So you found your dream home—only it wasn’t a dream. No. It was a nightmare in dream’s clothing. As you crossed the threshold—wishing there was a door in it—your eyes widened with excitement as you imagined mahogany floors, granite countertops, stainless steel appliances, and French doors where the gold, paint-speckled linoleum floors (which coordinate nicely with the identically-colored linoleum countertops), mustard yellow appliances, and hollow pine doors now stand. Then came your next thought… No, it wasn’t “SH!@#$%^T!”

Your next thought was…How shall I finance this miracle transformation?

Believe it or not, there is still a rehab loan program out there for first-time homebuyers that won’t require you to give up your first, second, and third born.

Federal Housing Administration (FHA) 203K and Streamlined 203(k)

The Section 203(k) program is the Department of Housing and Urban Development’s primary program for to help homebuyers finance the rehabilitation and repair of single family properties. Investor can no longer use 203K loans. You must apply for the loan through an approved FHA 203K lender. The great thing is this program has the same down payment requirements as normal FHA loans (now 3.5 percent).

Through this program a borrower can get a single long-term fixed (or adjustable) rate loan that will serve to finance the purchase and rehabilitation. The loan amount and payment are based on the projected value of the property after the work is complete (as determined by a before-and-after appraisal report). And the great thing is that homeowners can finance such items as painting, room additions, decks, or they can make energy efficiency improvements. The standard 203K loan has some really great benefits, including the fact that if you cannot move into your house while it is under renovation, up to six months of your mortgage payments can be used to finance repairs.

Under normal circumstances, the property must be a one- to four-family dwelling that has been completed for at least one year and meets local zoning requirements. Coops aren’t eligible. The standard program typically applies to properties that need more extensive rehabilitation and construction (including structural repairs) but you can consult the FHA guidelines for more information.

The 203K Streamline program permits homebuyers to finance up to $35,000 into their mortgage to finish minor upgrades or improvements before they move-in and generally processes more quickly than the standard 203K loan.

Allowable repairs under the streamline program include:

• Repair/Replacement of roofs, gutters and downspouts

• Repair/Replacement/upgrade of existing HVAC systems

• Repair/Replacement/upgrade of plumbing and electrical systems

• Repair/Replacement of flooring

• Minor remodeling, such as kitchens, which does not involve structural repairs

• Painting, both exterior and interior

• Weatherization, including storm windows and doors, insulation, weather stripping, etc.

• Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwave ovens

• Accessibility improvements for persons with disabilities

• Lead-based paint stabilization or abatement of lead-based paint hazards

• Repair/replace/add exterior decks, patios, porches

• Basement finishing and remodeling, which does not involve structural repairs

• Basement waterproofing

• Window and door replacements and exterior wall re-siding

• Septic system and/or well repair or replacement

As you well know, nothing processed through the government is ever “fast.” Ideally, streamline loans are supposed to close within 30 days but it typically can take 60 days (give or take a few weeks) to process loans under either program. For more information, please visit: http://www.hud.gov/offices/hsg/sfh/203k/faqs203k.cfm or contact an FHA approved lender (http://www.hud.gov/ll/code/llslcrit.cfm) for more detailed information about the program.

Yield on mortgage securities dropped to their lowest levels in three months, a sign that mortgage rates on new homes will decline further.

Yields on Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds fell to 4.29% as of 3 p.m. in New York, the lowest since May 26, according to data compiled by Bloomberg. Yields are following Treasury rates down as recent auctions have been over-subscribed.

The demand for Treasuries and the drop in Fannie and Freddie coupons augers will for a drop in mortgage rates. The average rate on a typical 30-year fixed-rate mortgage dropped to 5.07% in the latest week based on data from Freddie Mac. That’s down from a high of 5.59% percent in June but up from the record low of 4.78% in April. Analysts believe that rates need to drop below 5% to spur another wave of refinancing. We're close but it's hard to believe rates will go below 5% or stay there for much longer with more Treasury sales coming and the economy beginning to show some signs of life.

While homeowners may have missed the rate bottom in April, now may be a good time to think about refinancing, if you haven't already.

Many homeowners, stuck with an underwater property that they can only sell for a loss are renting the property instead, hoping the price will rebound in a few years. Is this a good move? Probably not.

The WSJ did a nice article on this. According to the Journal:

"Hard data are scant on how many homeowners are renting out their homes, but anecdotal evidence suggests numbers are up. In one indication of the trend: More homeowners are converting their homeowners insurance to landlord policies that cover the additional risks of leasing out a home. Allstate Corp., the second largest home insurer in the U.S., reported a 27% increase in conversions in the first quarter from the previous year."

So why isn't this a good idea for most people? There are several reasons:

First, many homeowners are renting out their homes in the expectation that real estate prices will bounce back sometime in the next three years. That's wishful thinking for much of the country. In the last real estate recession that started in 1998, it took almost ten years for housing prices to rebound to their 1987 levels in hard-hit places like Boston. And the current real estate downturn is significantly deeper than that one. It may take 10-20-30 years for some housing prices to rebound. Don't believe that? Remember, the Nasdaq is still 50% below it's closing high in 2001. Large bubbles often take decades to recover.

Second, because homeprices have dropped so much, so have rents. So homeowners are stuck with high mortgage payments that can only be partially subsidized via rents. It's doubtful most rents will generate enough income to even pay the mortgage. If you can't sell your property for what you bought it for, don't expect to be cash flow positive if you rent.

Third, a property has many more costs than just the mortgage - insurance, repairs, utilities, etc. These will put you deeper in the hole.

Fourth, renting a property is often a nerve-wracking and time-consuming endeavor. A property owner must list the property, screen the applicants, collect the rent, evict tenants that don't pay rent, fix damaged property, etc. Bad tenants can be a nightmare and are not just confined to low-income properties. I know a couple in a luxury condo that rented their unit to a couple they thought were nice, clean, etc. The couple completely trashed the condo. I have another friend who rented her place and it flooded with the tenants there. The repairs, including mold removal will cost over $100,000 and the insurance company is claiming the tenants should have been aware of the flooding and is refusing to pay for the bulk of the repairs.

You could hire a property management company but that will increase the expense and will make you more cash-flow negative.

The best advice, get rid of the property via a short-sale. Take the loss upfront and move on. This is especially true if you are in a different city or far away from the property. Managing a property long-distance is a recipe for disaster.

Washington, August 21, 2009

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 7.2 percent to a seasonally adjusted annual rate¹ of 5.24 million units in July from a level of 4.89 million in June, and are 5.0 percent above the 4.99 million-unit pace in July 2008. The last time sales rose for four consecutive months was in June 2004, and the last time sales were higher than a year earlier was November 2005.

Lawrence Yun, NAR chief economist, said he is encouraged. “The housing market has decisively turned for the better. A combination of first-time buyers taking advantage of the housing stimulus tax credit and greatly improved affordability conditions are contributing to higher sales,” he said.

The monthly sales gain was the largest on record for the total existing-home sales series dating back to 1999.

“Because price-to-income ratios have fallen below historical trends, there are more all-cash offers. In some recovering markets like San Diego, Las Vegas, Phoenix, and Orlando, the demand for foreclosed and lower priced homes has spiked, and a lack of inventory is becoming a common complaint,” Yun said.

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to 5.22 percent in July from 5.42 percent in June; the rate was 6.43 percent in July 2008.

An NAR practitioner survey showed first-time buyers purchased 30 percent of homes in July, and that distressed homes accounted for 31 percent of transactions.

NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said the first-time buyer tax credit is working. “In addition to first-time buyers, we’re also seeing increased activity by repeat buyers. While many entry-level buyers are focused on the discounted prices of distressed homes, they’re also freeing some existing owners to sell and make a move,” he said.

“Realtors® are the best resource for consumers in these changing market conditions because the transaction process has become more complex. Since it’s now taking longer to complete a home sale, first-time buyers who want to take advantage of the $8,000 tax credit should try to make contract offers by the end of September,” McMillan said. “Otherwise, they may miss the November 30 closing deadline.”

Total housing inventory at the end of July rose 7.3 percent to 4.09 million existing homes available for sale, which represents a 9.4-month supply² at the current sales pace, which was unchanged from June because of the strong sales gain. Raw inventory totals are 10.6 percent lower than a year ago when the number of unsold homes was at a record.

The national median existing-home price³ for all housing types was $178,400 in July, which is 15.1 percent lower than July 2008. Distressed properties continue to weigh down the median price because they typically sell for 15 to 20 percent less than traditional homes.

Single-family home sales increased 6.5 percent to a seasonally adjusted annual rate of 4.61 million in July from a pace of 4.33 million in June, and are 5.0 percent higher than the 4.39 million-unit level in July 2008. The median existing single-family home price was $178,300 in July, which is 14.6 percent below a year ago.

Existing condominium and co-op sales jumped 12.5 percent to a seasonally adjusted annual rate of 630,000 units in July from 560,000 in June, and are 5.9 percent above the 595,000-unit level a year ago. The median existing condo price⁴ was $178,800 in July, down 18.9 percent from July 2008.

Regionally, existing-home sales in the Northeast surged 13.4 percent to an annual pace of 930,000 in July, and are 3.3 percent higher than July 2008. The median price in the Northeast was $236,700, down 15.0 percent from a year ago.

Existing-home sales in the Midwest jumped 10.9 percent in July to a level of 1.22 million and are 8.0 percent above a year ago. The median price in the Midwest was $157,200, which is 5.9 percent less than July 2008.

In the South, existing-home sales rose 7.1 percent to an annual pace of 1.95 million in July and are 5.4 percent higher than July 2008. The median price in the South was $164,500, down 7.1 percent from a year ago.

Existing-home sales in the West slipped 1.7 percent to an annual rate of 1.13 million in July, but are 1.8 percent above a year ago. The median price in the West was $202,300, which is 28.0 percent below July 2008.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.2 million members involved in all aspects of the residential and commercial real estate industries.

# # #

NOTE: Any references to performance in states or metro areas are from unpublished raw data used to analyze regional trends; please contact your local association of Realtors® for more information.

¹The annual rate for a particular month represents what the total number of actual sales for a year would be if the relative pace for that month were maintained for 12 consecutive months. Seasonally adjusted annual rates are used in reporting monthly data to factor out seasonal variations in resale activity. For example, home sales volume is normally higher in the summer than in the winter, primarily because of differences in the weather and family buying patterns. However, seasonal factors cannot compensate for abnormal weather patterns.

Existing-home sales, which include single-family, townhomes, condominiums and co-ops, are based on transaction closings. This differs from the U.S. Census Bureau’s series on new single-family home sales, which are based on contracts or the acceptance of a deposit. Because of these differences, it is not uncommon for each series to move in different directions in the same month. In addition, existing-home sales, which generally account for 85 to 90 percent of total home sales, are based on a much larger sample – more than 40 percent of multiple listing service data each month – and typically are not subject to large prior-month revisions.

Single-family data collection began monthly in 1968, while condo data collection began quarterly in 1981; the series were combined in 1999 when monthly collection of condo data began. Prior to this period, single-family homes accounted for more than nine out of 10 purchases. Historic comparisons for total home sales prior to 1999 are based on monthly single-family sales, combined with the corresponding quarterly sales rate for condos.

²Total inventory and month’s supply data are available back through 1999, while single-family inventory and month’s supply are available back to 1982.

³The only valid comparisons for median prices are with the same period a year earlier due to the seasonality in buying patterns. Month-to-month comparisons do not compensate for seasonal changes, especially for the timing of family buying patterns. Changes in the composition of sales can distort median price data. Year-ago median and mean prices sometimes are revised in an automated process if more data is received than was originally reported.

⁴Because there is a concentration of condos in high-cost metro areas, the national median condo price generally is higher than the median single-family price. In a given market area, condos typically cost less than single-family homes.

Existing-home sales for August will be released September 24. The next Pending Home Sales Index & Forecast is scheduled for September 1; release times are 10 a.m. EDT.

Information about NAR is available at www.realtor.org. This and other news releases are posted in the News Media section. Statistical data in this release, other tables and surveys also may be found by clicking on Research.

Some put the number of borrowers underwater in their mortgage, at 11%, while I have heard others putting that figure much higher, at as high as thirty percent.

Regardless of the figures I think we can all see that the industry is still in shambles and will be for some time yet. So what can those who are upside down, or underwater, due to prevent the seemingly inevitable foreclosure?

The problem in part is that even though the federal government and states are working to help people avoid foreclosure those programs are not for people with negative equity. The good news is, lenders are beginning to come around and help. It is in no ones best interest to foreclose. The borrower loses his home and his credit is trashed for years. The bank has to maintain the home and put in the work to sell it. They often take a loss.

If you are current on your mortgage and can make the payments in the foreseeable future do not expect help. Banks want to know there really is a hardship. However there are a couple things you can do.

Loan Modification: There are some hoops to jump through here. First off you must be able to stay in your current loan. Lenders usually will require a letter explaining your financial hardship. How did you get into your current position? You will need to provide detailed financial information, including bank statements and budget proving that you can handle the payments if the bank does a loan modification for you. Many lenders refuse to work with you until you are delinquent, but you should contact them as soon as you see a problem developing.

If you feel that you need a loan modification contact your lender and start getting your financial ducks in a row.

Short Sale: Here is a much lesser known route you may qualify for. A short sale is when your lender lets you sell your home at a loss with the understanding that it will have to take the financial hit. Short sales have been all but unheard of because we have had a real estate market that virtually guarantees your home value will go up. You can expect to sell it for a gain even if you put no money down in the purchase. To do a short sale you first have to be delinquent on your payments. Then come the required documentation; bank statements, an appraisal, etc...You will also need to show you do not have money to cover the amount your home is underwater. Now here is the hard part. You have to find a buyer and if your neighborhood is littered with for sale signs, this may be one tough short sell. The process is not a fast one and typically takes a number of months to close. If you decide to pursue this avenue you need to talk to a real estate broker and a lawyer familiar with this kind of transaction.

The good news is you won't take a tax hit on the amount that the bank forgives. It use to be that if your home is sales for thirty grand less that its value the bank forgives the thirty and it is treated as regular income. No so today with the Mortgage Forgiveness Debt Relief Act of 2007.

Your credit will take a pounding, much like it would if you went the route of a foreclosure. Bottom line, keep the lines of communication open with the bank just as soon as there is a hint of trouble. Remember, lenders really do not want to foreclose, that is a lose lose proposition.

• Give borrowers written disclosure on essential credit terms including the cost of credit expressed as a finance charge and an annual percentage rate.
• Respond to consumer complaints of billing errors on certain credit accounts within a specified period.
• Identify credit transactions on periodic statements of opened credit accounts.
• Provide certain rights regarding credit cards.

• Inform customers of the right of rescission in certain mortgage-related loans within a specified period.

And what about points? There are many ways your bank can make money on your loan, and points is just one of the ways. They may sell the loan and retain servicing so they have some steady income from your loan payments. Some may take a large grouping of like loans, package them together, and sell them as a type of derivative product. Lenders make money off the interest and fee's paid to them over the life of the loan.

Now let's go to the hardest part of the mortgage proposal to swallow, for both the lenders and their clients. I cannot begin to tell you how many people I talked to who, in the first three minutes of our initial conversation, made it clear to me they would not pay any points, no matter what. Nobody likes to start the loan process swimming against the no points current.

So what is the right answer; pay points or not? There is no flat out right answer and on one can tell you it's better to pay the points or stick to your guns and refuse to pay them. And that is of course what we mean when we are buying down the rate. When you look at a lenders rate sheet, which you will not be allowed to see, there is a start rate, with no points, and at a rate you probably not want to accept unless you have sterling credit. Now to get that zero points rate down to something you can live with, like six and a quarter, you may have to pay three points to get it. If you have a half a million dollar loan which is common for the San Francisco Bay Area, you are going to have to pay fifteen thousand dollars, either at close or increase your loan amount by that much to cover the points. So how do you know if you should be paying points or not? This is where that mortgage calculator comes in. A simple calculation is all that is necessary to see if paying points makes financial sense.

Lets take that half a million dollar loan and crunch the numbers. The principal and interest payment on a loan that size at five and a half percent for thirty years is $2,838.95 a month.

Now lets take that same loan, pay three points that we are going to wrap into the loan, and see what our new payment would be. We will have to increase the loan size of course, so we are using a loan amount of five hundred fifteen thousand, rather than five hundred thousand. Now our new loan will be calculated at a new rate of four percent, a full one and a half lower than the zero points loan. The new principal and interest payment over the same thirty year term comes out to $2,458.69 a month. Thats a difference of $380.26, or a savings of $136,893.60 over the life of the loan. Now it will take about three and a half years to make that money back that you paid in points, so if you think you will move or sell the house before that time period then you may want to look harder at a zero points loan, or maybe, just less points. Either way, why not ask your broker, or loan officer to run the numbers, and maybe use your own calculator and follow his calculations so you can see this in black and white.

So, I hope I have shed some light on the whole subject of points. One thing you should always remember. Any points that you do not pay with cash at closing are added into the loan amount and effect your monthly loan payment. Discount points are tax deductible as well, but there are rules to that so I would consult a tax professional before putting them in on my tax return.

Because points increase the size of your loan, it increases the commission paid to your loan officer or broker. Make sure that when your mortgage person suggests paying points it makes sense to your pocket book and not just your loan officers. Some loan officers get paid on loan size as well as part of the points you pay. That is called overage. Basically overage is points that are above and beyond the points for a given rate as stated on the lenders rate sheet. Now, in case that was a clear as mud let me try and simplify.

When I look at ABC Mortgage's rate sheet, I see that my borrower qualifies for a five and a half percent on a thirty year fixed rate mortgage. I also see that to get that rate one must pay two points. Now if I am the loan officer and I can get you to pay a half point above the listed rate on the sheet I may get all or part of that point. This used to be very common as it adds thousands of dollars to the commission your broker of loan officer receives. I believe that practice has been eliminated since the bottom fell out of the mortgage market.

Remember, just because your Mortgage Consultant, or broker suggests you pay points, it does not mean he is thinking purely of his commissions. Hopefully he is thinking about your loan and giving you the best deal available. Some people will tell you never to pay more than two points, and I still maintain that you can not make a blanket statement like that without doing the calculation I mentioned above. I have had clients who pain no origination fee and no points, and at the same time I have asked borrowers to pay three points. You just have to crunch the numbers so you can see in black and white, what makes the best financial sense for you. Everyone's situation is different so don't just listen to the plumber next door, do the leg work and find out for yourself.