Real Estate Market Updates

Wells Fargo Says Credit Score of 500 OK

In a long-awaited shift, Wells Fargo is providing FHA mortgages to borrowers with credit scores as low as 500. The move comes after the National Association of Realtors® and FHA Commissioner David Stevens, among others late last year, criticized the country’s major banks for requiring credit scores as high as 650 in some cases before making loans. At NAR’s annual conference last year in New Orleans, Stevens said banks’ credit policies were out of sync with the FHA and artificially restraining home sales by as much as 20 percent. Under its new policy, Wells Fargo will accept borrowers with credit scores of 500 to 579 if those borrowers can make a down payment of at least 10 percent; gifted funds or other down payment assistance is not allowed. For borrowers with credit scores of 580 to 599, borrowers must put down 5 percent, with the same restriction on gifts and assistance funds. Borrowers with credit scores of 600 or higher can make a 3.5 percent down payment. The new policy took effect Jan. 15.

Home Price Stabilization Seen in Most Metro Areas during Fourth Quarter, Sales Up

8 Reasons Why You Should Work With a REALTOR®

Not all real estate practitioners are REALTORS®. The term REALTOR® is a registered trademark that identifies a real estate professional who is a member of the NATIONAL ASSOCIATION of REALTORS® and subscribes to its strict Code of Ethics. Here are five reasons why it pays to work with a REALTOR®. 

1. Navigate a complicated process. Buying or selling a home usually requires disclosure forms, inspection reports, mortgage documents, insurance policies, deeds, and multipage settlement statements. A knowledgeable expert will help you prepare the best deal, and avoid delays or costly mistakes.

2. Information and opinions. REALTORS® can provide local community information on utilities, zoning, schools, and more. They’ll also be able to provide objective information about each property. A professional will be able to help you answer these two important questions: Will the property provide the environment I want for a home or investment? Second, will the property have resale value when I am ready to sell?

3. Help finding the best property out there. Sometimes the property you are seeking is available but not actively advertised in the market, and it will take some investigation by your REALTOR® to find all available properties.

4. Negotiating skills. There are many negotiating factors, including but not limited to price, financing, terms, date of possession, and inclusion or exclusion of repairs, furnishings, or equipment. In addition, the purchase agreement should provide a period of time for you to complete appropriate inspections and investigations of the property before you are bound to complete the purchase. Your agent can advise you as to which investigations and inspections are recommended or required.

5.  Property marketing power. Real estate doesn’t sell due to advertising alone. In fact, a large share of real estate sales comes as the result of a practitioner’s contacts through previous clients, referrals, friends, and family. When a property is marketed with the help of a REALTOR®, you do not have to allow strangers into your home. Your REALTOR® will generally prescreen and accompany qualified prospects through your property.

6. Someone who speaks the language. If you don’t know a CMA from a PUD, you can understand why it’s important to work with a professional who is immersed in the industry and knows the real estate language.

7. Experience. Most people buy and sell only a few homes in a lifetime, usually with quite a few years in between each purchase. Even if you have done it before, laws and regulations change. REALTORS®, on the other hand, handle hundreds of real estate transactions over the course of their career. Having an expert on your side is critical.

8. Objective voice. A home often symbolizes family, rest, and security — it’s not just four walls and a roof. Because of this, homebuying and selling can be an emotional undertaking. And for most people, a home is the biggest purchase they’ll every make. Having a concerned, but objective, third party helps you stay focused on both the emotional and financial issues most important to you.

Provision in Sweeping Bank Reform Law to Affect Mortgage Availability

A behind-the-scenes battle is forming over a provision to the sweeping bank reform law that will affect mortgage availability. At issue is a provision in the sweeping Dodd-Frank Act that requires banks to have “skin in the game” by retaining some of the risk of loans they package and sell.

The goal of the measure is to eliminate a problem leading to the financial crisis where lenders packaged and sold subprime mortgages they knew would fail. Lawmakers drafting the legislation also included a measure that would exempt certain mortgages from the risk retention rule if their loans met certain high underwriting standards.

But reaching an agreement on what the criteria will be for these high-standard loans dubbed “qualified residential mortgages” (QRM) is expected to be difficult and, depending on how regulators rule, a huge slice of the mortgage market could be exempted from risk retention—or only a small piece of the market.

That could have a major impact on what kinds of mortgages are available, and for what price. Mortgage rates have remained near historic lows but mortgage activity is near decade depths.

Reuters reported last week that a group of prominent investors and academics urged top U.S. officials to move quickly to enact the provision, citing the “chaotic situation in the mortgage market today.”

Ernest Patrikis, a partner at White & Case LLP in New York, said regulators must balance how conservative they want underwriting standards to be against how much lending they want to see. What they decide will have a major impact on the kinds of interest rates borrowers with different capabilities will receive. “The borrower that passes the test for a zero-risk retention mortgage will likely get a lower rate on their mortgage than someone that must buy a mortgage that doesn’t get exempted because banks will have to retain some risk there,” he said.

Bank regulators and the Treasury Department are required to work together to draft rules under the watchful eye of a newly formed Financial Stability Oversight Council made up of the heads of bank and securities regulators. A soon-to-be-formed Consumer Financial Protection Bureau, which will write rules for mortgages and other consumer-credit products, will want to be involved as well. Regulators aren’t expected to introduce a proposal for this measure until January.

Washington observers say that regulators, consumer groups and bankers generally already agree to prohibit more exotic or problematic loans from qualifying for the risk retention provision. Specifically, those with negative amortization loans, pre-payment penalties or balloon payments—many of the problematic structures that helped drive the financial crisis—won’t be permitted. Strong credit scores will also be a must as well as effective verification of borrower income.

However, squabbles are already taking place among banks, investors and consumer groups over whether the loans approved under the exemption should have down payments, and if so, how much money down is necessary. Other points of dispute: How many months of verification should be required for a borrower’s income (12 months? 24 months?) and how much debt can a borrower handle. The Mortgage Bankers Association is seeking to include interest-only loans in the definition but consumer groups are passionately opposed.

Big banks are seeking some sort of significant down payment, perhaps as much as a 30% stake by borrowers, arguing that it means homeowners have some skin in the game and would be less likely to abandon the mortgage.

Alternatively, consumer groups are either opposed to having any down-payment requirement or prefer a small down-payment condition.

Finally, smaller banks would like to see a 5% or a similarly small down-payment requirement if borrowers obtain private mortgage insurance and have high credit scores.

Kathleen Day, spokeswoman at the Center for Responsible Lending in Washington said having a high down-payment requirement for the QRM, in the realm of 30% money down, would limit a lot of responsible lending. “Non-standard, non-traditional and predatory products would become part of the universe of the common loan, and it would mean we have the status quo where bad loans are sold as legitimate products,” Day said.

Lisa Rice, president of the National Fair Housing Alliance, a consumer advocacy organization, said a small down payment doesn’t mean the borrower will be more likely to default on the loan. “There are many things that impact a mortgage,” said Rice. “You could take a person who only puts 3 percent down but got their loan at a safe deposit institution or credit union and that loan is better performing than someone who put 20 percent down, got a payment option (adjustable-rate mortgage) and the appraisal was over-inflated.”

Jaret Seiberg, analyst at MF Global Inc. in Washington said he believes regulators will agree to a down payment of 5% for fully documented loans with private mortgage insurance. “Yet this is a real fight, and we continue to worry that the market has ruled out an adverse outcome,” he said.

Wells Fargo & Co. suggested a 30% down-payment requirement, according to a letter the mega-bank sent to the Treasury. The bank argues that a qualified residential mortgage definition that encompasses a large portion of the mortgage market, such as one with a low down-payment obligation, would be ill-advised because it would hike costs for serving credit-worthy borrowers who seek mortgages outside of that definition.

MF Global’s Seiberg reports that some big banks seek a high down payment for the exemption so they can develop products for mortgages that don’t qualify. “A definition of QRM that encompasses a large portion of the mortgage market will produce a tendency to avoid lending to credit-worthy borrowers falling outside that definition,” Wells Fargo stated.

Tom Deutsch, executive director for the American Securitization Forum, which represents mid-sized and large financial institutions and mortgage investors said his members are generally seeking anywhere from a 5-20% down-payment requirement. He contends that a significantly higher down-payment QRM requirement would result in less credit availability for mortgages outside of that definition. “If you are a securitizer, you will have to hold some capital for every mortgage securitized outside of the QRM definition, which means banks will have less capital available to lend for non-QRM borrowers,” Deutsch said.

Seiberg adds that a high down-payment requirement for a QRM loan will mean that most banks and smaller independent mortgage lenders will drive a lot of their lending to Federal Housing Administration mortgages, which are also exempted from the risk-retention requirement.

“The rest of the market will likely reside with the biggest banks, which have the ability to house the mortgages on the balance sheet until the risk retention expires. Yet a low down-payment requirement keeps the door open to competition and should keep mortgage rates low,” Seiberg said.

Consumer groups are worried about access to credit in a scenario where FHA is the only lender for borrowers who can’t afford a 20% down payment.

(c) 2010, MarketWatch.com Inc.

Distributed by McClatchy-Tribune Information Services

Pending Home Sales Continue Recovery

Pending home sales rose again in November 2010, with the broad trend over the past five months indicating a gradual recovery into 2011, according to the National Association of REALTORS®. The Pending Home Sales Index, a forward-looking indicator, rose 3.5% to 92.2 based on contracts signed in November from a downwardly revised 89.1 in October. The index is 5.0% below a reading of 97.0 in November 2009. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.

Lawrence Yun, NAR chief economist, said historically high housing affordability is boosting sales activity. “In addition to exceptional affordability conditions, steady improvements in the economy are helping bring buyers into the market,” he said. “But further gains are needed to reach normal levels of sales activity.”

The PHSI in the Northeast increased 1.8% to 72.6 in November but is 6.2% below November 2009. In the Midwest, the index declined 4.2% in November to 78.3 and is 7.7% below a year ago. Pending home sales in the South slipped 1.8% to an index of 91.4 and are 7.2% below November 2009. In the West, the index jumped 18.2% to 123.3 and is 0.4% above a year ago.

“If we add 2 million jobs as expected in 2011, and mortgage rates rise only moderately, we should see existing-home sales rise to a higher, sustainable volume,” Yun said. “Credit remains tight, but if lenders return to more normal, safe underwriting standards for creditworthy buyers, there would be a bigger boost to the housing market and spillover benefits for the broader economy.”

The 30-year fixed-rate mortgage is forecast to rise gradually to 5.3% around the end of 2011; at the same time, unemployment should drop to 9.2%.

For perspective, Yun said that the U.S. has added 27 million people over the past 10 years. “However, the number of jobs is roughly the same as it was in 2000 when existing-home sales totaled 5.2 million, which appears to be a sustainable figure given the current level of employment,” he explained.

“All the indicator trends are pointing to a gradual housing recovery,” Yun said. “Home price prospects will vary depending largely upon local job market conditions. The national median home price, however, is expected to remain stable even with a continuing flow of distressed properties coming onto the market, as long as there is a steady demand of financially healthy home buyers.”

Existing-home sales are projected to rise about 8% to 5.2 million in 2011 from 4.8 million in 2010, with an additional gain of 4% in 2012. The median existing-home price could rise 0.6% to $173,700 in 2011 from $172,700 in 2010, which was essentially unchanged from 2009.

“As we gradually work off the excess housing inventory, supply levels will eventually come more in-line with historic averages, and could allow home prices to rise modestly in the range of 2-3% in 2012,” Yun said.

New-home sales are estimated to rise 24% to 392,000 in 2011, but would remain well below historic averages, while housing starts are forecast to rise 21% to 716,000.

Yun sees Gross Domestic Product growing 2.% in 2011, and the Consumer Price Index rising 2.3%.

For more information, visit www.realtor.org.

Should you sell in a down market?

Q: Is now a good time to sell my house, before it loses more equity, or should I wait until house prices go up again? What’s the best time of year to sell?
— Rolando

A: A great location can trump factors such as unemployment rates, low or high mortgage rates, mortgage access and other variables.

For example, a classic home on a tree-lined block near a prestigious university will always be in demand, despite the economy. The same goes for a quaint house that overlooks a lake or forest or one with a mountain view.

As for “losing more equity,” odds are good at this point in the cycle that your home has lost most of the value — and equity — it’s going to lose, give or take a few percentage points. But again, that value is only what someone is willing to pay for it, not market averages.

Markets in most parts of the country are closer to turning around than tailing off, with some notable exceptions. So I wouldn’t let the anticipation of further losses force your hand. If you’re resolved to wait for a vigorous run-up in value akin to what we saw in the middle of the previous decade, however, your wait could be long and futile.

Again, don’t mistakenly base your marketing strategy on the health of the overall market. Things such as comparative sales or “comps,” investment potential, mortgage-lending standards and interest rates are important in determining your potential homebuyers. But the product on hand — your specific address — should be the chief focus.

An accomplished agent can help you identify your home’s relative strengths and show you how to emphasize them. But hire carefully.

As for the best time of year to sell your home, the stock response is still spring because that’s when most buyers emerge. This is largely because a spring purchase allows families to plan moves that won’t uproot their kids from their schools in the middle of the term.

Today, “spring” really means “late winter.” If you want to sell next year, have your house on the market and ready for showings by mid- to late February. Many potential buyers are starting searches as early as possible because they also must sell their current home to make the purchase work.

Real Estate Provisions in the Tax Relief, Unemployment Insurance Reuthorization, and Job Creation act of 2010

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853) extending the Bush-era tax rates and a host of other expired and expiring provisions. The legislation is not "paid for," so there are no revenue raisers taken from real estate or other industry groups. The package provides temporary extensions of its numerous provisions. Some are retroactive, as well, so that the rules that had been in place previously will operate as if they had never expired.

Included in the bill are provisions that affect real estate investment and operations—such as energy-efficiency tax credits, capital gains, and more. A few key provisions of interest to REALTORS® include:

• Retention of Bush-era tax brackets through the 2011 and 2012 tax years;
• Retention of the capital gains tax rate of 15 percent for assets sold or disposed of during 2011 and 2012;
• Reduction of payroll taxes for employees and self-employed individuals during 2011;
• Extension of numerous energy efficiency credits through December 31, 2011, including: the Energy Efficient New Homes, Energy Efficient Existing Homes, and Energy Efficient Buildings credits.

For more detailed information on the provisions of this bill affecting real estate, home owners, and REALTORS® as small business owners, please see the see the full summary.

Congress has passed and President Obama has signed legislation (HR 4853) that

extends the Bush-era tax rates and a host of other expired and expiring provisions.

The legislation is not “paid for,” so there are no revenue raisers taken from real

estate or other industry groups. The package provides temporary extensions of its

numerous provisions. Some are retroactive, as well, so that the rules that had been

in place previously will operate as if they had never expired.

Only the provisions that affect real estate investment and operations are included

in this summary. The bill itself is vast, even though there are few expansions or

cutbacks of previous or current law.

Tax Rates:

tax years. Thus, there will be 6 brackets ranging from 10% to 35%. Also, the

backdoor rate increases that affect upper income taxpayers are repealed in 2010,

2011 and 2012. These backdoor rate increases are known as the personal

exemption phase-out and the limitation on itemized deductions.

Capital Gains:

2011 and 2012. Depreciation recapture tax rates remain 25%. No new limitations

are created for Section 1031 like-kind exchanges. The 15% rate is retained for

dividends received during those years. Small investors with incomes in either the

10% or 15% brackets will have a capital gains and dividend tax rate of 0%.

Payroll/Self-employment Taxes:

6.2% for employees and 12.4% for self-employed individuals. During 2011,

employee payroll tax rates will be 4.2% and self-employed individuals will have a

10.4% rate. This holiday is available only for earnings during 2011. The earnings

cap in 2011 is $106,800.

Estate Tax:

assets from an estate were required to use a so-called “carryover basis” in

determining the value of the assets they receive. Carryover basis is the amount

that the original owner of the asset paid for it. Prior to 2010, the heirs had always

received the asset with a “stepped-up basis.” Carryover basis requires heirs to

know when the decedent acquired his/her assets and at what price. Stepped-up

basis measures the value of the asset at its fair market value at the time of the

During 2010, the estate tax was repealed, but heirs who receivedFor many years, the payroll tax rates have beenThe tax rate will remain 15% for assets sold or disposed of duringThe Bush-era tax brackets will remain intact for the 2011 and 2012

 

To Claim Tax Credit, Close Before July 1

U.S. homebuyers who secured a purchase contract by April 30 have taken the first step toward receiving the Homebuyer Tax Credit of up to $8,000 for first-time buyers and $6,500 for some repeat buyers. But there’s still one more hurdle: You must close on the sale before July 1 to get the credit.

First-time buyers can receive a credit of 10 percent of the home price up to $8,000. You are considered a first-time buyer if neither you nor your spouse has owned a principal residence in the U.S. in the last three years.

Homebuyers who owned and lived in their principal residence for five consecutive years of the last eight are eligible for a credit of up to 10 percent of the purchase price, up to $6,500.

This is money that never has to be repaid, provided you live in the home for three years.

Other facts about the Homebuyer Tax Credit:

• The upper income limit to receive the full credit is $125,000 for individuals and $225,000 for couples.
• If the purchase price is more than $800,000, you are not eligible for the credit.
• There is no minimum income for claiming the credit. You qualify for the full credit even if you won’t owe any taxes for 2009 or 2010.
• You can apply the credit to the 2009 or 2010 tax years. And you can even apply the credit to your down payment for the purchase of an FHA-insured home.

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