Chuck Gollay

The 1st Time Home Buyer's Tax Credit is scheduled to expire 12/1/2009. While it may be extended, I would say that there is an event coming that is of greater importance. Interest rates are going to rise; it's only a matter of time. An increase to 6% or more wouldn't be surprising. That increase in interest will affect buyers and sellers alike. Buyers will be faced with higher mortgage payments, or in order to control costs, they'll have to settle for lesser priced homes. Sellers will find a market that is dampened by the higher interest rate, making a sale that much harder. 6% is still a very good rate, but to put it in perspective, let's look at how it will affect one's monthly payment.

On a $200,000 mortgage, at a 5% interest rate, one's monthly payment (principal and interest only) would be $1074. At 6%, that monthly payment would increase to $1199. That's $125 per month extra, x 12 months = $1500 per year. Over the course of a 30 year mortgage, that extra percentage point of interest translates to $45,164. That's a huge difference, far outshadowing the maximum $8000 tax credit.
So what's the moral of the story? It depends on how long one plans to live in their new home. If the intent is to sell within 5 1/2 years, then the tax credit has the bigger, more immediate impact. If, however, one plans on remaining in their home for a longer period of time, then the interest rate has the bigger overall effect.

Here are seven things I hope we have learned as a result of this real estate and financial crisis.

1) Housing fills the basic human need of shelter. A home keeps us warm and safe and dry.

2) Homes are the foundation for lasting memories. Whether one entertains friends, or raises a family, or hosts holiday dinners, homes help create the memories that will last us a lifetime.

3) Equity is realized by paying down one's principal on the mortgage. Making just one extra payment per year will accelerate equity growth and decrease the interest one pays on the loan. Of course, equity can be realized through appreciation, but that's not something we can (or necessarily should) count on.

4) Consumers should live within their means. Bigger is not always better. Newer is not always nicer. More expensive is not always a good thing. A house does not define us as individuals. Rather, as individuals, we make our houses homes. We define the home, but the home does not define us.

5) This is a corollary to Point #4: don't over-extend. Home equity loans and lines of credit are a great idea, but like credit cards, they can also serve to over-extend us. In a rapidly burgeoning market, it may make sense to take out a home equity loan and live beyond our means. But as we have painfully witnessed, rapid appreciate can lead to drastic and painful losses if that appreciate bubble should burst. If a property increases in value through appreciation, that's great. Just don't count on it, and you won't get hurt.

6) Maintain your home! It is an asset, and it will hold its value much better if you maintain it on a regular basis. It may even appreciate through careful guardianship.

7) It is not practical to expect one's home to appreciate so much and so rapidly that it will fund one's savings, vacation, and retirement accounts. We need to do that the old fashioned way, through savings. Those who banked on large scale appreciation to fund retirements have learned a painful lesson. Don't set yourself up to repeat that same mistake.

I'd love to hear your thoughts on this matter. Please share your comments!

The following text is a summary of a statement issued on 11/11/08 by the FHF Director, James B. Lockhart.

"The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (FHLB), strongly supports a new initiative that assists "at risk" borrowers who could lose their homes to foreclosure. This initiative is creating a streamlined, simplified loan modification program to get struggling homeowners into mortgages that they can afford. This streamlined modification program, with uniform eligibility requirements, will be supported by a consistent, efficianet process approved by key industry participants. This program resulted from a unified effort among the various government agencies, Hope Now and its 27 servicer partners, the Department of the Treasury, the Federal Housing Administration (FHA) and FHFA.

The program targets the highest risk borrower who has missed three payments or more, owns and occupies the property as a primary residence, and has not filed for bankruptcy. To be considered for the program, a seriously delinquint borrower should contact his/her servicer and provide the requested income information. The program creates a a fast-track method of getting troubled borrowers to an affordable monthly payment, where "affordable" is defined as no more than 38% of the household's gross monthly income. This affordable payment will be achieved through a mix of reducing the mortgage interest rate, extending the life of the loan, or even deferring payment on part of the principal. Servicers will have flexibility in the mix used to get there, but the goal is to create a more affordable payment.

The key to success is the borrower's ongoing cooperation and communication with the servicer. Borrowers shouldn't fear working with servicers. They have dedicated personnel who are experienced in working with homeownerrs who are struggling with finances, but who are eager to keep their homes.

The streamlined modification program complements existing loss mitigation programs. We expect that it could significantly increase the number of modification s completed. Borrowers who participate will be strongly encouraged to seek financial counseling though HUD-approved agencies, particularly if the default is a result of being overextended or due to financial mismanagement.

Fannie Mae and Freddie Mac will soon issue specific guidance to their servicers implementing this program, requiring implementation by December 15, 2008. To encourage participation, servicers will receive a fixed payment of $800 for each loan modified through this program.

Troubled borrowers eligible for this program have already experienced significant erosion in their credit scores, making them unlikely to obtain mortgage credit through typical means. Many also lack equity in their homes. This streamlined program is meant to reach as many of these borrowers as possible to give them a chance to save their homes and being restoring their credit. The borrowers' ultimate obligation to repay his/her current mortgage does not change...."

As a realtor who focuses on short sales and distressed homeowners, I applaud this initiative. As I have written in the past, this is not merely a financial crisis, it is a human crisis. These are real people facing the very real likelihood of losing their homes. While this may hinder my abilities to do short sales, I am optimistic that this approach will greatly reduce the number of distress sales, and have a positive impact on our real estate markets.

I would love to hear from fellow realtors, and get a feel for all your thoughts on this tremendously important issue.

There is so much negativity about the real estate market, locally, regionally, and nationally. Yes, it is true that home values have dropped markedly. Yes, it's also true that many, many homeowners face the threat of foreclosure. It clearly isn't the best of times we have ever seen. But it's also true that the real estate market is cyclical, that home prices had inflated beyond all logic and reason, and that this situation is an inevitable correction in the market. Yes, there are many problems, and it is not my intention to dismiss those problems, or make light of them. But it's also true that problems create opportunities, and this is the time for consumers to make the most of those opportunities.

The current economic crisis has created a huge inventory of homes for sale. The declining market offers buyers the chance to purchase a home at greatly lower costs than the bull market of a few years ago. Interest rates are very attractive (6.05% today for a 30 year fixed rate), and there are many programs designed to help first time homebuyers. Those programs range from Rural Development loans with 100% financing, to FHA loans with only 3-3.5% down payment, to a $7500 tax credit. That confluence of inventory, pricing, interest rates, and tax credits creates unparalleled opportunity for healthy consumers to realize the American Dream of home ownership. As Realtors, we have the opportunity and obligation to educate our prospects and clients, and introduce them to the Silver Lining that lies behind this dark cloud of foreclosure.

This also represents a great opportunity for investors to purchase homes. With so many consumers being displaced by foreclosure, there is a burgeoning need for rental units. In many cases, the current homeowner may make an excellent tenant, so the investor would have immediate and long term occupancy. For those investors who can afford to carry a mortgage for a few years, it may represent a chance to realize significant profit when the real estate market finally begins its rise.

For too many years during our unprecedented bull market in real estate, the general attitude was that home ownership was an inalienable right, instead of the American Dream. Yes, that dream has turned to nightmare for many consumers, but this shakeout could be for the best in the long run. If we as a population can adopt the attitude of our parents and grandparents, and actually learn to live within our means, actually save money and build credit, then this hugely painful experience will not be for naught. And although this opportunity comes at the expense of too many current and former homeowners, it does open doors to a new generation of consumers who can finally afford to buy a home.

I hope that this does not come across as glib or uncaring. The fact is, I dedicate much of my real estate career to assisting distressed homeowners, so I am keenly aware of the many problems and stresses facing them right now. But, just as there is much suffering and loss right now, there is also much opportunity. Yes, the dark cloud is there, but let's not blind ourselves to the silver lining, either.

It's my belief that the very best outcome would be to keep homeowners in their homes, whether that's through loan modifications, short refinance, or some other workout plan. But many of these homeowners are facing chronic, long term hardships that make modifications virtually impossible. If homeowners in arrears can demonstrate that the hardship they are facing is acute, and of a limited duration, then (in my opinion) we as realtors have a certain obligation to assist homeowners with the task of staying in their homes. Short sales should be a last resort.

I know that lenders and loan servicers are working as hard as they can to offer solutions to homeowners in arrears. The problem, as often as not, is that these homeowners typically withdraw themselves from communications with their lenders. Too often they miss out on opportunities to help themselves because they are scared, and fail to respond to any lender initiatives.

Short sales definitely have a place in this real estate market, and are a better option than foreclosure. The damage done by foreclosures extends beyond the individual, and affects all of us locally, regionally, and nationally. Before I consent to do a short sale, I will counsel homeowners to explore and exhaust all options. I introduce them to many of the resources available to assist them. Foreclosure is not merely a lending problem; it is a societal problem and a human tragedy. Too often we lose sight of the fact that these are real people being displaced from their homes.