing costs. If you are considering a home purchase this spring but find that financing and personal funds are limited, a few options you may want to consider include the FHA mortgage, the Maryland Mortgage Program, and the American Dream Downpayment Initiative.

While conventional financing has been reduced by increasingly restrictive underwriting guidelines, the FHA mortgage has re-emerged and re-established itself as the mortgage of choice for many home buyers (HUD.gov). The FHA mortgage’s low down payment, flexible underwriting, and provisions for gift funds make it clear why it is a poplar way to finance home purchases:

First, even though the down payment requirement for the FHA mortgage increased to 3.5% last fall, it is still lower than most conventional mortgages. Compared to a 5% or 10% down payment conventional mortgage, a home buyer needs thousands less to purchase a home.

Second, if you experienced past credit problems you may find it increasingly difficult to qualify for a mortgage. However, FHA’s flexible underwriting allows home buyers to have had past credit issues with documented mitigating circumstances and sufficient re-established credit.

Lastly, if you are short on funds, the FHA mortgage will not only allow the seller to contribute up to 6% of the sales price towards your closing costs, a family member may gift you the amount you need for your down payment as well! Of course, the source of funds needs to be carefully documented, but the combination of seller assistance and family gift could allow you to purchase a home with very little money down.

Another home buyer program is the Maryland Mortgage Program (mmprogram.org), offered through the State of Maryland’s Community Development Administration. The Maryland Mortgage Program includes several programs, when combined, can also allow you to purchase a home with little money down. First, the program offers mortgages through Community Development Administration (CDA) financing, which feature fixed, low interest rates. Second, the program offers the House Keys 4 Employees program, which matches contributions from participating employers (up to $5,000). And third, the program offers grant assistance through CDA for down payment and closing costs (either 2% or 3% repayable grant).

A final home buyer resource is the American Dream Downpayment Initiative (ADDI) offered through the Montgomery County Department of Housing and Community Affairs. The program is a government subsidized down payment and closing cost program for first time homebuyers. Since funding is limited throughout the country, Montgomery County has specific eligibility guidelines.
Since each program may have specific eligibility requirements and funding limitations, you should check with the each program provider to see if you qualify; and although FHA guidelines are well established, you should check with your FHA lender for specific credit and underwriting requirements as you may find that many FHA lenders impose additional credit requirements and other limitations on top of the flexible FHA underwriting guidelines. Finally, because interest rates and fees vary from lender to lender, HUD recommends that you compare rates and lender fees.

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 February 23, 2009. Copyright © 2009 Dan Krell

February 20, 2009October 5, 2019

Another Try for Mortgage Modification

by Dan Krell, © 2009

As more and more home owners default on their mortgages, something must be done to soften the blow of the foreclosure tsunami facing America. Mortgage modification is one form of home owner assistance that has been attempted since the beginning of the recent crisis. As there are strict criteria for such assistance, it is clear that not all home owners can be helped by a mortgage modification.

A mortgage modification is when a mortgage servicer or lender changes the terms of a mortgage, usually to make repayment easier for the home owner. A modification may be in the form of a lower payment through an interest rate adjustment, lengthening the mortgage term, or both. Home owners who are at-risk of foreclosure will typically have their arrearages added to the principal and/or added to their monthly payment.

Although there are numerous media reports of loan services and lenders making mortgage modifications available to at-risk home owners, the results of voluntary mortgage modification attempts have been mixed. Many home owners’ requests for mortgage modifications from their mortgage servicers/lenders fell on deaf ears. Some home owners who were successful in modifying their mortgage found that their monthly payment increased when arrearages were applied to the new terms; and there are reports of home owners who are delinquent even after successfully modifying their mortgages.

The reason why mortgage modifications as whole have not been widely successful thus far is because of the complexity of the relationship of those involved. A majority of the mortgages that are at-risk are securitized instruments which have many investors (thousands in many cases), to which the servicers and lenders have a fiduciary responsibility. In order for the loan to be modified and meet their fiduciary roles, the servicer/lender would have to have all investors for each mortgage agree to the new terms. In many cases, the servicers and lenders are walking a tightrope balancing between mortgage losses and investor law suits.

Government efforts to make mortgage modifications available to home owners who meet criteria set by HOPE for Homeowners have not been successful, as reported by the National Association of Consumer Bankruptcy Attorneys (NACBA.com). In a December 2008 report, the NACBA stated that the HOPE for Homeowners modification program had a total of 312 applications and no modified mortgages. Additionally, the NACBA reported statistics that indicate voluntary mortgage modification has not benefited homeowners and advocates for judicial mortgage modification (also known as court supervised modification).

Critics voice dissention to judicial mortgage modification and government subsidized mortgage modifications citing concerns that these programs will not only fail to significantly lower foreclosure rates, but will have unintended affects as well. In addition to pointing out that majority of mortgages are not subject to modification (due to deaths, divorce, among other reasons), critics state mortgage interest rates will rise to cover future potential losses from these mortgage modification programs.

Home owners, mortgage servicers and lenders, as well as Wall Street investors are awaiting (with great anticipation) the details of new foreclosure prevention programs unveiled by the Obama Administration. It is unclear what effects the new mortgage modification programs will have on foreclosure rates and mortgage interest rates; however it is clear that modification programs will be only one feature of a total recovery plan.