'Walkaways' go mainstream
Commentary: Watch out for credit starvation and 'HoHo' humiliation
By Lou Barnes, Friday, August 1, 2008.
Mortgage rates are back down to 6.5 percent (low-fee), taken by sudden understanding that the economy probably passed its high point for the year in June.
A huge spike in unemployment claims (to 443,000 last week, 60,000 above recent range) may overstate weakness, and today's announcement of 51,000 jobs lost in July may understate, but weakness is spreading beyond housing, construction and manufacturing. The purchasing managers' July survey came in dead flat, at 50, but with the fewest new orders since October 2001, and tailing strength in exports.
Second-quarter GDP arrived plus 1.9 percent, propped by rebate checks and the best export sales ever (a weak dollar has its benefits). However, the Euro economy is now slowing faster than we are, and soon won't be buying much (a strong euro has its penalties). The United Kingdom is in real trouble, with retail sales hitting a 25-year low and mortgage approvals off 72 percent.
Western central banks fighting inflation (Asian ones are still flinching) have been helped by market-based credit tightening. However, beware of Frankenstein. Credit shortage is spreading to all sectors: Corporate bond issuance, intact through spring, just had its worst month in five years, prime rates an immense 3 percent above Treasurys.
The new housing assistance bill, dismissed here briefly last week, deserves a more thorough hatchet-job.
Its centerpiece is a $300-billion FHA loan guarantee (not money) to refinance underwater home "owners." Consider a Bubble-Zone victim who bought a $200,000 home five years ago, made a 5 percent down payment and got a 5-year interest-only ARM for $190,000. The home has fallen 25 percent in value to $150,000. She has made interest-only payments since, and her $190,000 loan is entering amortization reset.
Her rate is not bad, 5.5 percent even after adjustment. However, her payment will jump from $871 to a killing $1,167. To her rescue, the bill's "Hope for Homeowners." In the land of unfortunate acronyms, gotta call it HoHo.
HoHo provides for a write-down of the mortgage to 90 percent of current market value, to $135,000, plus a 3 percent refinance fee to the FHA, $139,000 total. HoHo further provides a 1.5 percent annual surcharge; added to 6.5 percent current market equals 8 percent, amortized for 30 years is $1,020 per month. Better by a little, possibly affordable, equity negligible, pride failing. Then there's HoHo's anti-equity kicker: When the place appreciates in value (how many years ahead?) and she either refinances off the 8 percent or sells, HoHo will take half of any appreciation. I bet HoHo won't split costs.
While she considers HoHo humiliation, a new renter moves into the house next door, identical, rent $700. Millions of people just like her are now condemned as "Walkaways." Professionals, fiddle with local examples; I think this one is mainstream.
A more pernicious provision in the bill is the First-Time Homebuyer Tax Credit, retroactive to April 9, 2008, $7,500 per household. This is a credit, not a deduction; if you owed $7,500 in '08 taxes and had $7,500 withheld, you'll get a refund of your whole withholding. The advice from this firm to all buyers except compulsive savers and the rich: Don't take the FHOBTAC credit.
There's a fishhook in the FHOBTAC sirloin: You have to pay it back. $500 per year added to your taxes (goodbye, refund), and the whole remaining balance if you sell the palace. Own for three years, you'll still owe $6,000. How many recipients of the credit will still have that cash when it's time to pay at tax time? Scammers are already trying a payday-loan trap: Assign your credit to us, and we'll give you money for a down payment.
Meanwhile, mortgage credit starvation -- the real problem -- is doing its grim work. MGIC, the mortgage insurer, published its new regional risk guide: of 73 metro areas, two are strong, 31 soft or weak. Of the remaining 42 rated "stable," 19 are weakening. It is one thing to allow Bubble Zones to correct, another to let a credit crunch do some inflation-fighting. But, allow the entire housing market to sink? Careful, fellas.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
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Submitted by Michael Espiritu on August 1, 2008 - 3:07pm.
I can't believe no one has posted any comments on this one. I think your analysis of the "fix" is correct.
I like your no BS approach. This plan is weak, it is set to help 400,000 in the whole United States, and only if they fit the guidelines.
Talk about a band-aid on a gaping wound???
When you delve into the plan it is clear that the plan isn't going to accomplish anything! Oh yeah... the most important point in this plan is that its strictly "voluntary" for the banks to participate.
No participation from the banks, no write-downs, no hope!
We are in the first phase of the foreclosure crisis. Right now we are seeing the people who bought in 2006 w/ 2- year ARM's. Next come the 3-year ARM's and then the 5-year ARM"s. The last phase will be the people who walk away because their property has declined in value 75%.
I just showed a client a house yesterday that sold in 2006 for $1,250,000. The house was in graet condition, 3700 SF, with a built-in pool
and BBQ on 3 acres. That property was listed @ $699,000.
How would you like to be the next-door neighbor who paid 1.2 for his house and the new guy buys the same house for almost 50% less in only 2 years?
Many people will walk away from $500,000 negative equity and start over. Good money for bad debt doesn't make sense and we are all in for more pain.
Maybe Exxon can put some of its latest profits into the housing sector (wishful thinking).
Michael Espiritu
Broker
Copeland Wealth Management
So Cal
Submitted by Jeremy Brandt on August 1, 2008 - 3:22pm.
Great points Lou. Like taking your shoes off at the airport and putting your liquids in a bag - most of the provisions are "feel good" without any real solution.
Jeremy Brandt
Founder, CEO
1-800-CashOffer
www.CashOffer.com
Submitted by D. Sullivan on August 1, 2008 - 4:02pm.
So if a HoHo borrower buys a safe energy efficient furnace, it depreciates 50% the first day under HoHo's equity recapture scheme? Just what America needs -- debt strapped homeowners with a strong disincentive to improve and maintain their property.
Submitted by Tina In Virginia, Hampton Roads Realtor on August 1, 2008 - 4:11pm.
This new legislation just seems to put a delay in the inevitable. I wish they would just let the market correct itself and move on. Lessons learned.
Submitted by Rick Posey on August 1, 2008 - 5:41pm.
I know you're a mortgage guy and not a CPA but take a look at the title of Dan Green's article over at www.themortgagereports.com "With The New Housing Law,The $250,000/$500,000 Capital Gains Exclusion Is Gone". He's a mortgage guy too and not a CPA but he's interpreting section 3092,pgs. 690-693 of the Housing and Economic Recovery Act of 2008 as a stealth torpedo into the capital gains exclusion for personal residences. Any comment from you or feedback from your contacts in the real estate tax accounting profession would be appreciated.
Submitted by Joe Elizondo on August 2, 2008 - 2:25am.
Not to be nit picky, but your example uses a 5 yr ARM, I was under the impression that the bill's provisions cover only 30yr fixed mortgages.
Submitted by Joe Elizondo on August 2, 2008 - 2:31am.
Not to be nit picky, but your example uses a 5 yr ARM, I was under the impression that the bill's provisions cover only 30yr fixed mortgages.
Submitted by Dan Green on August 2, 2008 - 6:15am.
@Rick Posey : Thanks for the link.
The headline of that blog post should PROBABLY have read "With The New Housing Law, The $250,000/$500,000 Capital Gains Exclusion Is REVISED" because my interpretation is that the exclusion still exists up to $250,000/$500,000, but that a home seller's claim is limited to the ratio of how long he lived in the home versus how long he OWNED the home.
Of course, a qualified accountant will be your BEST source of tax law interpretation instead of me. I'm just a loan officer... :-)
Dan Green
Loan Officer
http://www.TheMortgageReports.com
Submitted by Tim Burrell on August 3, 2008 - 3:08pm.
You have some good points on the refinance provisions of the act. But, you missed the point with your comments on the tax credit for first time homebuyers. You say they should not take it because they will have to pay it back. I want them to get an incentive to buy a home now, and as a taxpayer, I want them to pay it back. The terms on this "loan" are great. When was the last time someone gave you a $7,500 loan, that has no interest, no payments for two years, and if you do not make enough profit when you sell, you do not have to pay back the loan? That is what first time homebuyers get.
You need to analyze this in detail to understand it, and I think you did not have everything available on the terms of this deal.
The tax credit is 10% of the cost of the home, up to a maximum of $7,500. So, if the home costs $65,000, your tax credit is $6,500. If the home cost $100,000, you would get a credit of $7,500. This is not an additional deduction that lowers the amount of income to be taxed, it is a tax credit. In other words, you take $7,500 off your tax bill. What if your tax bill is only $5,000? The IRS will send you the additional $2,500 as a refund. When was the last time the IRS sent you a refund because you bought something?
The loan has no interest, and will be paid back over 15 years. You get the credit on your 2008 taxes, but you start paying it back on your 2010 taxes that are due in 2011, so you get at least two years without a payment. You pay back 6.67% of the credit each year, so for a $7,500 credit the payment is $502.50 per year. If you stay put for 15 years, you pay it off with no interest.
What happens if you sell the house? You pay the balance back at the closing. So, you get $7,500 now, and pay the rest of it back if you make money on the sale of your house.
What happens if you do not make enough money when you sell your house? They forgive the rest of the debt. In other words, get $7,500 now and pay back nothing if your house only breaks even, or loses money, at closing. When was the last time you got a loan on a speculative venture where the person who gave you the loan forgave the rest of the loan if you did not make enough profit on the sale?
Some of the risk of loss in buying now is on the government. In parts of the country where real estate is going down in value, you can up to $7,500 of the value of the home and the loss is covered by the fact that you do not pay back the tax credit. I sell homes in Raleigh, North Carolina, and the Raleigh real estate that first time buyers can aford is going up in value, so we are not as worried about the risk of loss. But, a bad buy that does not go up in value is covered by the tax benefit because you get $7,500 no matter what happens. A decrease of $7,500 is nothing for Southern California, but much of the rest of the United States can appreciate that amount of money.
There are restrictions on the amount of income that you can make and still get the credit. It does not give a credit to high income families. That is fine with me, as our treasury needs the money.
The restriction on the location of the property is minimal, it has to be in the United States. Not too tough, huh?
What is the catch? You have to buy your first house in three years before July 1,2009, not have super high income, not use bond financing and buy anywhere in the US, Not too difficult, right?
The government gives tax credits to huge companies, here is one for the little guy. You should not tell people to miss this opportunity.
If you want to read about this tax credit in more detail, visit my blog at http://www.TeamForYOUrDreams.com/blog and look at the post for August 3. If this analysis sounds like it comes from a lawyer, you are right.
I hope you write another article where this new information changes your mind and you advise the little guy to take this benefit.
Submitted by Matt Carter on August 4, 2008 - 5:41pm.
Rick (and Dan): the tighter rules for taxing gains on the sale of a second home were originally part of a bill passed by the House in October 2007, HR 3648.
The tighter rules were intended to offset the estimated $1.4 billion in lost tax revenues that are expected over the next 10 years as a result of changing the tax code so that debts forgiven by mortgage lenders in the process of doing a loan mod or short sale don't count as taxable income.
The thinking was that you didn't want to discourage homeowners from doing workouts by making them pay taxes on money they would never actually see. The industry wanted that tax break for troubled borrowers pretty badly, and NAR supported the trade off (see story).
The Senate, however, stripped the language on taxing gains on second homes from HR 3648 before approving the bill, which was signed into law in December 2007.
The language on taxation of gains on the sale of second homes in the new housing bill, HR 3221, is taken verbatim from HR 3648. So another way to look at it is the Senate was able to delay implementation of this idea for one year.
Joe: Congress did not stipulate that the new "Hope for Homeowners" refi program Lou Barnes is referring to would be restricted to refinancing out of any particular type of mortgage (but you would have to refinance into a 30-year fixed). The board that will implement the program could restrict (the type of loan to be refi'd) to certain loan types but it's not expected that they will.
Tim: NAHB has created an entire Web site devoted to singing the virtues of the new first-time homebuyer tax credit. Seems the bottom line is the longer you're in the house, the better a deal it is...