Sequestration will affect real estate and housing markets

by Dan Krell
DanKrell.com

Housing and Sequestraion(Dan Krell © 2013) Remember the “Fiscal Cliff?” Well, after a two month hiatus, sequestration concerns are again entering (if not intrusively) the minds of those who may be affected. And, if you remain indifferent on the matter, you might consider the local economic effect from looming government budget cuts that may begin on March 1st.

On February 14th, HUD Secretary Shaun Donovan provided written testimony to the “Hearing before the Senate Committee on Appropriations on The Impacts of Sequestration” (HUD.gov). Secretary Donovan outlined what he described as the “harmful effects of Sequestration” to not only at-risk populations, but families, communities, and the economy at large, as he concluded, “…Sequestration is just such a self-inflicted wound that would have devastating effects on our economy and on people across the nation.”

As a result, HUD counseling would be limited. According to Secretary Donovan, about 75,000 families would not be able to receive the critical counseling services that include pre-purchase counseling, and foreclosure prevention counseling. According to the Secretary: “…This counseling is crucial for middle class and other families who have been harmed by the housing crisis from which we are still recovering, and are trying to prevent foreclosure, refinance their mortgages, avoid housing scams, and find quality, affordable housing. Studies show that housing counseling plays a crucial role in those 3 efforts. Distressed households who receive counseling are more likely to avoid foreclosure, while families who receive counseling before they purchase a home are less likely to become delinquent on their mortgages.”

FHA has been the workhorse to stabilize the housing market as well as providing the means for affordable home purchases. Those directly affected by sequestration would be home buyers and home owners who are applying for FHA mortgages; as well as those seeking assistance through HAMP and HAFA. In written testimony, Secretary Donovan stated that “…furloughs or other personnel actions may well be required to comply with cuts mandated by sequestration.” As a result, “…The public will suffer as the agency is simply less able to provide information and services in a wide range of areas, such as FHA mortgage insurance and sale of FHA-owned properties.”

Another concern is the possibility of a sharp increase in interest rates. Up until now, home buyers (and those refinancing) have had the benefit of historically low mortgage interest rates. Low mortgage interest rates are one of the reasons why home affordability is also at historic levels. A sharp rise in interest rates combined with FHA mortgage delays could shock the housing and real estate market. The result could be housing activity similar to what we experienced immediately after the financial crisis. Granted, the shock would probably not be as prolonged as what occurred in 2008-2009, but nonetheless significant.

In a region that has been relatively unaffected by unemployment and economic issues due to a strong government workforce, sequestration could essentially put a damper on the local housing recovery. Home buyer activity has already been affected, as those who are concerned about sequestration have either put their home purchase plans on hold, or have changed their housing plans altogether. And of course, over time, the changes to consumer behavior would trickle down to various sectors of the economy.

But don’t worry, although sequestration is set to begin March 1st, budget cuts won’t occur all at once. Unless Congress acts on the matter, you might not immediately feel its effects.

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This article is not intended to provide nor should it be relied upon for legal and financial advice.  Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

Necessary reforms to save FHA

by Dan Krell
DanKrell.com
© 2013

home for saleAfter the financial and foreclosure crises, FHA became the workhorse that not only kept the housing industry afloat, but assisted many financially distressed home owners keep their homes. After taking the brunt of the crises and almost facing insolvency, it’s time for FHA to get back to helping home buyers who might not otherwise have the means of purchasing a home.

The Federal Housing Authority (also known as FHA) was established in 1934, to help jump start a housing industry that was decimated by the Great Depression. Much like the housing downturn of the recent “Great Recession” which followed a housing boom; the 1930’s housing bust followed a 1920’s housing boom. At a time when a majority of Americans rented, the FHA provided the means for would be home buyers to become home owners.

Unless you’re familiar with the FHA’s history, you might have questioned the use of FHA as a means to refinance home owners with underwater mortgages as well as assisting those in foreclosure. However, FHA has a history of assisting home owners facing financial uncertainty, as well as making mortgages available to home buyers during times when conventional lenders were not lending. And although many criticized such assistance programs as being unnecessary and wasteful; in retrospect, these measures were significant and necessary during an uncertain time for the housing industry – regardless of the outcomes.

Last year, the outcomes of mortgage and home owner assistance programs were highly criticized as being responsible for almost bankrupting FHA. Although many describe FHA’s woes stemming from being saddled with non-performing loans and a historic number of borrowers; Tami Luhby, in her January 24th 2012 article in CNNMoney (Has Obama’s housing policy failed?; cnnmoney.com), provides some insight to the crises related assistance programs’ lender related bureaucratic issues and low success rates. She reported that at the time of her article, the HAMP program only helped about 910,000 home owners refinance to lower interest rate mortgages instead of the planned 4 million; and the HARP program “… which was intended to reach 5 million borrowers, has yielded about the same results. Through October [2011], when it was revamped and expanded, the program had assisted 962,000…”

It comes as no surprise that after eroding capital reserves, congressional hearings were held late last year to address FHA’s losses. As a result, FHA plans to shore up its financial short falls by increasing mortgage insurance premiums, increased down payment requirements for loans in excess of $625,500, as well as tightening underwriting standards.

FHA’s survival may come down to its perceived role in housing industry. And of course, there is criticism from both sides: some argue that FHA’s losses have become an unsustainable burden; while others argue the tightening measures will hurt the housing market and limit home ownership.

So, when I read Jacob Gaffney’s January 15th lamentation about refinancing out of an FHA mortgage (Refinancing Away From the Government; With an FHA Blessing: housingwire.com), the planned FHA changes not only make sense, but is necessary to preserve the access to homeownership that FHA provides. FHA Commissioner Carol Galante’s response to Gaffney not only impressed him, but may sum up the FHA mission: “…The role of FHA is to enable homeowners. FHA helped you get your home, made it happen” …”If you find you can move on, then I’m pleased you have that opportunity.”

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Has the housing market improved in the last four years

Dan Krell, Realtor®
DanKrell.com
© 2012

HousingIn retrospect, the beginning of the global recession in late 2007 was the end of the housing boom and may have spawned the foreclosures crisis and the financial crisis of 2008.  And although this period of time will undoubtedly become the basis of many future dissertations examining the “Great Recession;” you might ask “how much has the state of housing improved since 2008?”

If you recall, the Housing and Economic Recovery Act of 2008 (HERA) was anticipated to have wide reaching changes in the mortgage and housing industries as well as supposed to have assisted struggling home owners.  This multifaceted piece of legislation consolidated many individual bills addressing issues that were thought to either be the cause or the result of the financial crisis.  Besides raising mortgage loan limits to increase home buyer activity, the historic legislation was the beginning of changes meant to “fix” Fannie Mae and Freddie Mac, as well as “modernizing” FHA to make the mortgage process easier for home buyers and refinancing easier for struggling home owners. Additionally, this law was the origination of the Hope for Homeowners program to assist home owners facing foreclosure (www.govtrack.us/congress/bills/110/hr3221).

The Federal Housing Finance Agency (FHFA), originated from HERA, has been the “conservator” of the then sinking Fannie Mae and Freddie Mac. Since the FHFA took control, there has been conjecture as to what would become of the mortgage giants: some talked about closing their doors, while some talked about changing their role in the mortgage industry. Since FHFA became the oversight agency, Fannie Mae and Freddie Mac has strengthened their role in maintaining liquidity in the housing market by helping struggling home owners with their mortgages as well as freeing up lender capital by the continued purchases of loans (fhfa.gov)

The inception of Hope for Homeowners was the beginning of a string of government programs designed to assist home owners facing foreclosure, or assist underwater home owners refinance their mortgage.  Although there have been individual success stories, there has been criticism that these programs did not assist the expected numbers of home owners.  A January 24th CNNMoney article by Tami Luhby (money.cnn.com) reported that “…the HAMP program, which was designed to lower troubled borrowers’ mortgage rates to no more than 31% of their monthly income, ran into problems almost immediately. Many lenders lost documents, and many borrowers didn’t qualify. Three years later, it has helped a scant 910,000 homeowners — a far cry from the promised 4 million…” and “HARP, which was intended to reach 5 million borrowers, has yielded about the same results. Through October, when it was revamped and expanded, the program had assisted 962,000…” (money.cnn.com/2012/01/24/news/economy/Obama_housing/index.htm).

HousingDespite the recent slowdown in foreclosure activity, there is disagreement about the projected number of foreclosures going into 2013.  A March 29th Corelogic news release (www.corelogic.com/about-us/news/corelogic-reports-almost-65,000-completed-foreclosures-nationally-in-february.aspx) reported that there have been about 3.4 million completed foreclosures since 2008 (corelogic.com).  And although an August 9th RealtyTrac® (www.realtytrac.com/content/foreclosure-market-report/july-2012-us-foreclosure-market-report-7332) report indicated a 3% decrease from June to July and a 10% decrease from the previous year in foreclosure filings; July’s 6% year over year increase in foreclosure starts (initial foreclosure filings) was the third straight month of increases in foreclosure starts.

So, if you’re wondering if housing is better off today than it was four years ago, the answer may be a resounding “maybe;” It all depends on your situation.

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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 September 3 , 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

Buying a home when you’re short on cash

by Dan Krell ©2012
DanKrell.com

Buying a homeGiven how the lending industry has changed, it’s easy to understand that you might think you need perfect credit and a 20% down payment to buy a home. Although credit requirements have been tightened, buying a home with little or no money is still possible.

Yes, it’s true that the financial and housing crisis forced banks and mortgage lenders to re-think the idea of easy money. Sure minimum credit scores have been raised to qualify for a mortgage, and you better believe that increased underwriting scrutiny and due diligence is the rule (rather than the exception). But, that doesn’t mean that you can’t get a mortgage if you don’t have a lot of cash. Depending on your situation, you may find yourself comparing conventional loans to FHA and VA.

Conventional mortgages have been traditionally thought of as requiring a 20% down payment; however, you may obtain a conventional loan with as little as a 5% down payment. The misconception that a conventional mortgage requires such a high down payment may have stemmed from the fact that you need a 20% down payment to circumvent private mortgage insurance. Additional confusion about conventional mortgages arises from the distinct programs that Fannie Mae and Freddie Mac offer for specific home buyers. For example, Fannie Mae offers a mortgage for as little as a 3% down payment through their “HomePath” financing– but this is only available to purchase Fannie Mae owned foreclosures.

Conventional financing typically allows you to receive financial assistance in the form of a gift and/or seller closing cost assistance. The documented gift must be from a relative. Although gift guidelines for some conventional programs have recently become more lenient; generally, you may be required to have a “minimum borrower contribution” (from your own funds) as your down payment decreases. However, a minimum borrower contribution may not be required if your down payment is 20% or more. Seller closing cost assistance may be limited depending on your down payment.

Buy a homeAs conventional mortgage credit requirements became increasingly strict, more home buyers found that the FHA mortgage remained somewhat flexible. Certainly, buyers with credit dings found that FHA underwriting is more forgiving (provided borrowers provide substantiating documentation) than conventional; but another attraction to FHA financing is the low down payment. Although FHA increased the required minimum down payment- you may find that the current 3.5% down payment is still relatively low. Not having the 3.5% down payment does not have to deter you either; your down payment can be from a documented gift of funds. If you’re still short of funds, FHA allows the seller to assist with your closing costs (not to 6% of the sale price).

If you’re an eligible veteran or active duty service personnel, you may find that the VA offers a very good mortgage. As a benefit to your service, you could buy a home with no down payment (provided the purchase price does not exceed the VA appraisal of reasonable value and loan limits). Additionally, the VA allows the seller to pay your lender’s fees. Eligibility and other information can be checked on the VA website (www.benefits.va.gov/homeloans/veteran.asp).

Even though mortgage options exist, program guidelines change frequently- so check with your lender about qualifying. One final word: be prepared to document everything and follow your lender’s instructions.

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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 5, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

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Be Prepared to Repair Home Before You Purchase It!

by Dan Krell
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The FHA mortgage has recently changed to accommodate the changing marketplace. Due to its broad availability and higher loan limits, the FHA mortgage is more prevalent now than it has been in the recent past. So, if you are a home buyer, it’s a good chance that you may be applying for a FHA mortgage to purchase your home.

You can expect the FHA underwriting to be flexible yet careful and thorough. You know that FHA underwrites your credit as a buyer, but did you know that FHA underwrites the property condition as well?

FHA underwriters and appraisers are required to assess a home for security, safety, and soundness. To protect your interests as a home buyer (security), as well as the interests of the FHA and lender, the home you are buying must meet minimum health and safety standards, as well as being structurally sound. Any deficiencies identified by the FHA appraiser will be required to be repaired prior to your closing (HUD.gov).

Having a home inspection may allow you to identify easily seen deficiencies within the home. If there are any safety or structural issues, you can be fairly certain that the FHA appraiser will see these as well and require these items to be repaired. However, since your home inspector is not an appraiser nor is the appraisal a home inspection (and having different purposes), there may be disparity between the two.

Items that are often identified by the FHA appraiser as needing repairs include (but not limited to): defective (peeling or chipping) paint surfaces in homes built before 1978; broken windows; roof having less than two years of useful life remaining; drainage problems; lack of handrails on stairwells of three or more steps; pest infestation; damaged and/or non-functioning electric, plumbing, or HVAC systems; foundation and structural defects; underground fuel (i.e., oil) tanks; and any other health or safety issue (fhainfo.com).

The FHA addendum (GCAAR form 1330 in this area) explains who is to make the required repairs: the buyer typically gives the seller notice what repairs are to be made. However, if the seller refuses to make the repairs the buyer has the option to make the repairs themselves. If both the buyer and seller refuse to make the repairs, the contract becomes void.

Many times, the buyer and seller negotiate as to how the repairs are to be made prior to closing. However, if you are purchasing a bank owned home, the bank usually prohibits the buyer from making any alterations to the home prior to settlement- including repairs.

If the home is in poor condition, however, the FHA appraiser will likely reject the home for FHA 203b financing. Don’t worry, though, you can apply for the FHA’s renovation mortgage (FHA 203k). Additionally, you can apply for a FHA 203k if the home you are purchasing is conveyed “as-is” (such as a bank owned home or short sale) and repairs are required. Be careful though, not all FHA lenders offer the 203k loan; you can find a FHA 203k lender at HUD.gov.
The FHA mortgage is an excellent way to finance your home purchase. However be prepared because property condition can sometimes turn a seemingly good deal into a no-deal.

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 September 29, 2008. Copyright © 2008 Dan Krell.