This week in Salem the 1031 Exchange tax deferral is coming under fire. The 1031 Exchange is a way for investors to defer paying capital gains tax on the sale of an investment property when they use the proceeds to buy another "like property."
The 1031 Exchange is not a true waiver of the tax like the one you get when you sell your owner occupied home. The taxes are simply deferred until you finally cash the property in when you sell and keep the money. This deferment essentially pushes investors toward buying more real estate whenever they sell.
The ability to sell one property to buy another is obviously something we don't want to inhibit in economic times like these. I understand that the state is hard up for cash and looking for ways to increase revenue, but anything that hurts the already reeling real estate market is a huge mistake.
If you're reading this you at least have some interest in the real estate market, so I probably don't have to work too hard to convince you that this is a bad idea. What is needed is for you to contact your representatives and make sure they understand what a bad idea it is. There is a hearing on Tuesday, March 10th at 8:00 in Hearing Room A for any of you who can make it. Tell your representatives to vote no on House Bill 2696.
Monday, March 9, 2009
Friday, March 6, 2009
Financial Stability Plan Details
The details of Obama's Financial Stability Plan are officially out, but there are still unanswered questions. The official website is up with the specifics of the two plans, one for high loan-to-value refinances for good borrowers and the other providing modifications for borrowers in danger of losing their homes.
The basic idea is to first find out if you are eligible by following the steps on the website, next call your loan servicer, and then be patient. The servicers are no doubt being inundated with more requests than they have the ability to deal with.
You'll need patience since it sounds like even the refinancing part of the plan is to be run through the servicers. Typically servicing loans, i.e. opening envelopes and posting payments, is a completely separate operation from originating loans, i.e. evaluating income, assets, credit and appraisals. Many lenders specialize in one or the other function while a few of the big ones do both.
Those large lenders who do both are going to be overwhelmed with applications, and it wouldn't surprise me to see refinances taking two or three months to complete. Interest rates are low right now, but they're also volatile. Hopefully borrowers won't start the process with rates in the 4%s and end up in the high 5%s because it takes so long. A much more efficient way to do these refinances would be to offer this program through all Fannie/Freddie lenders and let the existing force of loan officers and underwriters close the loans.
The other thing that is still not clear in all this is the pricing. Politicians who are far removed from the real world can say things like "market rate" without really understanding what that means. In today's mortgage market there is no such thing as a single rate on any given day. Most important is the fact that rates are partially based on loan-to-value, and there is no pricing for a 105% loan. In fact, the rate often gets better just over 80% LTV because the presence of mortgage insurance decreases the risk to the lender. Will there be MI on these refinances? We still don't know, and these are the details that determine whether the program will be a success.
On the modification side, the only question I still have is how to get the investors to go along. One thing that will help is the passage in congress of the mortgage bill allowing bankruptcy judges to modify loans. Hopefully it won't come to that, but having that "stick" to go along with the financial "carrot" already announced should help motivate lenders to play ball.
The difficulty is knowing who really owns these loans after they've been converted, shuffled and repackaged. A recent Time Magazine article gives a great glimpse into the complexities of mortgage bonds and CDOs. Anyone wanting to understand the challenges to loan modification and how a relatively small number of foreclosures can wreak so much havoc in the financial world should take a moment to read this story.
Even with the poor performance of modifications to date, with as many as 59% already being back in default, it still remains the best option we have for troubled mortgages. This new plan's success rate should be better since it includes debt-to-income guidelines that should work for most families. People who really can't afford their mortgage at any interest rate will not be able to modify. Even if the success rate is the same, stopping 41% of the foreclosures is a lot better than doing nothing and should have a positive effect on the housing market.
The basic idea is to first find out if you are eligible by following the steps on the website, next call your loan servicer, and then be patient. The servicers are no doubt being inundated with more requests than they have the ability to deal with.
You'll need patience since it sounds like even the refinancing part of the plan is to be run through the servicers. Typically servicing loans, i.e. opening envelopes and posting payments, is a completely separate operation from originating loans, i.e. evaluating income, assets, credit and appraisals. Many lenders specialize in one or the other function while a few of the big ones do both.
Those large lenders who do both are going to be overwhelmed with applications, and it wouldn't surprise me to see refinances taking two or three months to complete. Interest rates are low right now, but they're also volatile. Hopefully borrowers won't start the process with rates in the 4%s and end up in the high 5%s because it takes so long. A much more efficient way to do these refinances would be to offer this program through all Fannie/Freddie lenders and let the existing force of loan officers and underwriters close the loans.
The other thing that is still not clear in all this is the pricing. Politicians who are far removed from the real world can say things like "market rate" without really understanding what that means. In today's mortgage market there is no such thing as a single rate on any given day. Most important is the fact that rates are partially based on loan-to-value, and there is no pricing for a 105% loan. In fact, the rate often gets better just over 80% LTV because the presence of mortgage insurance decreases the risk to the lender. Will there be MI on these refinances? We still don't know, and these are the details that determine whether the program will be a success.
On the modification side, the only question I still have is how to get the investors to go along. One thing that will help is the passage in congress of the mortgage bill allowing bankruptcy judges to modify loans. Hopefully it won't come to that, but having that "stick" to go along with the financial "carrot" already announced should help motivate lenders to play ball.
The difficulty is knowing who really owns these loans after they've been converted, shuffled and repackaged. A recent Time Magazine article gives a great glimpse into the complexities of mortgage bonds and CDOs. Anyone wanting to understand the challenges to loan modification and how a relatively small number of foreclosures can wreak so much havoc in the financial world should take a moment to read this story.
Even with the poor performance of modifications to date, with as many as 59% already being back in default, it still remains the best option we have for troubled mortgages. This new plan's success rate should be better since it includes debt-to-income guidelines that should work for most families. People who really can't afford their mortgage at any interest rate will not be able to modify. Even if the success rate is the same, stopping 41% of the foreclosures is a lot better than doing nothing and should have a positive effect on the housing market.
Tuesday, March 3, 2009
The New Mortgage Fraud
Unfortunately mortgage fraud has not fizzled out along with the real estate market. It's just changed. The new mortgage fraud preys upon desperate homeowners threatened with foreclosure, and these tough economic times are creating plenty of potential victims.
The Foreclosure Rescue Scam is probably the most common and one that I have fielded many calls about. These companies offer to help negotiate with your lender to avoid foreclosure and modify the terms of your loan. First of all, there's nothing that even a reputable firm can do that a persistent homeowner can't do themselves. You're better off calling yourself to negotiate a modification. The real problem, however, is that the scammers will collect money up front and then do little or no work. Homeowners end up still facing foreclosure and out hundreds or even thousands of dollars.
The Mortgage Elimination Scam is another popular one today. In this scenario the scammer prepares paperwork that appears to eliminate the mortgage. There is, of course, a fee for this service and, of course, it doesn't actually work since the only way to eliminate your mortgage is to pay it off. The homeowner stops making payments and by the time they receive notice that they're in default the scammer is long gone.
The Equity Theft scam is essentially a version of the foreclosure rescue scam. To avoid foreclosure homeowners are convinced to execute a quitclaim deed transferring the property to the scammer for very little money. The scammer promises to rent the home back to the homeowner with the option to buy it back down the road. Of course, these promises are never in writing and the scammer proceeds to evict the former owner and sell the property. This one only works if the owner has significant equity.
The newest scams involve the Federal Stimulus Bill and other mortgage relief legislation. Basically these are the same basic scams, but by invoking the legislation or government agencies we've all been hearing about on the news they lend themselves instant credibility.
Scam artists will continue to come up with newer and more clever ways to commit mortgage fraud as long as there's money to be made. However, there are some basic guidelines that should keep most homeowners out of trouble. The oldest piece of advice on the topic is still the best, "If something seems too good to be true, it probably is." If you keep this one concept firmly in mind, you will be very difficult to take advantage of.
The other big one is to be wary of anyone who requires payment up front. Also avoid anyone who wants to rush you into things and won't allow time for you to check it out. Another common red flag is being told not to contact family, friends, attorneys, financial advisers, etc. Desperate people make the easiest victims, so take a step back to be sure you understand everything. When in doubt, take the time to check with the Better Business Bureau or the State Attorney General's office.
The Foreclosure Rescue Scam is probably the most common and one that I have fielded many calls about. These companies offer to help negotiate with your lender to avoid foreclosure and modify the terms of your loan. First of all, there's nothing that even a reputable firm can do that a persistent homeowner can't do themselves. You're better off calling yourself to negotiate a modification. The real problem, however, is that the scammers will collect money up front and then do little or no work. Homeowners end up still facing foreclosure and out hundreds or even thousands of dollars.
The Mortgage Elimination Scam is another popular one today. In this scenario the scammer prepares paperwork that appears to eliminate the mortgage. There is, of course, a fee for this service and, of course, it doesn't actually work since the only way to eliminate your mortgage is to pay it off. The homeowner stops making payments and by the time they receive notice that they're in default the scammer is long gone.
The Equity Theft scam is essentially a version of the foreclosure rescue scam. To avoid foreclosure homeowners are convinced to execute a quitclaim deed transferring the property to the scammer for very little money. The scammer promises to rent the home back to the homeowner with the option to buy it back down the road. Of course, these promises are never in writing and the scammer proceeds to evict the former owner and sell the property. This one only works if the owner has significant equity.
The newest scams involve the Federal Stimulus Bill and other mortgage relief legislation. Basically these are the same basic scams, but by invoking the legislation or government agencies we've all been hearing about on the news they lend themselves instant credibility.
Scam artists will continue to come up with newer and more clever ways to commit mortgage fraud as long as there's money to be made. However, there are some basic guidelines that should keep most homeowners out of trouble. The oldest piece of advice on the topic is still the best, "If something seems too good to be true, it probably is." If you keep this one concept firmly in mind, you will be very difficult to take advantage of.
The other big one is to be wary of anyone who requires payment up front. Also avoid anyone who wants to rush you into things and won't allow time for you to check it out. Another common red flag is being told not to contact family, friends, attorneys, financial advisers, etc. Desperate people make the easiest victims, so take a step back to be sure you understand everything. When in doubt, take the time to check with the Better Business Bureau or the State Attorney General's office.
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