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This Month in Real Estate ............................................................................................................................................... Commentary
The housing sector continues to show signs of recovery. Together the tax credit (which expired at the end of April), the more upbeat consumer confidence, and favorable market conditions all contributed to bolstering April's sales activity - with existing home sales increasing for the second straight month. The return of buyer confidence with much of the home price correction believed to be over, encouraging economic developments and historically low mortgage rates, will provide the stepping stone for further market stabilization. Meanwhile, stagnant job growth and elevated levels of foreclosure continue to be cause for concern. The government is now taking proactive steps to restructure the mortgage industry with risk-management measures seen by experts as a "huge cut in red tape" that would ultimately benefit consumers. The Housing Market
Existing Home Sales Existing home sales strengthened in April to 5.77 million, up 8.7% from March and 22.8%from last April. This is the tenth consecutive month of year-over-year increases. According to Lawrence Yun, NAR chief economist, although part of the uptick was expected from the tax credit, there's also been a return of buyer confidence, for those who remained on the sideline last year. The return of confidence is a result of stabilized prices, an improved economy, and continued advantageous interest rates. In March, 49% of sales were from first-time buyers.
Median Home Price The median price for an existing home was $173,100 in April, up 2.1% from a year ago and 4% from March. Distressed homes, accounting for a third of last month's sales, continued skewing prices downward slightly as they typically are discounted 15% compared to typical home sales. Overall, prices this past year showed increased stability over the previous year.
Inventory Total housing inventory rose slightly to 4.04 million in March, representing slightly less than an eight-and-a-half month supply of sales (if homes continue to sell at the current pace consistently and no new homes come on the market). Compared to the previous year, there are now 3% more homes on the market. Although this is the first rise in twenty consecutive months of decline when compared to the previous year, NAR's chief economist believes this increase can be attributed to the summer selling season and that home prices are back on track.
Mortgage Rates Mortgage rates dipped back below 5% this month due largely in part to the European debt crisis. As confidence in the value of the Euro eroded, more investors chose the U.S. dollar instead. With more demand for dollars, the cost of debt (interest rate) dropped. This event has also shown the global recovery is not free-and-clear of roadblocks to complete recovery. However, experts still anticipate rates will increase to between 6% and 6.5% by the end of the year. As the recovery gains increasing traction, the Federal Reserve will need to increase rates to prevent inflation.
Affordability Affordability remains advantageous, supported by some of the lowest mortgage rates in decades as well as less expensive home prices. The home price-to-income ratio continues to remain well below the historical average of 25%. The ratio now stands at 14.9%. Sources: National Association of Realtors, Freddie Mac Government Action FHA Turns to Lenders to Monitor Brokers
As the Federal Housing Administration (FHA), the government agency that insures home loans, saw its market share rise to about one-third of the mortgage market last year, up from 2% in 2006, the number of brokers seeking to arrange FHA-backed loans has mushroomed to 9,043 at the end of 2009 from 5,759 just two years earlier. The agency, finding itself inadequately equipped to monitor its brokers, is shifting the responsibility to its lenders. The FHA expects the new policies to result in better risk management, and the cut in red tape should produce better rates for consumers. As of May 20, the FHA no longer certifies mortgage brokers or tracks the performance of brokers' loans. Instead, lenders are now required to sponsor brokers and assume responsibility for loans they originate, including losses from fraud or mistakes in underwriting. In addition to revamping broker insight, the agency also beefed up oversight of its lenders by increasing net-worth requirements to $1 million from $250,000. The change is in effect for one year for existing lenders. Source: WSJ.com Topics For Buyers & Sellers Myths about Distressed Properties - Debunked!
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Call Paul Washington, 404-574-5265 your local real estate expert, for information about what's going on in our area. Don't forget to check out this month's video:
Newsletter Contents 1. Commentary 2. The Housing Market 3. Government Action 4. Topics for Buyers
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Brought to you by KW Research. For additional graphs, please see the This Month in Real Estate PowerPoint Report. |
With the permission of a trusted lender, I am posting information that is very important to individuals who are faced with crisis in their lives concerning foreclosure, short sales, bankruptcy and the like. This is the most comprehensive, straight forward info you will find regarding your credit and how each instance affects you.
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Having The Answers To Those Tough Questions
When a homeowner finds themselves upside down in their mortgage payments, they have no idea of which direction to turn, and It seems that it is almost impossible to get straight answers to their questions about what options they have, and how each option will affect their credit. Following is information to help you answers those questions. Remember, there are NO quick fixes when it comes to credit, so it is imperative that you don't wait until the last minute to get this information out to your clients. and your prospects, clients and referral partners .
FORECLOSURE
Foreclosure is the legal process in which a bank or other secured creditor either sells or repossesses a parcel of real property, home or land, after the owner has failed to comply with the mortgage or deed of trust agreement with the lender. Most frequently, the violation of the mortgage agreement is the default of payment. The completion of the foreclosure process allows the lender to sell the property, and keep the proceeds to pay off the mortgage as well as any legal costs. The length of the foreclosure process varies from state to state.
If the foreclosed property is sold for less than the remaining primary mortgage balance, and there is no insurance to cover the loss, the court overseeing the foreclosure process may enter a deficiency judgment against the borrower. Deficiency judgments can be used to place a lien on the borrower's other personal property, obligating the borrower to repay the difference or suffer the loss of their property. It gives the lender a legal right to collect the remainder of debt out of borrower's other existing assets.
However, there are exceptions to this rule. If the mortgage is classified as "non-recourse debt," then the borrower has no personal liability in the event of foreclosure. This is often the case with residential mortgages. If so, the lender may not go after borrower's personal assets to recoup additional loss.
The lender's ability to pursue a deficiency judgment can be restricted by state laws. In California and some other states, original mortgages (the ones taken out at the time of purchase) are typically non-recourse loans, however, refinanced loans and home equity lines of credit aren't.
If the lender chooses not to pursue deficiency judgment-or can't because the mortgage is non-recourse-and writes off the loss, the borrower may have to pay income taxes on the un-repaid amount if it can be considered "forgiven debt."
Any other loans taken out against the property being foreclosed (second mortgages, HELOCs) are "wiped out" by foreclosure (in the sense that they are no longer attached to the property), but the borrower is still obligated to pay them off if they are not paid out of the foreclosure auction's proceeds.
How Does a Foreclosure Affect Credit?
A foreclosure can be reported as a Foreclosure or Repossession and carries a derogatory payment status of 8 or 9 (M1, R1 and I1 being the best and R9, I9, etc. being the most negative) which is just under a Public Record. There is a misconception that foreclosures are considered Public Records to the scoring system, however, they are not. Although there is a Public Notice Record on file once a foreclosure is filed, but this record is completely different than a credit report public record.
A Foreclosure will remain on a credit report for 7 years from completion date. And the score will drop from 50-250 points. The difference in point loss depends on how many points your client has to lose in the payment history factor of their credit. So if someone has a 750 credit score, and they opt to foreclose, their score could drop up to 250 points. However, if someone has a 500 credit score, they may lose 50 points for the same derogatory.
If a Deficiency Judgment or Tax Lien is filed in connection with a Foreclosure, the credit score can drop an additional 100 points.
Fannie Mae Waiting Period
The current HYPERLINK "http://www.creditresourcecorp.com/NewsletterAttach/FannieMaeGuidelinesAnn08-16.pdf"selling guideline from Fannie Mae has upped the previous 4 year period of how much time must elapse after a foreclosure to 5 years from the date the foreclosure proceeding is completed, not started.
The exception for extenuating circumstances has been increased from a 2 year to a 3 year waiting period.
WORD OF CAUTION: If you have a borrower going through a foreclosure due to circumstances of losing a job, a medical crisis, sub-prime mortgage crisis fall-out, I suggest that you advise them to fully document their experience now. Not to wait until later, because the details and emotional energy of what they are going through will be more difficult to document and prove down the road if they decide to apply for a loan in 2 years based on an extenuating circumstance claim.
In General: When it comes to foreclosure and how it affects the ability to obtain credit in the future, there are multiple points of extremely negative impact. Deficiency judgments for the amount not collected by the lender in the foreclosure sale can end up on the borrower's credit report as a derogatory mark. Additionally, there is a high risk that the borrower will be hit with a substantial tax penalty which can result in a tax lien, which also appears on the credit report. As a general rule, other than a bankruptcy, foreclosure is the least desirable of all of the options available when a borrower is upside down in a home mortgage.
Deed in Lieu Of Foreclosure
An alternative to foreclosure is a "deed in lieu of foreclosure." In this scenario, the borrower turns the house over to the lender and walks away without owing anything. A deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The main advantage to the borrower is that it immediately releases him or her from most or all of the personal debt associated with the defaulted loan. The borrower also avoids a foreclosure proceeding and may receive more generous terms than he or she would in a formal foreclosure. Advantages to a lender include a reduction in the time and cost of repossessing the property.
However, the lender usually will not proceed with a deed in lieu of foreclosure if the outstanding debt on the property exceeds the current fair market value of the property. So in this market, this option probably won't be available to most homeowners who are upside down.
How Does a Deed in Lieu Of Foreclosure Affect the Borrower's Credit?
Most lenders report a deed in lieu of foreclosure as a foreclosure, so the credit scores will carry the same serious affect as if it were an actual foreclosure. However, what most borrowers don't know is that they can negotiate with the lender to report it differently in return for turning over the deed and avoiding foreclosure costs.
Many lenders will say that they cannot change the reporting status, but they can. Here are their options in preferred order:
The item will remain on the credit report for 7 years from the completion date or the settlement date.
Fannie Mae Waiting Period
The HYPERLINK "http://www.creditresourcecorp.com/NewsletterAttach/FannieMaeGuidelinesAnn08-16.pdf"selling guideline from Fannie Mae has not changed. It is a 4 year period of how much time must elapse after a deed in lieu of foreclosure proceeding is completed.
The exception for extenuating circumstances also remains the same at 2 years.
Short Sale (aka Pre-Foreclosure Sale)
In my opinion, the best option is a short sale, which occurs when a bank or mortgage lender agrees to discount a loan balance, due to an economic hardship on the part of the home owner. The home owner sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove a proposed sale.
A short sale is typically executed to prevent a home foreclosure. Lenders often choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owners, the advantages include avoidance of having foreclosures on their credit histories. Additionally, a short sale is typically faster and less expensive than a foreclosure.
Junior lien holders, such as holders of second mortgages, HELOC lenders, and homeowner associations (special assessment liens), may also need to approve the short sale. Frequent objectors to short sales include those who hold tax liens (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even unrecorded) and mechanic's lien holders. It is possible for junior lien holders to prevent the short sale.
While it is frequently common for a lender to forgive the balance of the loan in question, it is unlikely that a lien holder that is not a mortgagee will forgive any of their balance. Further, it is common for a lender to omit updating the zero balance and settlement option on the mortgagor's credit report, or even flat-out refuse to do so "due to their financial loss."
The Mortgage Forgiveness Debt Relief Act Of 2007
When the lender decides to forgive all or a portion of the debt and accept less, the forgiven amount is considered as income for the borrower, like with a foreclosure, leaving it open to be taxed. However, The Mortgage Forgiveness Debt Relief Act of 2007 contains amendments to remove such tax liability, allowing the borrower and lender to work together to find a solution beneficial to both parties.
How Does a Short Sale Affect the Borrower's Credit?
The few reported short sales that I have seen have appeared as "Paid Settlements" on a mortgage account. In the wake of the current mortgage crisis, short sales are becoming extremely common, but legislation has not caught up with the tidal wave and there is no law on the books relating to them to date. As a result, there is an opportunity for the borrower to negotiate credit reporting with the lender. I've seen several successful negotiations, so be sure to let your borrower know that it is possible.
My view - a short sale proves that the borrower is exhausting every effort to pay the loan. The borrower has willingly committed to taking on months of emotional and physical stress in a good-faith effort to sell the property to maintain a good relationship with that lender. Most likely, the reason they can't afford their current mortgage is because they were in an adjustable product and their mortgage payment has doubled. That doesn't mean that they can't afford a different loan program with a lower payment. Which leads me to wonder what the incentive is for lenders not to negotiate with the borrower on how the item is reported to the bureaus. All they would be doing is cutting off a pretty substantial future income stream if they put these types of borrowers out of the market for two years. In that light, negotiation for a non-report on short sales is well worth it.
Here are their options in preferred order:
If reported, the item will remain on the credit report for 7 years from the completion date or the settlement date.
Fannie Mae Waiting Period
A few weeks ago, Fannie Mae was going to consider a short sale the same as a foreclosure, however, the current HYPERLINK "http://www.creditresourcecorp.com/NewsletterAttach/FannieMaeGuidelinesAnn08-16.pdf"selling guideline from Fannie Mae has reduced the amount of time that must elapse after a short sale to 2 years from the date the short sale is completed, not started.
There is no exception for extenuating circumstances.
Bankruptcy Mortgage Relief
Currently, bankruptcy offers very limited protection to a homeowner who is upside down with their payments. The borrower can file a Chapter 7 which, depending on the state bankruptcy law, will most likely require him or her to surrender the property to the bankruptcy court, or file a Chapter 13 debt repayment plan to spread out prior delinquent payments over a number of months or years in the future. However, no bankruptcy proceeding can modify the terms of an existing home loan on a principal residence. Legislation is being proposed to Congress that would allow bankruptcy judges to modify the terms of an existing mortgage loan. I would not hold my breath. It could take years to make further substantial changes to the bankruptcy laws.
How Does a Bankruptcy Affect the Borrower's Credit?
My advice on this is to avoid Bankruptcy at all costs unless, your borrower is upside down on everything. Not only have the new bankruptcy filing requirements become more difficult and more costly, a public record will wreak havoc on credit scores and could stop someone from being hired or renting a place to live.
A Chapter 7 Bankruptcy will remain on the report for 10 years, and a Chapter 13 will remain for 7. The point loss could be from 100-350 points, depending on how many points the borrower has to lose in this factor.
Fannie Mae Waiting Period
The HYPERLINK "http://www.creditresourcecorp.com/NewsletterAttach/FannieMaeGuidelinesAnn08-16.pdf"selling guideline from Fannie Mae has not changed. It is a 4 year period of how much time must elapse after a Chapter 7 Bankruptcy. The 4 year period can start on either the discharge or dismissal date.
The exception for extenuating circumstances is 2 years.
Again, the HYPERLINK "http://www.creditresourcecorp.com/NewsletterAttach/FannieMaeGuidelinesAnn08-16.pdf"selling guideline from Fannie Mae has not changed. It is a 2 year period of how much time must elapse after a Chapter 13 Bankruptcy. The 2 year period can start on either the discharge or dismissal date.
In the case of multiple bankruptcies, the current HYPERLINK "http://www.creditresourcecorp.com/NewsletterAttach/FannieMaeGuidelinesAnn08-16.pdf"selling guidelines that have just been added require a 5 year waiting period from the most recent discharge or dismissal date.
The exception for extenuating circumstances in the case of multiple bankruptcies is a 3 year waiting period from the most recent discharge or dismissal date.
What's the Good News?
Mableton is a rapidly growing area of S. Cobb county just west of Downtown Atlanta. It has easy access to highway 20, 285 and 75. There are many older neighborhoods around as well as many more newer neighborhoods popping up all over.
I tell you this cause many people really don't know much about Mableton. We have our own Amphitheatre here, w/ many acts filling out the summer calender. This year is a mix of 3 different series. You can choose which genre you like best or try all three. Attached is a link to the webpage with the different acts, times and dates as well as how you can purchase tickets.
This market has been a strange beast lately. One that the typical agent/ lender/ homeowner has not seen since the early 90's, and that was nothing like what we are experienceing now. It started last year and has kept slowing all the way through winter and now here we are right smack into the Springtime....which typically, is the strongest time of the year. I can tell that the market has picked up...a little! It seems that people really do want to find a place to call home. Goodness knows that there is definitely plenty of property around. What I am finding though is that pricing in the area has been coming down. It's still a good time to be in the market....if you are buying. If you are selling and staying local, then it's not bad for you either. Just remember that any reduction you may experience in the sale of your home, you can most likely realize a similar reduction on your new property. Just be smart about where you are looking and price your home right.
The important thing to remember with this market is to get qualified. You really need to have a good working relationship with several lenders that you trust and can make it happen. If you are a buyer, you may very well find yourself in a Government backed loan. That's not a bad thing...just something to keep in mind.
Builders are still offering pretty good incentives, but who knows how much longer that may last. Depends upon the inventory. It is difficult for a seller to compete with a builder and their price reductions.
If you are selling or thinking of selling remember these few important points. Price is Key! On top of that, you really need to have your home in top shape. Do the necessary repairs, paint, clean, get an appraisal and an inspection. You don't want to have a property under contract and have it fall apart cause the home doesn't appraise or there was a defect that scared away the buyer.
Happy house selling and hunting. There are always going to be people buying and selling....it's how you present it and deal with it that matters.
Let me know your thoughts on how you see the market.
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