December  2007      

In this issue of Home Base:

Buying Now Can Be a Smart Move

Although much of the housing market is in a slump, this is still a good time for most to buy a home.

Even though many economists are predicting further drops in home values in most areas, today is still an excellent time for most of us to buy a home. The direction of area home values won’t make much difference to homeowners who will both buy and sell in the same area, and other important factors very much favor buying a home now.

Most move up buyers buy their next home in the same area. Whether overall home values in that area are going down, up, or holding their own, other homes in the area will be similarly impacted. Current local home values and any future changes in those home values, whether negative or positive, will therefore have the same effect on a home they might buy as they will have on their current home when they sell it. For that reason the direction of housing values in any given area is of small consequence relative to other factors for those homeowners, who should not let declining values get in the way of buying their next home.

If you are a prospective first time buyer in one of the few appreciating markets, buying sooner rather than later certainly makes sense. Similarly, if you live in an area where home values are falling and plan to relocate to another area where prices are rising, that is a good reason to buy and sell (or sell and buy) as soon as you can, before the gap widens further.

Holding off on a home purchase due to current market conditions may make sense in some cases only for a much smaller group – prospective first time buyers who live in an area where further home price declines are likely. The same is true for those living in the relatively few areas where homes are appreciating and who plan to relocate to other parts of the country where home prices are still falling. Unfortunately some homeowners now owe more money on their mortgage than their home is worth because of dropping home values. They may be unable to afford to sell at this time regardless of local market conditions unless they have sufficient savings to make up the difference.

There are several reasons that today is a particularly good time to buy a home for most of us. The selection is as great as it will ever be, mortgage rates are still relatively low by historical standards, and costs of any desired remodeling/upgrades are a lot less because of the downturn in new home construction and the resulting glut of building supplies.

With inventories of homes for sale at all time highs in many places, there’s a much greater chance that you’ll be able to find a home that’s ideally suited for your needs. That’s a very big plus because homeowners spend an average of nearly a decade in their home before they sell it. The shortage of inventory and high home prices that existed up until 2005 forced many buyers to make many compromises on home features at that time. No doubt many of them wish that some of the nicer homes for sale in their neighborhood today had been available at that time. Today’s home buyers will have to make far fewer, if any compromises, and many will be able to pay less for a home that’s much better suited to their needs.

If today’s home buyers decide to make some upgrades and improvements to their next home they can usually do it for substantially less than it would have cost several years ago. The rate of new home construction has dropped precipitously, and prices of many building materials have dropped substantially as a result. Prices for oriented strand board, which is used for exterior wall sheathing, roof sheathing and subfloors, is down 40% from late 2005, according to the National Association of Home Builders. Lumber used for framing floor and roof joints retreated 24%, in cost according to NAHB. Drywall prices are down 35% from late last year, according to United States Gypsum Company.

Construction labor costs are down as well, as many home builders have decided to become remodeling contractors until the market for new homes improves. The remodeling market has also slowed down somewhat. With many home builders recently reinventing themselves as remodeling contractors, price competition in that market is very intense today. Only a few years ago you were lucky if half the contractors returned your call, and a few actually showed up and subsequently gave you a proposal. That has changed dramatically. “When we remodeled our kitchen and bathrooms several months ago every contractor we called showed up, and their bids were very competitive,” said American Homeowners Foundation President Bruce Hahn. “Many of them were ready to start immediately, and none of them balked when we told them we wanted them to sign a comprehensive contract specifying all of the details of the project,” he added. (Note: Judging from the continuing number of complaints regarding remodeling contractors, the competition has yet to drive incompetent and/or dishonest contractors out of the business. If you plan a remodeling project you can protect yourself with the American Homeowners Foundation’s comprehensive 8 page sample remodeling contract, available at www.AmericanHomeowners.org .)

Lastly, mortgage rates are still competitive by historical standards. Although lenders have become more particular about who they will lend to, and the gap between mortgage interest rates for those with excellent credit and those with marginal credit histories has widened, mortgages with 30 year fixed rates are still affordable for a majority of home buyers. If you are looking down the reset barrel of an adjustable rate mortgage on your current home, you will also be able to resolve that problem and avoid the higher mortgage reset interest rate with a fixed rate loan on your next home.

The bottom line: Trying to employ market timing in real estate entails many of the same risks as attempting market timing in the stock market, as many real estate flippers who flocked to the market in the middle of this decade learned the hard way. Despite all the current doom and gloom in the housing market, it’s still a great time for most of us to buy a home!

Can the Government Help Us Save our Homes?

There is a growing question of whether the government can solve the mortgage crisis even if it acts.

The mortgage crisis, by many measures, is getting worse. While some policymakers are working hard to mitigate the problems, many others are acting like the Roman emperor-musician Nero, fiddling while our home values burn. The largest mortgage lender, Countrywide Financial Corp. lost $1.2 billion in the third quarter, and government sponsored enterprises like Fannie Mae and Freddie Mac have also taken a beating in the stock market. Some mortgage products are no longer available and others are much harder to qualify for today.

The current mortgage market environment is a particular challenge for homeowners who bought with low or no down payments at the height of the market, and especially those who also financed using adjustable rate loans that have already adjusted upward or will adjust in the next two years. Higher loan standards, falling prices, and a dearth of home buyers is raising the risk of a death spiral in home values. Growing numbers of foreclosure sales, often at prices of 15-25% less than recent selling prices of similar homes in a neighborhood, are further aggravating the problem by setting new and lower market prices. As prices continue to drop, more homeowners will find themselves “underwater”, owing more than their home is worth. If those homeowners have adjustable rate loans that will reset and insufficient income to make payments at the higher interest rates, many are going to be unable to refinance out of the problem and will face foreclosure unless they can either come up with some cash or work out an alternative solution with their lender.

Fortunately there have been some positive government responses, particularly in the last few months. Most have been too long in coming, and the question is whether they will be too little, too late. Fannie Mae and Freddie Mac have helped prop up the mortgage market, guaranteeing more mortgages even as investors fled the market. Their share of mortgages has grown to nearly 75% from a low of 40% at the height of the housing market in 2005. Mortgage lenders and the Bush Administration, which had aggressively sought to restrict Fannie and Freddie’s market share, have backed off of that position. Many mortgage lenders now see the advantage to temporarily allowing Fannie Mae and Freddie Mac to rescue them from the financial consequences of their abandonment of sound underwriting practices, at least until the mortgage market recovers.

A rumored agreement in negotiation between mortgage lenders and the Bush Administration could allow many thousands of home owners to keep their homes. They reportedly are on the verge of announcing a plan to automatically freeze the rates on adjustable subprime loans for a large number of homeowners likely to be able to keep up with their payments if they are kept at the original teaser rates. This would be very helpful. By slowing the swelling inventory of foreclosed homes, it would likely also help reduce the adverse impact of foreclosed home inventories on home values. A state level prototype for that plan was announced in California in November. There four major mortgage loan servicers and California Governor Arnold Schwarzenegger have agreed to a plan to temporarily freeze interest rates so that borrowers in good standing but who would be at risk when their adjustable loan rates increased would not have to face foreclosure.

In November Federal Reserve Chairman Ben Bernanke suggested that the government might consider providing guarantees against defaults on jumbo mortgages, which are loans above the $417,000 current limit on mortgages guaranteed by Fannie Mae and Freddie Mac. Rumors that the Federal Reserve will cut interest rates at their next meeting in order to help drive down mortgage rates are growing, and this would help as well. 

Congress is acting as well. The Federal Housing Administration (FHA) would be able to provide insurance against mortgage defaults for more homes under legislation passed in the House of Representatives but currently stalled in the Senate, despite Administration support. If the legislation passes, FHA may further increase its share of such home loans to 10% from its current 2-3% market share.

In November the U.S. House of Representatives approved legislation to reform mortgage lending practices. Though it will have limited impact on the current crisis, it will greatly reduce the likelihood of a similar crisis in the future. “The Mortgage Reform and Anti-Predatory Lending Act of 2007” will establish a national standard to rein in the abusive lending practices that contributed to the current mortgage crisis, according to House Financial Services Committee Chairman Barney Frank.

This comprehensive legislation will create a licensing system for residential mortgage loan originators, establish a minimum standard requiring that borrowers have a reasonable ability to repay a loan, and will attach a limited liability to secondary market securitizers.  The legislation will also expand and enhance consumer protections for “high-cost loans,” will include protections for renters of foreclosed homes, and will establish an Office of Housing Counseling through the Department of Housing and Urban Development.  More details about the legislation are at www.financialservices.house.gov.

Neither the American Homeowners Grassroots Alliance nor business interests were entirely happy with the Mortgage Reform and Anti-Predatory Lending Act. Business interests are opposed limitations on incentive payments brokers and loan officers receive when they place borrowers in high-cost loans, as well as restrictions on prepayment penalties used to discourage borrowers from refinancing their loans. AHGA argued for the establishment of substantial national minimum educational requirements for mortgage loan officers and to allow homeowners injured by violations of the act to recover the full amount of their actual damages. Nevertheless the Alliance believes the legislation is still an important step forward. Because of the great need for timely positive action AHGA supports the measure, and hopes that other players will adopt the same approach. Unfortunately gridlock in the Senate and continuing Administration and business opposition to many of the provisions may delay or prevent the legislation from passing.

Different barriers face the House FHA reform bill in the Senate. A small group of Republicans opposed to federal engagement in the mortgage market blocked its consideration in November. Senator Elizabeth Dole (R-NC) is opposed to FHA pricing mortgages based on credit risk because it would raise the price of homes for lower income and minority families. Nevertheless, FHA plans to implement risk-based pricing in January, whether the FHA reform bill passes or not.

Both of these measures would help slow the decline in home values. For every 1% drop in home value thousands more homeowners will find themselves underwater and unable to refinance or sell their homes. For that reason it is imperative that compromises on these bills be made quickly. Even the strongest bills won’t solve the problems entirely, but even if further compromises are necessary the legislation will at least help some. For that reason some compromises that can allow the measures to go forward and overcome filibuster threats are needed.

Some business concerns with the Mortgage Reform bill could be addressed with relatively little impact on its effectiveness. For example, limitations on incentive payments brokers and loan officers could receive could be addressed through alternative language requiring that lenders not only disclose all their fees, but also credit all rebates, referral fees, or other remuneration from title insurers or other third parties to borrowers. The borrowers would then have to approve the payment of the brokers fees, giving the homeowners the ability to make sure brokers and loan officers weren’t getting any undisclosed payments from the lenders or other sources that exceeded the fees the homeowner had agreed to. While this would not limit their earnings, it would at least make them transparent. Some level of prepayment fees might be also allowed as long as there were better and more effective disclosures and some restrictions on their use.

The Senate FHA reform bill would become more viable if the credit-based pricing issue can be addressed. It is worth remembering that, currently, both FHA and private mortgage insurance premiums are tax deductible for many borrowers and that in order to keep housing costs down, that provision of the tax code needs to be extended or it will expire at the end of this year. That tax deduction particularly helps lower income and minority families, so some degree of risk-based pricing already exists in the marketplace. There should be room to address the concerns of Senators who want to assure that risk factors don’t price mortgages out of the reach of lower income and minority families that would allow the FHA reform bill to go forward.

“It’s clear that the U.S. Senate may become the graveyard for legislation that will help minimize further damage from the mortgage mess unless all the players make a serious effort to resolve their differences” observed Bruce Hahn, President of the American Homeowners Grassroots Alliance. “Senate leaders need to make the necessary compromises to reach a filibuster and veto-proof majority support for the FHA and Mortgage Reform bills, and pass the non-controversial seven year extension to the PMI tax deduction. Its time to follow the sage advice of Larry the Cable Guy and “Git-R-Done”, he added.

You can help. Contact both of your U.S. Senators using the lookup toll on the AHGA home page, and ask them to “Git-R-Done”. If you want to do more check with their local offices to find out if they’ll be in your area during the December Congressional recess, and deliver the message personally.

top

Managing Your Way Out of Adjustable Mortgages

Escaping adjustable mortgage resets can save your home.

The subprime mortgage crisis is poised to get much worse. According to the Bank of America, $362 billion in adjustable-rate subprime mortgages will reset next year, often increasing homeowners’ monthly mortgage payments by 30% or more. The Mortgage Bankers Association estimates that 1.44 million homes will enter foreclosure in 2008, more than double the 705,000 foreclosures in 2005. Even scarier, the projected inventory of foreclosed homes may reach around 45% of existing home sales according to Bear Stearns senior managing director Dale Westhoff.

Many homeowners chose teaser rate adjustable mortgages because they had no other choice. They didn’t have enough savings for a larger down payment and they didn’t have enough income to afford the higher monthly payments on a fixed rate mortgage.

Two or three years later they are in a bind. Many homeowners have not seen their income rise by the 30% or more they need to cover their new higher payments, and many who bought their homes in 2004 or 2005 with a low or no down payment have no equity in their home because of declining home values. What can those homeowners do to solve this problem, which will likely force a large number of homeowners into bankruptcy?

In some cases nothing can be done because of the homeowner’s economic circumstances, but in others there are numerous alternatives. As a result of continuing decline in home values and weakening of mortgage lenders balance sheets, the outlook for the mortgage marketplace is very fluid. As the situation worsens new solutions that may help many homeowners are being proposed and/or implemented by lenders and/or policymakers.

For example last month four major mortgage-loan servicers and California Governor Arnold Schwarzenegger supported a plan to temporarily freeze ARM mortgage interest rates so that borrowers in good standing, but who would be at risk when their adjustable loan rates increased, would not have to face foreclosure. The rules for who may qualify, the length of the forbearance, any obligation for making up the payment shortfalls, and when the program will be implemented have yet to be finalized. Nonetheless, when the program is implemented, many hard pressed California homeowners may have a reprieve that could carry them over until the housing market and/or their own personal finances improve.

As noted in the previous article, U.S. Treasury Secretary Henry Paulson has asked the mortgage servicing sector to develop programs that would enable large numbers of borrowers to automatically qualify for less risky loans rather than dealing with each mortgagee on a case-by-case basis. With 150,000 mortgages resetting a month and default rates rising, the ability of lenders and loan services to work with homeowners on a case-by-case basis is rapidly diminishing, and the growing need for some such action is becoming increasingly apparent. We expect that other alternatives will be proposed and or implemented in the coming months. Homeowners who will face problems when their mortgages reset over the next several years should closely follow developments in this area to see if federal and/or programs that can help them are announced.

Whether several helpful legislative proposals that have passed the U.S. House of Representatives, but appear stalled in the U.S. Senate can pass, is problematic. The continuing deterioration of the housing markets and the mortgage lending sector is increasing the pressure on the Senate to act and may also lead the Administration to become less rigid in its opposition to some of the provisions. However only the FHA reform proposal offers the potential of significant immediate help to many at risk current borrowers, and neither may be signed into law and translated into available programs in the next six months.

In the meantime there are some tried and true recommendations that homeowners who are challenged to keep up with mortgage payments and/or facing a big jump in payments upon their adjustable mortgage’s reset should consider. The first step is to thoroughly review your mortgage-loan documents, even if your reset date is many months in the future. Check the reset date, the reset interest rate or formula for determining the reset rate and any future rate resets, and see if there are prepayment penalties.

Assuming you’re pretty sure you may be facing financial hardship when your mortgage resets, the next step is to see if you can refinance into a safer fixed rate mortgage. Mortgage rates have dropped somewhat recently, and will probably be significantly less than the amount of a reset ARM mortgage. You can use a number of mortgage rate calculators on the Internet to find out what your principle and interest payments would be at current rates on your current mortgage balance, which should be on your monthly mortgage coupon (if not your lender can give you the correct amount).

If a fixed rate mortgage (plus taxes and insurance) would be affordable that is probably the best way to go. However you also need to find out how much equity you have in your home. If you owe more than it is worth you’ll have to contribute cash when you refinance, and if that’s not an option, seek other alternatives. A number of real estate websites have tools for finding the selling price of similar homes in your neighborhood and/or estimating your home’s current value. The accuracy of those tools varies considerably, so you should repeat the process at several of those sites.

Another source for an estimate of your home’s value would be an experienced local real estate agent with a lot of experience in your neighborhood. They may not be willing to prepare a full market analysis if you’re not a prospective client in the near future, but most know the value of building relationships and may be willing to at least give you an offhand guestimate of your home’s value that may well be closer to the your homes actual value (and the amount it will appraise for) than the Internet estimates.

Many homeowners may learn that they have little or no equity in their home due to falling home values. If you fit in that group and want to refinance you will have to come up with cash to make up the difference. If you have the money that may not be a bad idea. However if your credit is dinged you’ll also likely pay a higher interest rate to today’s nervous mortgage lenders than you would have in the past, assuming you can qualify.

For many the unfortunate result of the exercise will be to find out that a conventional refinancing won’t work. At that point it’s a good idea to contact experienced mortgage counselors for advice. The task is complex and there’s a lot of legalese in mortgage documents, so help understanding both is important.

There are many good local nonprofit mortgage/credit counselors that can explain the alternatives to homeowners. They have worked with many homeowners in similar circumstances and worked with many of the mortgage lenders. Some mortgage lenders are more flexible and forgiving than others, and locally-based mortgage counselors can help you understand the range of possibilities for your circumstances with your lender and suggest how to approach them. There are also some shady companies in this field who charge exorbitant fees and provide little service, so it is important to make sure you’re dealing with a reputable agency. The Department of Housing and Urban Development has a list of HUD–approved mortgage counselors on its website, so that’s a good place to start, according to Alan Fishbein, Director of Housing and Credit Policy at the Consumer Federation of America. Fishbein also recommended the Home ownership Preservation Foundation, whose Neighborworks America maintains a 24/7 toll free help line (888-995-HOPE) to advise homeowners with mortgage problems.

Most counselors will urge you to contact your mortgage lender as soon as possible and suggest some possible workouts that might be acceptable to them. Here the mortgage counselor’s knowledge of the various lenders and what each might be willing to accept can be invaluable. Some mortgage lenders may be willing to waive fees to allow you to convert to a fixed rate mortgage, especially if the numbers suggest that you’ll be able to make the payments and save them from a costly foreclosure process. Others may be willing to allow you to continue paying the teaser rate and add the difference between it and the reset rate to the mortgage balance.

Even if you are upside down (i.e. the mortgage balance is more than the value of the home), there’s still hope. Some lenders will allow what is a called a “short sale”. In a short sale, the lender allows the homeowner to sell the home for less than the mortgage balance, accepts the proceeds and calls it even. You’ll need to work with your lender in advance in order to get them to let you do this. A short sale can avoid much damage to your credit, but under current IRS rules you may still be liable to pay taxes on the difference (pending federal legislation would relieve you of that obligation if it passes).

One thing you shouldn’t do if you can help it is fall behind in your mortgage payments. This hurts your credit, reduces your options and makes lenders less willing to work out solutions with homeowners, in part because by that point many potential solutions may not be viable. Unfortunately, in the boom market earlier this decade, many first time home buyers were mislead into taking out risky mortgages before they were really financially prepared for home ownership. Hopefully as many of them as possible will be able to temporarily transition out of home ownership with as little pain and damage to their credit as possible, and will be able to rebuild their finances a better result the next time.

top

New Life for Energy Legislation?

top

 
Please take the time to contact your legislators and express your views on the policy issues covered in this month’s Home Base. It's easy - you can reach your legislators by email in a couple of mouse clicks, and you can use the content in Home Base and elsewhere on our website to help you develop your message. To look up the phone number, email, and/or postal address of your U.S. Representative or your two U.S. Senators, (or your state representative or state senator) click here. The site can look them up by zip code for you if you don’t recall their names.

Many legislators are also happy to meet personally with their constituents when they are back home on weekends or when Congress is not in session. Many will be back in their home states or districts after Congress recesses this month. A personal meeting is a particularly effective way to get their attention and reinforce your message, so please consider also requesting a follow up face-to-face meeting in their home state or home district offices near you when you contact them on policy issues.

Is there a policy issue that is particularly important to you which significantly impacts homeowners or home ownership? We are in the process of updating our policy positions for 2008. Any member may propose a position on a policy issue, so please check the American Homeowners Grassroots Alliance's 2007 Issue Guide to see whether it’s already on our list. If it isn't on the list, we invite you to send us an email and tell us why you think the American Homeowners Grassroots Alliance should take a position and work on it.