CNNMoney November 17, 2011
NEW YORK -- The head of the New York Fed, William Dudley, continued his push for more aid for homeowners Thursday, stressing the central bank is not yet "out of ammunition."
"We cannot be satisfied with the current state of the economy or the outlook for the next few years," said William Dudley, president of the Federal Reserve Bank of New York, in a speech at the U.S. Military Academy in West Point, N.Y.
Dudley stressed that helping the housing market may be the best way for the Federal Reserve to intervene in the economy. Buying more mortgage-backed securities, he said, is one potential option.
The Fed has already used its traditional tools to help the economy. By keeping interest rates at record lows since December 2008, it tried to make borrowing money cheap and spur spending from both businesses and consumers.
So far, those low interest rates have not been potent enough though to get the economy fully out of its slump, and since the Fed cannot lower rates any further than zero, it is stuck in a bit of a quandary.
That's why the Fed also launched two rounds of major asset purchases, known as quantitative easing, and recently initiated a program known as Operation Twist, as a way of bringing long-term interest rates, including mortgages, even lower.
In his speech on Thursday, Dudley made it clear that he believes the economy still has a long healing process ahead, and could need yet another boost.
Overall, Dudley forecasts that gross domestic product in the U.S. will grow only 2.75% next year, not enough to significantly bring down the unemployment rate. "I am deeply unhappy with the current forecast of prolonged high unemployment," he said.
Dudley also cited statistics that show about a quarter of homeowners who have outstanding mortgages are currently under water. He stressed that monetary policy can only do so much to help, and urged housing regulators and lawmakers to consider complementary policies to further aid homeowners.
The government, for example, could unload the foreclosed properties it now has on its books, for conversion into rentals, he said. That's a policy the Federal Housing Finance Agency is currently considering. Dudley also applauded the FHFA's recent decision to help some homeowners refinance at lower rates.
Federal Reserve still divided on the economy -
Dudley's comments come during a week filled with speeches from his Federal Reserve colleagues, many who disagree about what action the central bank should take.
Speaking just two days earlier, Dallas Fed President Richard Fisher, who has opposed more monetary stimulus, gave a more encouraging outlook on the economy, while Charles Evans, president of the Chicago Fed, urged his colleagues to focus on fixing the struggling job market.
Dudley urged outsiders to not view disagreement within the Fed as a cause for concern.
"Because reasonable people can differ over the costs and benefits of further action, you should not be surprised that there is vigorous debate among FOMC participants," he said.
The Fed's policymaking committee is next scheduled to meet on Dec. 13.
Thursday, November 17, 2011
Sunday, August 14, 2011
Short Sales: Are They Worth the Trouble?
For anyone who has braved the housing market in the past four years, short sales have become synonymous with high risk and high reward. But with so many discounted properties on the market today, are they really worth a buyer's trouble? Maybe -- if you have a lot of time and a strong stomach.
Yes, you can get a below-market price, say many realtors who specialize in short sales, but it's going to take patience because these deals are slow and difficult.
Unlike foreclosures, in which the owner has walked away and the bank is looking to unload a vacant -- and sometimes, vandalized -- property, a short sale isn't a distressed home that will sell at a rock bottom price. The homeowner is under water (meaning they owe more on the mortgage than the property is worth), and there's financial hardship such as a job loss. But to limit the damage to the homeowner's credit rating, they agree to stay in the house (often continuing to pay the mortgage bills) and to help sell it, at which point the bank has agreed to eat the loss. On average, statistcs show that short sales were going for nearly 10 percent less than the market price in the first quarter of 2011. (Foreclosures sold at a 35 percent discount.)
What makes the transaction tricky for the buyer is that you're negotiating not only with the homeowner but the bank -- and that creates three big headaches:
1. It takes time --
Normally, when you make an offer on a house, you'll hear back within days, or even hours. But banks move very slowly these days because their representatives are overloaded with cases. You might wait 30 to 60 days for a response, perhaps longer if there's a second mortgage on the property and therefore a second bank. The total process can easily take as long as six months from start to finish. For someone moving a family or relocating for a new job,that kind of timeline is incredibly difficult.
2. Your offer can't be contingent on selling your current home -
Banks generally won't accept offers on short sales if they're contingent on selling your current house to get the funds you need. Even if the buyer is already under contract, there are just too many things that can go wrong,and then all the dominoes fall. So unless you're a first-time homebuyer, you don't need the equity from your current home, or you're a real estate investor, it's unlikely that you can make a short sale work.
3. It's an as-is sale -
Banks also typically won't consider short-sale offers that have inspection contingencies in them. So you can either do your inspection before you make your offer -- which would mean spending $500 to $1,000 on the outside chance that you can make a deal (and less than a quarter of short-sale offers lead to a purchase ) -- or do what most people do, and go without an inspection.
As long as you're prepared for these hurdles, you may just land yourself a bargain. But make sure to work with a veteran Realtor because you want someone who knows the ins and outs of the process and can protect your interests throughout the negotiations. And since short sales aren't necessarily identified on Realtor.com or the part of the MLS data sheet that buyers see, always ask your agent whether any house is a short sale before bothering to look at it.
Then, if you fall in love with a house that's a short sale, get yourself a mortgage pre-approval -- another short-sale requirement -- and make a lowball offer. Sometimes you can do that without putting down any money, but if the bank requires a deposit, have your Realtor put language in the offer letter stating that if you don't have a response by a certain date (perhaps 60 or 90 days out -- however long you feel like you can wait), you have the option of retracting the offer and getting your deposit back. That gives you an out, just in case.
When the bank finally replies, it will more than likely counter with whatever value its' appraiser gives the house. The basic suggestion is
that you offer them 15 percent less than that, and see what happens.
Yes, you can get a below-market price, say many realtors who specialize in short sales, but it's going to take patience because these deals are slow and difficult.
Unlike foreclosures, in which the owner has walked away and the bank is looking to unload a vacant -- and sometimes, vandalized -- property, a short sale isn't a distressed home that will sell at a rock bottom price. The homeowner is under water (meaning they owe more on the mortgage than the property is worth), and there's financial hardship such as a job loss. But to limit the damage to the homeowner's credit rating, they agree to stay in the house (often continuing to pay the mortgage bills) and to help sell it, at which point the bank has agreed to eat the loss. On average, statistcs show that short sales were going for nearly 10 percent less than the market price in the first quarter of 2011. (Foreclosures sold at a 35 percent discount.)
What makes the transaction tricky for the buyer is that you're negotiating not only with the homeowner but the bank -- and that creates three big headaches:
1. It takes time --
Normally, when you make an offer on a house, you'll hear back within days, or even hours. But banks move very slowly these days because their representatives are overloaded with cases. You might wait 30 to 60 days for a response, perhaps longer if there's a second mortgage on the property and therefore a second bank. The total process can easily take as long as six months from start to finish. For someone moving a family or relocating for a new job,that kind of timeline is incredibly difficult.
2. Your offer can't be contingent on selling your current home -
Banks generally won't accept offers on short sales if they're contingent on selling your current house to get the funds you need. Even if the buyer is already under contract, there are just too many things that can go wrong,and then all the dominoes fall. So unless you're a first-time homebuyer, you don't need the equity from your current home, or you're a real estate investor, it's unlikely that you can make a short sale work.
3. It's an as-is sale -
Banks also typically won't consider short-sale offers that have inspection contingencies in them. So you can either do your inspection before you make your offer -- which would mean spending $500 to $1,000 on the outside chance that you can make a deal (and less than a quarter of short-sale offers lead to a purchase ) -- or do what most people do, and go without an inspection.
As long as you're prepared for these hurdles, you may just land yourself a bargain. But make sure to work with a veteran Realtor because you want someone who knows the ins and outs of the process and can protect your interests throughout the negotiations. And since short sales aren't necessarily identified on Realtor.com or the part of the MLS data sheet that buyers see, always ask your agent whether any house is a short sale before bothering to look at it.
Then, if you fall in love with a house that's a short sale, get yourself a mortgage pre-approval -- another short-sale requirement -- and make a lowball offer. Sometimes you can do that without putting down any money, but if the bank requires a deposit, have your Realtor put language in the offer letter stating that if you don't have a response by a certain date (perhaps 60 or 90 days out -- however long you feel like you can wait), you have the option of retracting the offer and getting your deposit back. That gives you an out, just in case.
When the bank finally replies, it will more than likely counter with whatever value its' appraiser gives the house. The basic suggestion is
that you offer them 15 percent less than that, and see what happens.
Saturday, July 2, 2011
The Tax Man Doesn't Want Housing to Recover
Housing is not likely to recover if property taxes keep going up. Many feel that cash-strapped governments should look elsewhere to fill their budget gaps.
During the housing boom, governments enjoyed windfalls from property taxes tied closely to home prices. But since the real estate bubble burst, the revenue stream officials had come to rely on to help pay for everything from education to roads has dried up. Officials have responded by embarking on everything from delaying road projects to freezing hiring and salaries and cutting public employees.
In addition to cutting expenses to cover budget shortfalls, governments have been forced to look for ways to raise more money. And increasingly, that's resulting in higher property taxes – which experts warn could actually hurt more than help public finances. Everything from high unemployment to record foreclosures are already hampering the real estate market, and since higher taxes add to the costs of a home, it could also make owning even less appealing.
In a 2011 survey of U.S. counties, 15% reported raising such taxes – an increase from the 10% reported during the previous year. The survey by the National Association of Counties also found that property taxes, which account for almost three-quarters of all tax revenue collected by municipalities, was one of the biggest reasons why governments were experiencing revenue shortfalls.
Last year, Miami-Dade County raised rates to deal with a $444 million budget gap in the face of plunging property values. So did the city of Austin, TX. And earlier this month, the Philadelphia City Council hiked up its tax rate for a second year in a row to help bail out its cash-strapped school district. More broadly, the amount of money state and local governments collected from property taxes between 2006 and 2008 surged from $364.5 billion to nearly $410 billion, according to the U.S. Census Bureau.
To be sure, the tax bump isn't happening everywhere. At a time when millions of Americans are still jobless, many elected officials haven't mustered the political will to raise costs for homeowners and would rather delay road projects instead. It seems Miami-Dade County Mayor Carlos Alvarez learned this all too well when voters in March ousted him out of office following several missteps culminating in the city's hike on property taxes.
But for governments trying to make up for the shambles of the housing market, those same efforts could very well prove self-defeating. If not for their political career, then likely the housing market.
"Given the situation we've been in for the past few years, increasing property taxes is not likely to aid in the short-term recovery of the housing market," says McKay Price, real estate finance expert at Lehigh University.
But a rise in property taxes doesn't always lead to a fall in home prices. It depends how much taxes are raised and if the additional tax dollars go toward things that support property values, such as good schools, parks, roads and other public infrastructure.
Many governments are faced with a dilemma. Following years of too much spending, officials find themselves having to rapidly cut services. In the National Association of Counties survey, nearly half of respondents reported delaying purchases and repairs, as well as capital investments to address revenue shortfalls. About 41% reported halting new hires, 45% froze employee salaries and pay, while 52% gave furloughs. About 34% reported delaying infrastructure repairs, while 31% delayed construction projects.
For municipalities considering asking homeowners to pay more, it might be time to start thinking more in the long-term.
During the housing boom, governments enjoyed windfalls from property taxes tied closely to home prices. But since the real estate bubble burst, the revenue stream officials had come to rely on to help pay for everything from education to roads has dried up. Officials have responded by embarking on everything from delaying road projects to freezing hiring and salaries and cutting public employees.
In addition to cutting expenses to cover budget shortfalls, governments have been forced to look for ways to raise more money. And increasingly, that's resulting in higher property taxes – which experts warn could actually hurt more than help public finances. Everything from high unemployment to record foreclosures are already hampering the real estate market, and since higher taxes add to the costs of a home, it could also make owning even less appealing.
In a 2011 survey of U.S. counties, 15% reported raising such taxes – an increase from the 10% reported during the previous year. The survey by the National Association of Counties also found that property taxes, which account for almost three-quarters of all tax revenue collected by municipalities, was one of the biggest reasons why governments were experiencing revenue shortfalls.
Last year, Miami-Dade County raised rates to deal with a $444 million budget gap in the face of plunging property values. So did the city of Austin, TX. And earlier this month, the Philadelphia City Council hiked up its tax rate for a second year in a row to help bail out its cash-strapped school district. More broadly, the amount of money state and local governments collected from property taxes between 2006 and 2008 surged from $364.5 billion to nearly $410 billion, according to the U.S. Census Bureau.
To be sure, the tax bump isn't happening everywhere. At a time when millions of Americans are still jobless, many elected officials haven't mustered the political will to raise costs for homeowners and would rather delay road projects instead. It seems Miami-Dade County Mayor Carlos Alvarez learned this all too well when voters in March ousted him out of office following several missteps culminating in the city's hike on property taxes.
But for governments trying to make up for the shambles of the housing market, those same efforts could very well prove self-defeating. If not for their political career, then likely the housing market.
"Given the situation we've been in for the past few years, increasing property taxes is not likely to aid in the short-term recovery of the housing market," says McKay Price, real estate finance expert at Lehigh University.
But a rise in property taxes doesn't always lead to a fall in home prices. It depends how much taxes are raised and if the additional tax dollars go toward things that support property values, such as good schools, parks, roads and other public infrastructure.
Many governments are faced with a dilemma. Following years of too much spending, officials find themselves having to rapidly cut services. In the National Association of Counties survey, nearly half of respondents reported delaying purchases and repairs, as well as capital investments to address revenue shortfalls. About 41% reported halting new hires, 45% froze employee salaries and pay, while 52% gave furloughs. About 34% reported delaying infrastructure repairs, while 31% delayed construction projects.
For municipalities considering asking homeowners to pay more, it might be time to start thinking more in the long-term.
Friday, May 6, 2011
GFEs Not Working Out as Expected
The federal government spent years designing a tool to help consumers shop intelligently for mortgages -- comparing lenders' rates, terms and total settlement costs -- but mostly consumers ignore it or don't use it.
A new survey of 1,000 American consumers suggests that the "Good-Faith Estimate" (GFE) disclosures that all homebuyers and refinancers receive at loan application to facilitate comparison are not getting the job done.
Federally mandated GFEs spell out the lender's charges, all anticipated fees for title insurance, escrow and settlement services, plus other key costs. The most recent version of the GFE, released at the beginning of last year, contains space for consumers to take one lender's estimates and get competing quotes from as many as three others. It also requires lenders to stand behind their estimates within a nominal tolerance.
But the survey found that the GFE may not be improving shopping as intended. After receiving the disclosure, 56 percent of buyers say they did no comparison shopping among other lenders. 12 percent used the form to contact just one additional lender, and 10 percent weren't sure whether they actually used the GFE at all.
Forty-nine percent of buyers said the GFE disclosure was too omplicated,
"a waste of time," or they weren't sure. Just 37 percent rated it "useful." The survey had a statistical margin of error of plus or minus 3.2 percent.
Between 2003 and 2008, the Department of Housing and Urban Development proposed modifications to the GFE, but critics said the revised disclosure was too lengthy -- three pages -- and predicted that it would become just another part of the paper blitz that cascades over buyers and mortgage applicants. As it turned out, not only has it failed to simplify consumer shopping, it's actually confusing shoppers.
Meanwhile, Congress has shifted responsibility for GFEs and other consumer mortgage disclosure issues to the new Consumer Financial Protection Bureau, which is scheduled to spring to life in July. The bureau has announced that streamlining the GFE and combining it with federal truth-in-lending disclosures will be one of its high-priority projects.
But given the glacial pace of federal rulemaking, the three-page GFE is likely to remain in use for many months -- maybe a year or more -- before any new streamlined version takes its place. So if you seriously want to shop intelligently for a home loan, read your GFE. And use it to compare costs -- line item by line item -- among multiple lenders.
A new survey of 1,000 American consumers suggests that the "Good-Faith Estimate" (GFE) disclosures that all homebuyers and refinancers receive at loan application to facilitate comparison are not getting the job done.
Federally mandated GFEs spell out the lender's charges, all anticipated fees for title insurance, escrow and settlement services, plus other key costs. The most recent version of the GFE, released at the beginning of last year, contains space for consumers to take one lender's estimates and get competing quotes from as many as three others. It also requires lenders to stand behind their estimates within a nominal tolerance.
But the survey found that the GFE may not be improving shopping as intended. After receiving the disclosure, 56 percent of buyers say they did no comparison shopping among other lenders. 12 percent used the form to contact just one additional lender, and 10 percent weren't sure whether they actually used the GFE at all.
Forty-nine percent of buyers said the GFE disclosure was too omplicated,
"a waste of time," or they weren't sure. Just 37 percent rated it "useful." The survey had a statistical margin of error of plus or minus 3.2 percent.
Between 2003 and 2008, the Department of Housing and Urban Development proposed modifications to the GFE, but critics said the revised disclosure was too lengthy -- three pages -- and predicted that it would become just another part of the paper blitz that cascades over buyers and mortgage applicants. As it turned out, not only has it failed to simplify consumer shopping, it's actually confusing shoppers.
Meanwhile, Congress has shifted responsibility for GFEs and other consumer mortgage disclosure issues to the new Consumer Financial Protection Bureau, which is scheduled to spring to life in July. The bureau has announced that streamlining the GFE and combining it with federal truth-in-lending disclosures will be one of its high-priority projects.
But given the glacial pace of federal rulemaking, the three-page GFE is likely to remain in use for many months -- maybe a year or more -- before any new streamlined version takes its place. So if you seriously want to shop intelligently for a home loan, read your GFE. And use it to compare costs -- line item by line item -- among multiple lenders.
How to Sell Your Home in Tough Times
If you're in the market to sell your home, you probably feel you can't catch a break. Nearly five years into the housing bust, when many experts thought the real estate market would at least have stabilized, sales and prices are still dropping in most of the country.
In February existing-home sales tumbled 9.6% from the previous month, and the median price of a single-family home dropped to $157,000 from $163,900 the previous year, according to the National Association of Realtors.
You can't count on things turning around soon, either. At the current sales pace, it would take 8.6 months to clear out the 3.5 million existing homes listed today.
With the boost from the recent homebuyer tax credit gone, anyone who decides or is forced to put a house up for sale enters a market where houses often linger a full six months -- even a year -- without any bites.
Put part of the blame on stiff competition: Foreclosures and Short Sales, which accounted for 39% of sales in February, sell for about 15% less than conventional homes.
Fortunately, there is one glimmer of good news. Bargain hunters, too, know that home prices are down some 32% from their peak. In a recent survey, three-quarters said that it was a good time to buy a home. But translating that interest into an actual sale can require some extreme measures.
It's not enough to show buyers your house is a deal: You have to convince them it's a total steal. That means slashing your price, bringing in a pro to pretty it up, and creating a killer website for your home. Here's how to do it right.
Slash Your Price -- Bigtime,
Sellers are still loath to accept the extent of the toll the bust took on their homes' value. Many also give in to the temptation to list the property above fair market value to see what happens. Big mistake. About a quarter of sellers in the past year initially listed too high and were forced to knock the price lower. Even in cities that have held up well, 25% of sellers resort to at least one price cut, and often two.
Think you can always drop the price if your home doesn't sell? Bigger mistake. The first 30 days on the market are the most important. That's when your place attracts the most attention and gets the most showings. So You often end up with less than you would have if you priced it right to begin with,. So get aggressive right out of the gate.
Undercut your competition. Today there's a big gap between what sellers want and what buyers are willing to pay. Ask your realtor to show you what houses similar to yours have sold for in the past three to six months. If more than a couple of the comparable properties were foreclosures or short sales, look closely at the photos and descriptions of those former listings. Distressed homes should be included in your comps if they are in move-in condition.
Once you have a handle on your likely sale price, list your home a bit beneath that. You don't have to undercut by much to attract attention, because that price will probably still be about 10% or 15% below what other homes are listed for. Even if you're competing with lots of foreclosures and short sales, your price should generate enough interest to attract more than one bidder, pushing up the final price to where it should be.
No bites within 30 days, take out the ax, and make a big move. Make a giant cut -- as much as 10% of the asking price, and even more in an area where prices are still falling. That should be enough to warrant a second look from buyers who passed the first time, and to bring in a new pool of potentials who are hunting in the lower price range.
Play hardball. It's okay to reject low-ball offers if a buyer won't budge. But if a buyer is willing to negotiate, stay cool and counter-offer.
Hire a Stager
Staging, increasingly popular with homeowners trying to sell mid-range houses, can extend from simply rearranging existing furniture to repainting, replacing fixtures, and bringing in new furnishings. The goal: to highlight the house's best features while making it as easy as possible for buyers to imagine themselves living there. Find the right stager. The ASP designation is a plus -- it indicates the stager has gone through some basic training -- but it isn't essential. Establish a budget and ask the stager to work within it. Stagers typically charge $150 to $400 to walk through your home and give recommendations for each room. You can then execute the plan yourself or hire the stager to do it for an hourly fee, usually $100 or so, plus the cost of any new paint or furnishings.
Find the Right Hook -
These days it's going to take far more than a FOR SALE sign in the front yard and a spot on the multiple-listing service to get potential buyers in the door. That means getting the word out in a creative fashion -- and finding a realtor who is willing to do the same.
Create a great website. You also want to get your listing on alternative sites like Craigslist or even Facebook. About 90% of buyers begin their search on the Internet, according to the National Association of Realtors. Make sure your home's online presence has a dozen or two photos.
Throw money at buyers. Incentives can perk buyers' interest just as much as price cuts. Many buyers will agree to a higher price if their upfront costs are lowered, since they often run short on cash. If you can afford it, offer to cover the buyer's closing costs or pay the first year's property taxes or condo or homeowner association dues. Or, you might be able to bring buyers to the door by tossing in an unusual bonus, such as a $1,000 gift card (throw in one for the buyer's agent as well); a belonging they mentioned loving, such as the pool table or plasma TV; or a $5,000 credit to use in the home as they wish. (You can even pay upfront points so that they can get a lower mortgage rate, if you can swing it.)
In 2009, when Karen Mauro put her small, historic two-bedroom Orange County, Calif., home on the market she thought it would be a tough sale. Realtor Lisa Blanc listed the property at $467,500 and spread the word not only through the MLS listing but also with an update on her Facebook page. A Facebook friend of Blanc's passed the info to someone she knew was looking for that kind of house. Within a week, Mauro had an offer for $460,000.
Stay away -- far away. Disappear (along with your dog, if possible) for all showings and open houses so that prospects can imagine themselves in your house -- an impossible task when your family is vegging on the couch.
In February existing-home sales tumbled 9.6% from the previous month, and the median price of a single-family home dropped to $157,000 from $163,900 the previous year, according to the National Association of Realtors.
You can't count on things turning around soon, either. At the current sales pace, it would take 8.6 months to clear out the 3.5 million existing homes listed today.
With the boost from the recent homebuyer tax credit gone, anyone who decides or is forced to put a house up for sale enters a market where houses often linger a full six months -- even a year -- without any bites.
Put part of the blame on stiff competition: Foreclosures and Short Sales, which accounted for 39% of sales in February, sell for about 15% less than conventional homes.
Fortunately, there is one glimmer of good news. Bargain hunters, too, know that home prices are down some 32% from their peak. In a recent survey, three-quarters said that it was a good time to buy a home. But translating that interest into an actual sale can require some extreme measures.
It's not enough to show buyers your house is a deal: You have to convince them it's a total steal. That means slashing your price, bringing in a pro to pretty it up, and creating a killer website for your home. Here's how to do it right.
Slash Your Price -- Bigtime,
Sellers are still loath to accept the extent of the toll the bust took on their homes' value. Many also give in to the temptation to list the property above fair market value to see what happens. Big mistake. About a quarter of sellers in the past year initially listed too high and were forced to knock the price lower. Even in cities that have held up well, 25% of sellers resort to at least one price cut, and often two.
Think you can always drop the price if your home doesn't sell? Bigger mistake. The first 30 days on the market are the most important. That's when your place attracts the most attention and gets the most showings. So You often end up with less than you would have if you priced it right to begin with,. So get aggressive right out of the gate.
Undercut your competition. Today there's a big gap between what sellers want and what buyers are willing to pay. Ask your realtor to show you what houses similar to yours have sold for in the past three to six months. If more than a couple of the comparable properties were foreclosures or short sales, look closely at the photos and descriptions of those former listings. Distressed homes should be included in your comps if they are in move-in condition.
Once you have a handle on your likely sale price, list your home a bit beneath that. You don't have to undercut by much to attract attention, because that price will probably still be about 10% or 15% below what other homes are listed for. Even if you're competing with lots of foreclosures and short sales, your price should generate enough interest to attract more than one bidder, pushing up the final price to where it should be.
No bites within 30 days, take out the ax, and make a big move. Make a giant cut -- as much as 10% of the asking price, and even more in an area where prices are still falling. That should be enough to warrant a second look from buyers who passed the first time, and to bring in a new pool of potentials who are hunting in the lower price range.
Play hardball. It's okay to reject low-ball offers if a buyer won't budge. But if a buyer is willing to negotiate, stay cool and counter-offer.
Hire a Stager
Staging, increasingly popular with homeowners trying to sell mid-range houses, can extend from simply rearranging existing furniture to repainting, replacing fixtures, and bringing in new furnishings. The goal: to highlight the house's best features while making it as easy as possible for buyers to imagine themselves living there. Find the right stager. The ASP designation is a plus -- it indicates the stager has gone through some basic training -- but it isn't essential. Establish a budget and ask the stager to work within it. Stagers typically charge $150 to $400 to walk through your home and give recommendations for each room. You can then execute the plan yourself or hire the stager to do it for an hourly fee, usually $100 or so, plus the cost of any new paint or furnishings.
Find the Right Hook -
These days it's going to take far more than a FOR SALE sign in the front yard and a spot on the multiple-listing service to get potential buyers in the door. That means getting the word out in a creative fashion -- and finding a realtor who is willing to do the same.
Create a great website. You also want to get your listing on alternative sites like Craigslist or even Facebook. About 90% of buyers begin their search on the Internet, according to the National Association of Realtors. Make sure your home's online presence has a dozen or two photos.
Throw money at buyers. Incentives can perk buyers' interest just as much as price cuts. Many buyers will agree to a higher price if their upfront costs are lowered, since they often run short on cash. If you can afford it, offer to cover the buyer's closing costs or pay the first year's property taxes or condo or homeowner association dues. Or, you might be able to bring buyers to the door by tossing in an unusual bonus, such as a $1,000 gift card (throw in one for the buyer's agent as well); a belonging they mentioned loving, such as the pool table or plasma TV; or a $5,000 credit to use in the home as they wish. (You can even pay upfront points so that they can get a lower mortgage rate, if you can swing it.)
In 2009, when Karen Mauro put her small, historic two-bedroom Orange County, Calif., home on the market she thought it would be a tough sale. Realtor Lisa Blanc listed the property at $467,500 and spread the word not only through the MLS listing but also with an update on her Facebook page. A Facebook friend of Blanc's passed the info to someone she knew was looking for that kind of house. Within a week, Mauro had an offer for $460,000.
Stay away -- far away. Disappear (along with your dog, if possible) for all showings and open houses so that prospects can imagine themselves in your house -- an impossible task when your family is vegging on the couch.
Thursday, April 21, 2011
Better Business Bureau Warns of Mortgage Lawsuit Mailings
If you receive an official-looking letter from an out-of-state law firm asking you to fork over a hefty upfront fee to join a "mass joinder" lawsuit to force your mortgage lender to reduce your monthly payments, chances are good, you've been targeted by a new nationwide mortgage scam.
The Better Business Bureau and others are warning homeowners to beware of these solicitations, which represent the latest twist on a scheme - the advance fee mortgage scam - to con homeowners struggling to make their mortgage payments out of upfront payments of $5,000 or more.
Complaints from homeowners who paid thousands of dollars for mortgage assistance are a familiar story at the BBB. Few, if any, of these people got help. Many ended up worse off than before the so-called mortgage modification companies entered their lives.
The Federal Trade Commission recently issued rules banning the collection of upfront fees by mortgage-relief firms, a rule that exempts attorneys under certain conditions. And the California Department of Real Estate warned last month that some businesses were trying to take advantage of the lawyer exemption loophole to charge consumers advance fees for mortgage assistance suits.
The BBB offers the following tips for homeowners seeking mortgage assistance:
Call your bank or mortgage company before turning to a third party.
Beware of marketing companies, lawyers or other groups asking for fees to join a class action or "mass joinder" lawsuit against a mortgage holder. The chances of actually getting mortgage relief from such suits is slim at best.
Beware of any company that promises to help you modify your mortgage in return for an advance fee. As of January 31, 2011, this business practice is illegal, except under certain circumstances.
Beware of any company asking you to pay for a forensic loan audit. These audits may not help you reduce your loan rates or mortgage payments.
Before sending any money or signing a contract, check BBB Business Reviews at www.bbb.org or by calling (314) 645-3300.
The Better Business Bureau and others are warning homeowners to beware of these solicitations, which represent the latest twist on a scheme - the advance fee mortgage scam - to con homeowners struggling to make their mortgage payments out of upfront payments of $5,000 or more.
Complaints from homeowners who paid thousands of dollars for mortgage assistance are a familiar story at the BBB. Few, if any, of these people got help. Many ended up worse off than before the so-called mortgage modification companies entered their lives.
The Federal Trade Commission recently issued rules banning the collection of upfront fees by mortgage-relief firms, a rule that exempts attorneys under certain conditions. And the California Department of Real Estate warned last month that some businesses were trying to take advantage of the lawyer exemption loophole to charge consumers advance fees for mortgage assistance suits.
The BBB offers the following tips for homeowners seeking mortgage assistance:
Call your bank or mortgage company before turning to a third party.
Beware of marketing companies, lawyers or other groups asking for fees to join a class action or "mass joinder" lawsuit against a mortgage holder. The chances of actually getting mortgage relief from such suits is slim at best.
Beware of any company that promises to help you modify your mortgage in return for an advance fee. As of January 31, 2011, this business practice is illegal, except under certain circumstances.
Beware of any company asking you to pay for a forensic loan audit. These audits may not help you reduce your loan rates or mortgage payments.
Before sending any money or signing a contract, check BBB Business Reviews at www.bbb.org or by calling (314) 645-3300.
Wednesday, March 30, 2011
Your Mortgage Checklist
Whether you are interested in buying a home or getting a lower interest rate on your current mortgage, the following items will most likely be required by the lender to determine eligibility or to process the loan.
With underwriting guidelines being more conservative than ever, it is essential to provide all documentation upon the initial loan submission - if you wish to acquire a new mortgage as easily and efficiently as possible.
(Provide clear, legible copies of the following for each borrower).
Here is the Checklist that would cover most applicants:
- driver’s license
- 2nd I.D. - such as social security card, passport, car registration
- most recent paystubs covering 30 days
- all 2009 & 2010 W2s
- 2009 & 2010 Federal tax returns (all pages, all schedules, state returns not needed)
- 2 year history of part-time, bonus, or overtime income (if applicalble)
- a recent statement (all pages) of your 401K, IRA, - or other retirement account(s).
- 2 months’ most recent monthly checking account statements, & liquid Stocks, Funds, etc. (all pages, not internet summary)
- If self-employed, name and tel. number of your accountant
- recent homeowner’s insurance bill
- recent property tax statement or bill
- recent HOA/Common Charge bill (if applicable)
- copy of your most recent monthly statement or payment coupon for your current 1st mortgage
- copy of most recent payment coupon for your 2nd mortgage / homequity line (if applicable). If your homequity line has a zero balance, provide a copy of the original note.
- copy of a recent statement for any other account that is intended to be payed off through this transaction (if applicable)
Why We Need Your Tax Returns
If you're shopping for a home mortgage loan, be prepared to provide proof of your taxable income.
During the housing boom, lenders rarely required borrowers to provide copies of federal tax returns. Now, lenders ask the borrower for the entire federal tax returns covering a 2 year period, with all schedules, because a person’s full income picture is contained in the entire set of documents, not just the first two pages. If a borrower has K-1 income/loss, those forms are also required. If you have filed an extension, you should also provide a copy of the extension- and cancelled check(s) showing any estimated payment(s).
Borrowers are often required to sign a Form 4506-T as well, which allows the lender to retrieve a tax transcript from the Internal Revenue Service. Lenders use the 4506-T tax transcript to compare the borrower’s W-2s to reported income. If the numbers match, all is well. If not, the lender will dig deeper.
Why the sudden interest in borrowers’ tax returns? The short answer is lenders are looking for income irregularities and evidence of loan fraud. All aspects of the tax return are subject to examination - to determine what the borrower’s income is. That means the lender not only will look at reported income, but also at other items such as:
Unreimbursed employee business expenses. 2106 business expenses are subtracted from income. Examples include uniforms, union dues, mileage, expenses related to a cell phone used for business, marketing costs and training costs. If somebody writes off $20,000 in business expenses, the underwriter would subtract the $20K for qualifying purposes.
Rental property income. This income must be documented and shown on the tax return, unless the property was purchased in the current calendar year. In that case, the rent must appear on a certian number of consecutive monthly bank statements. Also of note - If you don’t report income that should have appeared on your tax returns, you can’t use that income at all.
If you plan to keep your present home, and rent it out when trading up to a new home, you need a min. 30% equity in that property in order to use the rental income. You'll be required to pay for an appraisal on the current home to establish the equity percentage, and to provide a fully-executed lease agreement - with a paper-trailed security deposit from the tenants.
Business losses. These can include losses incurred by a spouse’s business. The lender will subtract those losses to yield a combined taxable income for the household, In some cases, that might not be enough income to be approved for a loan that a borrower may have otherwise qualified for.
Depreciation expenses. On the flip side, depreciation expense can often increase a borrower’s qualifying income, because it's a non-cash expense.
Capital gains. These also may be counted as income — or not.
If a capital gain is a one-time event, it probably won't count as income because it won't meet criteria for continuation into the future.
Self-Employment
Scrutiny of tax returns can be a big challenge for borrowers who are self-employed. Many are having a really difficult time getting loans because their accountants and bookkeepers are trained to minimize their income to save them on taxes.
Too Many Write-Offs
Many potential borrowers are faced with the challenge of building up their taxable income for two years before they can qualify for a loan. Some may have to forego certain deductions so they can show more income on their tax return to qualify for a loan.
But beware, borrowers who try to amend a prior year’s tax return to show more income is a strategy that won’t work. Instead, an amended tax return can trigger a loan denial. There's a new rule that says you cannot qualify for a mortgage if your tax return has been amended.
Bonus Income
Bonus income is scrutinized - and anything that is non-cash (such as stock options) do not count. The cash component should be ok - but it is averaged over a 2 year period. If the most recent annual bonus is lower than the previous year, then averaging is not done - and the lower amount is utilized.
During the housing boom, lenders rarely required borrowers to provide copies of federal tax returns. Now, lenders ask the borrower for the entire federal tax returns covering a 2 year period, with all schedules, because a person’s full income picture is contained in the entire set of documents, not just the first two pages. If a borrower has K-1 income/loss, those forms are also required. If you have filed an extension, you should also provide a copy of the extension- and cancelled check(s) showing any estimated payment(s).
Borrowers are often required to sign a Form 4506-T as well, which allows the lender to retrieve a tax transcript from the Internal Revenue Service. Lenders use the 4506-T tax transcript to compare the borrower’s W-2s to reported income. If the numbers match, all is well. If not, the lender will dig deeper.
Why the sudden interest in borrowers’ tax returns? The short answer is lenders are looking for income irregularities and evidence of loan fraud. All aspects of the tax return are subject to examination - to determine what the borrower’s income is. That means the lender not only will look at reported income, but also at other items such as:
Unreimbursed employee business expenses. 2106 business expenses are subtracted from income. Examples include uniforms, union dues, mileage, expenses related to a cell phone used for business, marketing costs and training costs. If somebody writes off $20,000 in business expenses, the underwriter would subtract the $20K for qualifying purposes.
Rental property income. This income must be documented and shown on the tax return, unless the property was purchased in the current calendar year. In that case, the rent must appear on a certian number of consecutive monthly bank statements. Also of note - If you don’t report income that should have appeared on your tax returns, you can’t use that income at all.
If you plan to keep your present home, and rent it out when trading up to a new home, you need a min. 30% equity in that property in order to use the rental income. You'll be required to pay for an appraisal on the current home to establish the equity percentage, and to provide a fully-executed lease agreement - with a paper-trailed security deposit from the tenants.
Business losses. These can include losses incurred by a spouse’s business. The lender will subtract those losses to yield a combined taxable income for the household, In some cases, that might not be enough income to be approved for a loan that a borrower may have otherwise qualified for.
Depreciation expenses. On the flip side, depreciation expense can often increase a borrower’s qualifying income, because it's a non-cash expense.
Capital gains. These also may be counted as income — or not.
If a capital gain is a one-time event, it probably won't count as income because it won't meet criteria for continuation into the future.
Self-Employment
Scrutiny of tax returns can be a big challenge for borrowers who are self-employed. Many are having a really difficult time getting loans because their accountants and bookkeepers are trained to minimize their income to save them on taxes.
Too Many Write-Offs
Many potential borrowers are faced with the challenge of building up their taxable income for two years before they can qualify for a loan. Some may have to forego certain deductions so they can show more income on their tax return to qualify for a loan.
But beware, borrowers who try to amend a prior year’s tax return to show more income is a strategy that won’t work. Instead, an amended tax return can trigger a loan denial. There's a new rule that says you cannot qualify for a mortgage if your tax return has been amended.
Bonus Income
Bonus income is scrutinized - and anything that is non-cash (such as stock options) do not count. The cash component should be ok - but it is averaged over a 2 year period. If the most recent annual bonus is lower than the previous year, then averaging is not done - and the lower amount is utilized.
Monday, March 28, 2011
Six Ways to Improve Your Chances of Getting a Mortgage
Understanding the mortgage process and meeting lenders' more stringent qualification requirements have become big obstacles for applicants, according to a survey the site conducted. Most recent home buyers -- 70% -- described the mortgaging process as more difficult than they expected. And those who bought homes during the bubble years, when mortgage loans were given out like candy at Halloween, are especially shell-shocked by the new lending standards.
One of the biggest problems home buyers run into today concern their credit scores and how, in general, they don't work to improve them before applying for a loan. In the same vein, a recent Fannie Mae survey found that poor credit was the top reason that renters gave for not buying a home.
(Following closely behind poor credit was the self-awareness that they couldn't actually afford to buy or keep up a home and the perception that now is not really a good time to buy. Hooray for enlightenment on the first point, but with home prices back to 2002 levels and interest rates among the lowest ever seen, how isn't this a good time to buy?)
Back to the mortgagematch.com study: A full 35% of successful buyers said they didn't even know their credit scores when they started to look for houses to buy. Somewhere, a Realtor is clenching his or her teeth just reading that. These buyers decide they want to buy a house but don't know their credit scores? Home-buying is a process that starts with getting your financial house in order and then hitting the brick and mortar ones.
See photos of homes for sale in your area and across the country on AOL Real Estate
Some tips before you apply for a mortgage to help you beat the odds:
- Pay down your debt. Reduce your total debt -- your monthly payments on cars, student loans, credit cards -- before you start the mortgage application. The goal is to reduce your overall debt-to-income ratio and improve your credit score. The somewhat unrealistic guideline that lenders want everyone to toe is that your total housing expenses not exceed 28% of your monthly gross income. For decades, people have exceeded that quite happily but now the lenders believe they know best and they control the money.
- Clean up your credit. Start with figuring out what your reported scores are. Obtain your free credit report from each of the three credit bureaus (Equifax, Experian and TransUnion) and carefully review them, noting all negative items. Correct inaccurate or outdated items. Your credit score needs to be a minimum of 680 -- preferably 720 or higher -- to qualify for a lower interest rate on a mortgage.
- Delay any large purchases, don't apply for any new credit until you close on your house. Lenders check credit reports at the time you apply and then again right before closing. A last-minute spending spree is going to be flagged. Once you clear the mortgage hurdle, feel free to move about the cabin and decorate your new house to your heart's content. (That's said in jest; charge wisely.)
- Increase your down payment. This reduces the loan-to-value ratio and improves your chances of getting a loan. How do you do this? You save up for it or call up your rich relatives. There are also a lot of community programs to help first-time buyers, so check around.
- Get your paperwork together. Your lender will want to see pay stubs, bank statements, assets, credit documents, income tax returns, all financial statements and possibly your fourth grade report card. OK, I made that last one up, but you get the idea. This is paperwork central. And you better make copies of everything you send them in case they ask you for it a third time.
- Develop some patience. You're going to need it.
Real Estate: It's Time to Buy Again
March 28, 2011
Forget stocks. Don't bet on gold. After four years of plunging home prices, the most attractive asset class in America is housing. From his wide-rimmed cowboy hat to his roper boots, Mike Castleman fits moviedom's image of the lanky Texas rancher. On a recent March evening, Castleman is feeding cattle biscuits to his two pet longhorn steers, Big Buddy and Little Buddy, on his 460-acre Bar Ten Creek Ranch in Dripping Springs, a hamlet outside Austin in the Texas Hill Country. The spread is a medley of meandering streams, craggy cliffs, and centuries-old oaks. But even in this pastoral setting, his mind keeps returning to a subject he knows as well as any expert around: the housing market. "I'm a dirt-road economist who sees what's happening on the ground, and in 35 years I've never seen a shortage of new construction like the one I'm seeing today," declares Castleman, 70, now offering a biscuit to his miniature donkey Thumper.
"The talking heads who are down on real estate will hate to hear this, but America needs to build a lot more houses. And in most markets the price of new homes is fixin' to rise, not fall."
Castleman is in a unique position to know. As the founder and CEO of a company called Metrostudy, he's spent more than three decades tracking real-time data on the country's inventory of new homes. Each quarter he dispatches 500 inspectors to literally drive through 45,000 subdivisions from Baltimore to Sacramento. The inspectors examine 5 million finished lots, one at a time, and record whether they contain a house that's under construction, one that's finished and for sale, or a home that's sold. Metrostudy covers 19 states, or around 65% of the U.S. housing market, including all the ones hardest hit by the crash: Florida, California, Arizona, and Nevada. The company's client list includes virtually every major homebuilder and bank -- from Pulte and KB Home to Bank of America and Wells Fargo.
The key figures that Metrostudy collects, and that those clients prize, are the number of homes that are vacant and for sale in each city, and the number of months it takes to sell all of them. Together those figures measure inventory -- the key metric in determining whether a market has a surplus or a shortage of new housing.
Today Castleman is witnessing an extraordinary reversal of the new-home glut that helped sink prices just a few years ago. In the 41 cities Metrostudy covers, a total of 78,000 houses are now either vacant and for sale, or under construction. That's less than one-fourth of the 343,000 units in those two categories at the peak of the frenzy in mid-2006, and well below the level of a decade ago. "If we had anything like normal levels of buying, those houses would sell in 2½ months," says Castleman. "We'd see an incredible shortage. And that's where we're heading."
If all the noise you're hearing about housing has you totally confused, join the crowd. One day you'll read that owning a home has never been more affordable. The next day you'll see news that housing starts have plunged to nearly their lowest level in half a century.
After four years of falling prices and surging foreclosures, it's hard to know what to think. Even Robert Shiller and Karl Case can't agree. The two economists, who together created the widely followed Case-Shiller Home Price indices, are right now offering sharply contrasting views of housing's future.
Shiller recently warned that the chances were high for a further double-digit drop in U.S. home prices. But in an interview, Case took a far brighter view: "The lack of new home building is a huge help that a lot of people are ignoring," says Case. "People think I'm crazy to be optimistic, but housing is looking like the little engine that could."
To see where real estate is truly headed, it's critical to keep your eye firmly on the fundamentals that, over time, always determine the course of prices and construction. During the last decade's historic run-up in prices, there were repeatedly warned that things were moving too fast. The fundamentals are now pointing in the opposite direction.
So let's state it simply and forcibly: Housing is back.
Two basic factors are laying the foundation for dramatic recovery in residential real estate. The first is the historic drop in new construction that so amazes Castleman. The second is a steep decline in prices, on the order of 30% nationwide since 2006, and as much as 55% in the hardest-hit markets. The story of this downturn has been an astonishing flight from the traditional American approach of buying new houses to an embrace of renting. But the new affordability will gradually lure Americans back to buying homes. And the return of the homeowner will start raising prices in many markets this year.
Of course, home prices are low and home construction is weak for a reason: incredibly low demand. For our scenario to play out, America will need a decent economy, with job creation and consumer confidence continuing to claw their way back to normal.
One big fear is that today's tight credit standards will chill the market. But we're really returning to the standards that prevailed before the craze, and those requirements didn't stop prices and homebuilding from rising in a good economy. "The credit standards are now at about historical levels, excluding the bubble period," says Mark Zandi, chief economist for Moody's Analytics. "We saw prices rising with fundamentals in those periods, and it will happen again."
To see why, let's examine the remarkable shift in home affordability. A new study by Deutsche Bank measures affordability in two ways: first, the share of income Americans are paying to own a home. And second, the cost of owning vs. renting. On the first metric, the analysis finds that homeowners now pay just 9.8% of their income in after-tax mortgage, tax, and insurance payments. That's down from 17.2% at the bubble's peak in 2007, and by far the lowest number in the Deutsche Bank database, going back to 1999. The second measure, the cost of owning compared with renting, should also inspire potential buyers. In 28 out of 54 major markets, it's now cheaper to pay a mortgage and other major costs than to rent the same house. What's most compelling is that in all of the distressed markets, owning now wins by a wide margin -- a stunning reversal from four years ago. It now costs 34% less than renting in Atlanta. In Miami the average rent is now $1,031 a month, vs. the $856 it costs to carry a ranch house or stucco cottage as an owner.
Not all markets will bounce back equally, of course. Housing resembles the weather: The exact conditions are different in every city. But in general the big U.S. markets fall into two different climate zones right now. We'll call them the "nondistressed markets" and the "foreclosure markets." A more detailed look shows why the forecast for both is favorable.
No cities went untouched by the collapse in prices over the past few years. But markets such as Northern Virginia, Indianapolis, Minneapolis, San Diego, the San Francisco suburbs, and virtually all of Texas held up reasonably well. In those areas prices spiked far less than in bubble cities -- the foreclosure markets we'll get to shortly -- chiefly because they didn't get nearly as many speculators who thought they could flip the homes or rent them to snowbirds.
The nondistressed markets will be able to get prices rising and construction growing far faster than the harder-hit areas for a simple reason: Although some of these markets are still suffering from foreclosures, they don't need to work through the big overhang haunting a Las Vegas or a Phoenix. The number of new homes for sale or in the pipeline is extraordinarily low in nondistressed markets. San Diego is typical. It has just 921 freestanding homes for sale or under construction, compared with 4,425 in late 2005. The challenge for these cities is to generate enough demand to reduce inventories of existing, or resale, homes. In the entire country the resale supply stands at 3.5 million houses and condos. That's a fairly high number, since it would take more than eight months to sell those properties; seven months or below is the threshold for a strong market.
But in the nondistressed cities, the existing home inventory is lower, closer to seven months on average. So a modest increase in demand will translate into strong gains in both prices and new construction. That should happen quickly, because most of those markets -- including Silicon Valley, Northern Virginia, and Texas -- are now showing good job growth.
Zandi of Moody's Analytics expects that prices will rise three to four points faster than inflation for the next few years in virtually all of the nondistressed markets. His view is that prices will increase in line with rents, which are now growing briskly because apartments are in short supply. Those higher rents will encourage buyers to cross the street from an apartment to a home of their own.
In Northern Virginia, Chris Bratz, an engineer, and his wife, Amy DiElsi, a publicist, are planning to leave their rental apartment and become homeowners for the first time. The main reason? Buying has simply become a far better deal than renting. "The market got completely inflated, then it crashed, so prices are coming back to where they should be," says Chris. As the couple have watched prices fall, they have also watched the rent on their apartment spiral upward, reaching $2,700 a month. They calculate that they should be able to purchase a townhouse for between $400,000 and $500,000 and pay less per month for a mortgage.
The nondistressed markets will also lead the way in construction. Zandi predicts that for the nation as a whole, single-family housing "starts" -- measured when a builder pours a foundation for a new home -- will rise from 470,000 in 2010 to as much as 700,000 this year. A large portion of that activity will happen in nondistressed markets where a tightening supply of resale houses will start making new homes look like a good deal. "Our main competition is from resales," says Jeff Mezger, CEO of KB Home. "The prices of those homes have stayed so low, because of low demand, that it's hampered the ability of builders to sell new houses."
But many would-be buyers simply prefer a brand-new house. Eventually they'll move from renters to buyers, and the trend will accelerate now that prices are no longer dropping. In Minneapolis, Yuan Qu and her husband, Xiang Chen, a researcher at the University of Minnesota, just moved from a two-bedroom rental to a new light-blue four-bedroom ranch with a chocolate-colored roof on a spacious corner lot. They paid $400,000, a bargain price compared with a few years ago. The couple, both in their early thirties, moved to Minnesota from China six years ago. "We wanted to buy a house, and we've been waiting and waiting and waiting," says Qu. "The prices went down for so long, we finally thought they couldn't keep falling." For Qu the only choice was new construction. "We're not very handy people," she admits.
Foreclosures put downward pressure on the market far out of proportion to their numbers because of markdown pricing. "We had levels of inventory even higher than this in 1990 and 1991," says MIT economist William Wheaton. "But they were traditional listings, not foreclosures, so they didn't create the big discounts you get with foreclosures."
Wheaton reckons that we'll see a flow of around 1 million foreclosures a year, at a fairly even pace, from now through 2013. That figure is frequently cited as evidence that the market is doomed for years in most markets. Not so. The reason is that the vast bulk of those units, probably over 600,000, according to Gleb Nechayev, an economist with real estate firm CB Richard Ellis, are being converted to rentals either by investors or their current owners. Those properties are finding plenty of renters, since the rental market is still extremely strong across the country. Remember, the millions who lost their homes to foreclosure still need somewhere to live.
A typical investor is Alex Barbalat, a Russian immigrant who's purchased seven homes east of San Francisco in the towns of Bay Point, Antioch, and Pittsburg. His average purchase price is around $100,000 for homes that once sold for between $300,000 and $500,000. But he has no trouble finding renters, since his tenants can commute to jobs in San Francisco on the BART transit system. Barbalat is pocketing rental yields on the prices he paid of around 12%, and he's in no hurry to sell. "I'm holding them until prices drastically rise," he says.
Investment funds are also entering the game. Dotan Y. Melech looks for bargains in Las Vegas for UnitedASM, a firm he co-founded that manages apartments and other real estate investments. The firm has raised more than $20 million from outside investors to purchase distressed properties. So far, Melech has bought around 300 houses and plans to purchase another 200 this year. He has no trouble renting the houses he buys, since, he estimates, occupancy rates in Las Vegas are touching 95%. The "cap rate," or return on investment after all expenses, is between 8% and 10% -- twice the rate on 10-year Treasuries. Melech rents to people who lost their homes but are reliable renters. "A lot of people can't be buyers because their credit got hurt," he says.
Even with investors jumping in, buying activity in foreclosure markets hasn't yet increased enough to bring inventories down. It will soon. Zandi thinks prices will fall a couple of percentage points lower in the distressed markets in the short run. "But that will be overshooting," he says. "It's like an elastic band. If prices do drop this year, they will need to bounce back because they'll be far too low compared with rents and replacement cost." Renters will come off the sidelines to purchase homes in the years ahead, precisely the opposite trend of the past few years.
Consider the example of Michael Dynda, a retired Air Force avionics technician who now works for a government contractor in Las Vegas. Dynda, 49, is a first-time buyer who put off purchasing for years, in part because prices were falling so rapidly in Las Vegas, with no bottom in sight. But last year the combination of bargain prices and low mortgage rates became too good to resist. He ended up purchasing a 2,300-square-foot stucco home for $240,000, or about half what it would have fetched in 2007. Dynda got a 4.38% home loan, and pays the same amount on his mortgage as on the rent on the house he left to become a homeowner. "The timing was about as good as it could get," says Dynda.
Back on the ranch, Mike Castleman is lounging in his creek-front mansion, built from "a hundred tons of fine central Texas limestone." As he shows off his collection of custom-made guitars, including one crafted to resemble the skin of a rattlesnake, the homespun housing guru once again returns to his favorite topic.
Castleman claims that this recovery will look like all the others: It will bring a severe shortage of housing. He invokes the livestock business to explain. "It takes three years between the time a bull mates with a cow and when you get a calf ready for market," he says. "That's how it is in housing too. We'll get a big surge in demand and the drywall companies will take a long time to ramp up, and it will take years to get new lots approved. Buyers will show up looking for a house in a subdivision, and all the houses will be sold. The builders will tell them it will take six months to deliver a house." But those folks, says Castleman, will be set on buying a place. "And they'll want it so bad they'll bid the prices up!" In other words: Beat the crowd.
Mike Castleman, the Texan with the best realtime view of housing in the U.S., tells editor-atlarge Shawn Tully that the naysayers are about to get a big surprise: rising prices for new homes.
Forget stocks. Don't bet on gold. After four years of plunging home prices, the most attractive asset class in America is housing. From his wide-rimmed cowboy hat to his roper boots, Mike Castleman fits moviedom's image of the lanky Texas rancher. On a recent March evening, Castleman is feeding cattle biscuits to his two pet longhorn steers, Big Buddy and Little Buddy, on his 460-acre Bar Ten Creek Ranch in Dripping Springs, a hamlet outside Austin in the Texas Hill Country. The spread is a medley of meandering streams, craggy cliffs, and centuries-old oaks. But even in this pastoral setting, his mind keeps returning to a subject he knows as well as any expert around: the housing market. "I'm a dirt-road economist who sees what's happening on the ground, and in 35 years I've never seen a shortage of new construction like the one I'm seeing today," declares Castleman, 70, now offering a biscuit to his miniature donkey Thumper.
"The talking heads who are down on real estate will hate to hear this, but America needs to build a lot more houses. And in most markets the price of new homes is fixin' to rise, not fall."
Castleman is in a unique position to know. As the founder and CEO of a company called Metrostudy, he's spent more than three decades tracking real-time data on the country's inventory of new homes. Each quarter he dispatches 500 inspectors to literally drive through 45,000 subdivisions from Baltimore to Sacramento. The inspectors examine 5 million finished lots, one at a time, and record whether they contain a house that's under construction, one that's finished and for sale, or a home that's sold. Metrostudy covers 19 states, or around 65% of the U.S. housing market, including all the ones hardest hit by the crash: Florida, California, Arizona, and Nevada. The company's client list includes virtually every major homebuilder and bank -- from Pulte and KB Home to Bank of America and Wells Fargo.
The key figures that Metrostudy collects, and that those clients prize, are the number of homes that are vacant and for sale in each city, and the number of months it takes to sell all of them. Together those figures measure inventory -- the key metric in determining whether a market has a surplus or a shortage of new housing.
Today Castleman is witnessing an extraordinary reversal of the new-home glut that helped sink prices just a few years ago. In the 41 cities Metrostudy covers, a total of 78,000 houses are now either vacant and for sale, or under construction. That's less than one-fourth of the 343,000 units in those two categories at the peak of the frenzy in mid-2006, and well below the level of a decade ago. "If we had anything like normal levels of buying, those houses would sell in 2½ months," says Castleman. "We'd see an incredible shortage. And that's where we're heading."
If all the noise you're hearing about housing has you totally confused, join the crowd. One day you'll read that owning a home has never been more affordable. The next day you'll see news that housing starts have plunged to nearly their lowest level in half a century.
After four years of falling prices and surging foreclosures, it's hard to know what to think. Even Robert Shiller and Karl Case can't agree. The two economists, who together created the widely followed Case-Shiller Home Price indices, are right now offering sharply contrasting views of housing's future.
Shiller recently warned that the chances were high for a further double-digit drop in U.S. home prices. But in an interview, Case took a far brighter view: "The lack of new home building is a huge help that a lot of people are ignoring," says Case. "People think I'm crazy to be optimistic, but housing is looking like the little engine that could."
To see where real estate is truly headed, it's critical to keep your eye firmly on the fundamentals that, over time, always determine the course of prices and construction. During the last decade's historic run-up in prices, there were repeatedly warned that things were moving too fast. The fundamentals are now pointing in the opposite direction.
So let's state it simply and forcibly: Housing is back.
Two basic factors are laying the foundation for dramatic recovery in residential real estate. The first is the historic drop in new construction that so amazes Castleman. The second is a steep decline in prices, on the order of 30% nationwide since 2006, and as much as 55% in the hardest-hit markets. The story of this downturn has been an astonishing flight from the traditional American approach of buying new houses to an embrace of renting. But the new affordability will gradually lure Americans back to buying homes. And the return of the homeowner will start raising prices in many markets this year.
Of course, home prices are low and home construction is weak for a reason: incredibly low demand. For our scenario to play out, America will need a decent economy, with job creation and consumer confidence continuing to claw their way back to normal.
One big fear is that today's tight credit standards will chill the market. But we're really returning to the standards that prevailed before the craze, and those requirements didn't stop prices and homebuilding from rising in a good economy. "The credit standards are now at about historical levels, excluding the bubble period," says Mark Zandi, chief economist for Moody's Analytics. "We saw prices rising with fundamentals in those periods, and it will happen again."
To see why, let's examine the remarkable shift in home affordability. A new study by Deutsche Bank measures affordability in two ways: first, the share of income Americans are paying to own a home. And second, the cost of owning vs. renting. On the first metric, the analysis finds that homeowners now pay just 9.8% of their income in after-tax mortgage, tax, and insurance payments. That's down from 17.2% at the bubble's peak in 2007, and by far the lowest number in the Deutsche Bank database, going back to 1999. The second measure, the cost of owning compared with renting, should also inspire potential buyers. In 28 out of 54 major markets, it's now cheaper to pay a mortgage and other major costs than to rent the same house. What's most compelling is that in all of the distressed markets, owning now wins by a wide margin -- a stunning reversal from four years ago. It now costs 34% less than renting in Atlanta. In Miami the average rent is now $1,031 a month, vs. the $856 it costs to carry a ranch house or stucco cottage as an owner.
Not all markets will bounce back equally, of course. Housing resembles the weather: The exact conditions are different in every city. But in general the big U.S. markets fall into two different climate zones right now. We'll call them the "nondistressed markets" and the "foreclosure markets." A more detailed look shows why the forecast for both is favorable.
No cities went untouched by the collapse in prices over the past few years. But markets such as Northern Virginia, Indianapolis, Minneapolis, San Diego, the San Francisco suburbs, and virtually all of Texas held up reasonably well. In those areas prices spiked far less than in bubble cities -- the foreclosure markets we'll get to shortly -- chiefly because they didn't get nearly as many speculators who thought they could flip the homes or rent them to snowbirds.
The nondistressed markets will be able to get prices rising and construction growing far faster than the harder-hit areas for a simple reason: Although some of these markets are still suffering from foreclosures, they don't need to work through the big overhang haunting a Las Vegas or a Phoenix. The number of new homes for sale or in the pipeline is extraordinarily low in nondistressed markets. San Diego is typical. It has just 921 freestanding homes for sale or under construction, compared with 4,425 in late 2005. The challenge for these cities is to generate enough demand to reduce inventories of existing, or resale, homes. In the entire country the resale supply stands at 3.5 million houses and condos. That's a fairly high number, since it would take more than eight months to sell those properties; seven months or below is the threshold for a strong market.
But in the nondistressed cities, the existing home inventory is lower, closer to seven months on average. So a modest increase in demand will translate into strong gains in both prices and new construction. That should happen quickly, because most of those markets -- including Silicon Valley, Northern Virginia, and Texas -- are now showing good job growth.
Zandi of Moody's Analytics expects that prices will rise three to four points faster than inflation for the next few years in virtually all of the nondistressed markets. His view is that prices will increase in line with rents, which are now growing briskly because apartments are in short supply. Those higher rents will encourage buyers to cross the street from an apartment to a home of their own.
In Northern Virginia, Chris Bratz, an engineer, and his wife, Amy DiElsi, a publicist, are planning to leave their rental apartment and become homeowners for the first time. The main reason? Buying has simply become a far better deal than renting. "The market got completely inflated, then it crashed, so prices are coming back to where they should be," says Chris. As the couple have watched prices fall, they have also watched the rent on their apartment spiral upward, reaching $2,700 a month. They calculate that they should be able to purchase a townhouse for between $400,000 and $500,000 and pay less per month for a mortgage.
The nondistressed markets will also lead the way in construction. Zandi predicts that for the nation as a whole, single-family housing "starts" -- measured when a builder pours a foundation for a new home -- will rise from 470,000 in 2010 to as much as 700,000 this year. A large portion of that activity will happen in nondistressed markets where a tightening supply of resale houses will start making new homes look like a good deal. "Our main competition is from resales," says Jeff Mezger, CEO of KB Home. "The prices of those homes have stayed so low, because of low demand, that it's hampered the ability of builders to sell new houses."
But many would-be buyers simply prefer a brand-new house. Eventually they'll move from renters to buyers, and the trend will accelerate now that prices are no longer dropping. In Minneapolis, Yuan Qu and her husband, Xiang Chen, a researcher at the University of Minnesota, just moved from a two-bedroom rental to a new light-blue four-bedroom ranch with a chocolate-colored roof on a spacious corner lot. They paid $400,000, a bargain price compared with a few years ago. The couple, both in their early thirties, moved to Minnesota from China six years ago. "We wanted to buy a house, and we've been waiting and waiting and waiting," says Qu. "The prices went down for so long, we finally thought they couldn't keep falling." For Qu the only choice was new construction. "We're not very handy people," she admits.
Foreclosures put downward pressure on the market far out of proportion to their numbers because of markdown pricing. "We had levels of inventory even higher than this in 1990 and 1991," says MIT economist William Wheaton. "But they were traditional listings, not foreclosures, so they didn't create the big discounts you get with foreclosures."
Wheaton reckons that we'll see a flow of around 1 million foreclosures a year, at a fairly even pace, from now through 2013. That figure is frequently cited as evidence that the market is doomed for years in most markets. Not so. The reason is that the vast bulk of those units, probably over 600,000, according to Gleb Nechayev, an economist with real estate firm CB Richard Ellis, are being converted to rentals either by investors or their current owners. Those properties are finding plenty of renters, since the rental market is still extremely strong across the country. Remember, the millions who lost their homes to foreclosure still need somewhere to live.
A typical investor is Alex Barbalat, a Russian immigrant who's purchased seven homes east of San Francisco in the towns of Bay Point, Antioch, and Pittsburg. His average purchase price is around $100,000 for homes that once sold for between $300,000 and $500,000. But he has no trouble finding renters, since his tenants can commute to jobs in San Francisco on the BART transit system. Barbalat is pocketing rental yields on the prices he paid of around 12%, and he's in no hurry to sell. "I'm holding them until prices drastically rise," he says.
Investment funds are also entering the game. Dotan Y. Melech looks for bargains in Las Vegas for UnitedASM, a firm he co-founded that manages apartments and other real estate investments. The firm has raised more than $20 million from outside investors to purchase distressed properties. So far, Melech has bought around 300 houses and plans to purchase another 200 this year. He has no trouble renting the houses he buys, since, he estimates, occupancy rates in Las Vegas are touching 95%. The "cap rate," or return on investment after all expenses, is between 8% and 10% -- twice the rate on 10-year Treasuries. Melech rents to people who lost their homes but are reliable renters. "A lot of people can't be buyers because their credit got hurt," he says.
Even with investors jumping in, buying activity in foreclosure markets hasn't yet increased enough to bring inventories down. It will soon. Zandi thinks prices will fall a couple of percentage points lower in the distressed markets in the short run. "But that will be overshooting," he says. "It's like an elastic band. If prices do drop this year, they will need to bounce back because they'll be far too low compared with rents and replacement cost." Renters will come off the sidelines to purchase homes in the years ahead, precisely the opposite trend of the past few years.
Consider the example of Michael Dynda, a retired Air Force avionics technician who now works for a government contractor in Las Vegas. Dynda, 49, is a first-time buyer who put off purchasing for years, in part because prices were falling so rapidly in Las Vegas, with no bottom in sight. But last year the combination of bargain prices and low mortgage rates became too good to resist. He ended up purchasing a 2,300-square-foot stucco home for $240,000, or about half what it would have fetched in 2007. Dynda got a 4.38% home loan, and pays the same amount on his mortgage as on the rent on the house he left to become a homeowner. "The timing was about as good as it could get," says Dynda.
Back on the ranch, Mike Castleman is lounging in his creek-front mansion, built from "a hundred tons of fine central Texas limestone." As he shows off his collection of custom-made guitars, including one crafted to resemble the skin of a rattlesnake, the homespun housing guru once again returns to his favorite topic.
Castleman claims that this recovery will look like all the others: It will bring a severe shortage of housing. He invokes the livestock business to explain. "It takes three years between the time a bull mates with a cow and when you get a calf ready for market," he says. "That's how it is in housing too. We'll get a big surge in demand and the drywall companies will take a long time to ramp up, and it will take years to get new lots approved. Buyers will show up looking for a house in a subdivision, and all the houses will be sold. The builders will tell them it will take six months to deliver a house." But those folks, says Castleman, will be set on buying a place. "And they'll want it so bad they'll bid the prices up!" In other words: Beat the crowd.
Mike Castleman, the Texan with the best realtime view of housing in the U.S., tells editor-atlarge Shawn Tully that the naysayers are about to get a big surprise: rising prices for new homes.
Wednesday, March 9, 2011
MBA Purchase Applications
Released 3-9-11 - A.M.
Prior Actual
Purchase Index – W/W Change -6.1% 12.5%
Refinance Index -6.5% 17.2%
Composite Index -6.5% 15.5%
Highlights
One week’s data is only one week’s data, but the Mortgage Banker’s Assoc. believes that job market improvement is starting to pave the way for housing market improvement. MBA’s purchase index, which measures volume of mortgage applications for home purchases, surged 12.5% in the week of March 4th – it’s best reading of the year. Rates remain favorable, at an avg. 4.93% for 30 yr. loans. The refinancing index also revived in the week – up 17.2% - the best reading since mid-January.
Definition
The MBA compiles various mortgage loan indexes.
The purchase applications index measures applications at mortgage lenders. This is a leading indicator for single family home sales and housing construction.
Saturday, February 26, 2011
A 12-Step Action Plan to Improve Your Credit Score
Your credit score impacts your ability to get out of debt and stay out of debt. The worse your credit score, the higher the interest rate you will be charged on money you borrow. The better your score, the less your debt will cost you and the quicker you'll be able to pay it off.
So it's not only important to know your credit scores from all three major credit rating bureaus -- Equifax, TransUnion and Experian -- but to know how to raise your score. The simple truth is that raising your credit score isn't that hard if you know what to do.
Over the years literally thousands of people have been able to fix their credit scores on their own using simple steps, a 12-step action plan if you will, which raises their score quickly and keeps it there. Regardless of where you start from, if you follow this plan and utilize the online tools discussed -- in six months your score should be higher than you ever thought possible.
Step 1: Get Your Credit Report and Check It for Errors
Under the Fair Credit Reporting Act, the Big Three credit bureaus are required to provide every consumer who asks with a free copy of their credit report once a year. You can get yours by going to annualcreditreport.com. This step is important because it is extremely likely that there are errors.
A study by the National Association of State Public Interest Research Groups found that one in four credit reports contain a mistake serious enough to keep you from getting a loan, credit card or in some cases a job.
Once you get your report, go through it with a fine-toothed comb. If you find any errors (for example, late payments that were actually paid on time or credit limits that are lower than they should be), get them corrected as quickly as possible. You can do this by sending the credit agency a certified letter that explains what information was inaccurate, including copies of documents (such as bank records) that verify your claim, along with a copy of your credit report with the disputed issue highlighted.
Under the Fair Credit Reporting Act, the credit-reporting agencies are required to correct inaccurate or incomplete information in your report within 30 days. Go to the "Free Stuff" tab at www.finishrich.com to access sample correction letters. Also, go to Finishrich.com and sign up right now and take advantage of the free Debt Wise 30-day trial. By signing up, you will be entitled to a free Equifax Credit Score, so you can see where you stand.
Step 2: Automate Your Bill Paying
This may be the most important tip. Missing payments or being late on payments can quickly ruin your credit score. For this reason, I strongly recommend that you use your bank's online bill-paying service to automatically transfer a pre-set amount every month from your checking account to cover at least the minimum payments on all your credit accounts. I have practically every bill of mine automated in this way. You can also use your credit card company online bill payment system to notify you through email when you are close to going over your credit limit, which can help you avoid more damage to your score.
Step 3: If You Have Missed Payments, Get Current
It's never too late to clean up your act. Get yourself current as quickly as you can and stay current. Your score will begin to improve within a few months, and the longer you keep it up, the more noticeable the increase will be. The negative weight that FICO gives to bad behavior like delinquencies lessens over time, so as long as you stay on the straight and narrow, those black marks will eventually disappear from your record for good.
Step 4: Keep Your Balance Well Below Your Credit Limit
Of all the factors you can control -- and improve quickly -- how much you owe is probably the most powerful. Since the credit crunch, credit card companies have been cutting customers' credit limits without warning. This can be devastating to your credit score. Say you've got a $1,000 balance on a card with a $2,000 limit--and then the card company slashes your limit to $1,000. Suddenly, you've gone from 50% credit utilization to being maxed out, which can shave 45 points from your credit score. The credit bureaus recommend that you keep your usage below 33% of your available credit.
Step 5: Beware the Credit Card Transfer Game
For years, people have saved money by transferring high-interest credit card balances to low-interest cards. This can still be helpful, but be aware that using one credit line to pay off another sets off credit score alarm bells -- even if all you're doing is consolidating your accounts. All other things being equal, your credit score will be higher if you have a bunch of small balances on a number of different cards, rather than a big balance on just one or two.
Step 6: If You Rack Up High Balances, Pay Your Card Bill Early
The "Amounts Owed" part of your credit score is based on the balance due listed on your most recent credit card statements. So even if you pay your bills in full each month, running up high balances can still hurt your score. Avoid this problem by paying down all or part of your bill before the end of your statement period, thus reducing the balance that will be reported to FICO and the credit bureaus.
Step 7: Hang On to Your Old Accounts
Part of your credit score is based on how long you have had credit accounts. Closing old accounts shortens your credit history and reduces your total credit -- neither of which is good for your credit score. Keep the older accounts open, even if you aren't using them.
Step 8: Use Your Old Cards
The credit card industry has gotten much stricter about closing inactive accounts. This can hurt your credit score, since it reduces the average age of your credit accounts. To prevent this from happening, you should pull out your old cards and start putting at least one charge on them every month.
Step 9: Demonstrate That You Can Be Responsible
The best way to raise your credit score is to demonstrate that you can handle credit responsibly -- which means not borrowing too much and paying back what you borrow on time. Don't open new accounts just to increase your available credit or create a better variety of credit. You should open new credit accounts only if and when you need them.
Step 10: Shop for Loans Quickly
When you apply for a loan, the lender will "run your credit" -- that is, send out an inquiry to one of the credit-rating agencies to find out how credit-worthy you are. Too many such inquiries can hurt your FICO score, since it could indicate that you're trying to borrow money from different sources. Of course, you can also generate a lot of different inquiries by shopping for the best mortgage or auto loan. The FICO scoring system is designed to allow for this by considering the length of time over which a series of inquiries is made. So, try to do all of your loan shopping within 30 days.
Step 11: Know the Difference Between a 'Soft Inquiry' and a 'Hard Inquiry'
The credit bureaus all recognize the difference between you checking your own score (a "soft inquiry") and lenders checking your score (a "hard inquiry"). While too many hard inquiries can lower your score, soft inquiries don't count at all. Feel free to check your score as often as you want.
Step 12: Buy a 3-and-1 Report, and a Credit-Monitoring Package and Identity-Theft Service
Your credit score and credit report are so important that it makes sense to pay for a 3-and-1 Report (which provides you with your credit scores from the three bureaus) as well as an identity-theft monitoring service. In most cases, these services will cost you between $14.95 and $19.95 a month -- I personally pay for these services myself because I think it's worth the investment.
Congratulations! You now know more than 95% of all Americans about what may well be the most important influence over your financial life -- your credit record and score. Make lifelong monitoring of your credit part of a debt-free lifestyle! For more resources and tools go to finishrich.com.
So it's not only important to know your credit scores from all three major credit rating bureaus -- Equifax, TransUnion and Experian -- but to know how to raise your score. The simple truth is that raising your credit score isn't that hard if you know what to do.
Over the years literally thousands of people have been able to fix their credit scores on their own using simple steps, a 12-step action plan if you will, which raises their score quickly and keeps it there. Regardless of where you start from, if you follow this plan and utilize the online tools discussed -- in six months your score should be higher than you ever thought possible.
Step 1: Get Your Credit Report and Check It for Errors
Under the Fair Credit Reporting Act, the Big Three credit bureaus are required to provide every consumer who asks with a free copy of their credit report once a year. You can get yours by going to annualcreditreport.com. This step is important because it is extremely likely that there are errors.
A study by the National Association of State Public Interest Research Groups found that one in four credit reports contain a mistake serious enough to keep you from getting a loan, credit card or in some cases a job.
Once you get your report, go through it with a fine-toothed comb. If you find any errors (for example, late payments that were actually paid on time or credit limits that are lower than they should be), get them corrected as quickly as possible. You can do this by sending the credit agency a certified letter that explains what information was inaccurate, including copies of documents (such as bank records) that verify your claim, along with a copy of your credit report with the disputed issue highlighted.
Under the Fair Credit Reporting Act, the credit-reporting agencies are required to correct inaccurate or incomplete information in your report within 30 days. Go to the "Free Stuff" tab at www.finishrich.com to access sample correction letters. Also, go to Finishrich.com and sign up right now and take advantage of the free Debt Wise 30-day trial. By signing up, you will be entitled to a free Equifax Credit Score, so you can see where you stand.
Step 2: Automate Your Bill Paying
This may be the most important tip. Missing payments or being late on payments can quickly ruin your credit score. For this reason, I strongly recommend that you use your bank's online bill-paying service to automatically transfer a pre-set amount every month from your checking account to cover at least the minimum payments on all your credit accounts. I have practically every bill of mine automated in this way. You can also use your credit card company online bill payment system to notify you through email when you are close to going over your credit limit, which can help you avoid more damage to your score.
Step 3: If You Have Missed Payments, Get Current
It's never too late to clean up your act. Get yourself current as quickly as you can and stay current. Your score will begin to improve within a few months, and the longer you keep it up, the more noticeable the increase will be. The negative weight that FICO gives to bad behavior like delinquencies lessens over time, so as long as you stay on the straight and narrow, those black marks will eventually disappear from your record for good.
Step 4: Keep Your Balance Well Below Your Credit Limit
Of all the factors you can control -- and improve quickly -- how much you owe is probably the most powerful. Since the credit crunch, credit card companies have been cutting customers' credit limits without warning. This can be devastating to your credit score. Say you've got a $1,000 balance on a card with a $2,000 limit--and then the card company slashes your limit to $1,000. Suddenly, you've gone from 50% credit utilization to being maxed out, which can shave 45 points from your credit score. The credit bureaus recommend that you keep your usage below 33% of your available credit.
Step 5: Beware the Credit Card Transfer Game
For years, people have saved money by transferring high-interest credit card balances to low-interest cards. This can still be helpful, but be aware that using one credit line to pay off another sets off credit score alarm bells -- even if all you're doing is consolidating your accounts. All other things being equal, your credit score will be higher if you have a bunch of small balances on a number of different cards, rather than a big balance on just one or two.
Step 6: If You Rack Up High Balances, Pay Your Card Bill Early
The "Amounts Owed" part of your credit score is based on the balance due listed on your most recent credit card statements. So even if you pay your bills in full each month, running up high balances can still hurt your score. Avoid this problem by paying down all or part of your bill before the end of your statement period, thus reducing the balance that will be reported to FICO and the credit bureaus.
Step 7: Hang On to Your Old Accounts
Part of your credit score is based on how long you have had credit accounts. Closing old accounts shortens your credit history and reduces your total credit -- neither of which is good for your credit score. Keep the older accounts open, even if you aren't using them.
Step 8: Use Your Old Cards
The credit card industry has gotten much stricter about closing inactive accounts. This can hurt your credit score, since it reduces the average age of your credit accounts. To prevent this from happening, you should pull out your old cards and start putting at least one charge on them every month.
Step 9: Demonstrate That You Can Be Responsible
The best way to raise your credit score is to demonstrate that you can handle credit responsibly -- which means not borrowing too much and paying back what you borrow on time. Don't open new accounts just to increase your available credit or create a better variety of credit. You should open new credit accounts only if and when you need them.
Step 10: Shop for Loans Quickly
When you apply for a loan, the lender will "run your credit" -- that is, send out an inquiry to one of the credit-rating agencies to find out how credit-worthy you are. Too many such inquiries can hurt your FICO score, since it could indicate that you're trying to borrow money from different sources. Of course, you can also generate a lot of different inquiries by shopping for the best mortgage or auto loan. The FICO scoring system is designed to allow for this by considering the length of time over which a series of inquiries is made. So, try to do all of your loan shopping within 30 days.
Step 11: Know the Difference Between a 'Soft Inquiry' and a 'Hard Inquiry'
The credit bureaus all recognize the difference between you checking your own score (a "soft inquiry") and lenders checking your score (a "hard inquiry"). While too many hard inquiries can lower your score, soft inquiries don't count at all. Feel free to check your score as often as you want.
Step 12: Buy a 3-and-1 Report, and a Credit-Monitoring Package and Identity-Theft Service
Your credit score and credit report are so important that it makes sense to pay for a 3-and-1 Report (which provides you with your credit scores from the three bureaus) as well as an identity-theft monitoring service. In most cases, these services will cost you between $14.95 and $19.95 a month -- I personally pay for these services myself because I think it's worth the investment.
Congratulations! You now know more than 95% of all Americans about what may well be the most important influence over your financial life -- your credit record and score. Make lifelong monitoring of your credit part of a debt-free lifestyle! For more resources and tools go to finishrich.com.
Friday, February 25, 2011
Top Five Credit Score Myths
A good credit score is one of the basic building blocks to financial stability. However, even well-informed consumers may still believe in one or two of the commonly-believed myths about those crucial three digits.
"We're seeing a lot of myths out there and a lot of misperceptions consumers have about their credit scores," says Melinda Opperman, senior vice president of community outreach and industry relations at Springboard Nonprofit Consumer Credit Management.
Financial educators and industry experts share and dispel here the most common fallacies surrounding credit scores. Here's the real truth about your credit score-
Myth: Paying your bills on time and carrying a balance on your credit cards will give you a good credit score.
Yes, making payments on time is important, since late payments can drag down your score significantly, but it's not enough to ensure that your score will be high. That's because 30% of your credit score is based on what's called your utilization ratio - how much of your available credit has been tapped at any given point.
"Folks think they have to carry a balance on their cards in order to get a good credit score," says Opperman. "We let them know they just have to make a purchase and then make a timely payment." If you have cards with high balances, even if you make your minimum payments promptly every month, the large amount of debt you're carrying makes you look like a higher risk to the credit bureaus and will reflect poorly on your score.
Myth: You have to make a huge financial mistake for your credit score to be negatively affected.
Bankruptcy? Foreclosure? Sure, those kind of economic calamities will deliver a big hit to your score, but you don't have to be fielding collection calls at all hours for your score to suffer. In fact, just one late payment can be detrimental, and something as innocuous as opening a slew of store credit cards for the promotional discount can make you look like a credit risk, according to the credit scoring formula.
"One common myth is that credit scores are static, that they don't change that often or that you have to do something huge for them to change," says Natalie Lohrenz, director of counseling at the Consumer Credit Counseling Service of Orange County. But since a credit score is just a snapshot of your credit's health at any given time, it's going to vary at least a little bit from time to time. To put it in more concrete terms, you wouldn't expect your blood pressure to be exactly the same every time you go to the doctor, right? Your credit score goes up and down just a little bit the same way. Conversely, since your score is in constant fluctuation, you shouldn't stress over a point here or there, Lohrenz says.
Myth: The only part of your credit history that matters is your three-digit score.
Terry Clemans, executive director of the National Credit Reporting Association, says many Americans only focus on their score number, to the exclusion of their actual credit report, from which the score is derived. Lohrenz agrees and add, "People shouldn't really obsess so much about the score. Watch the report." In fact, the report is at least as important as the actual number, which is why experts recommend checking it regularly for outdated or erroneous information that can lower your score.
If you don't want to pay for a credit report, you can get one free once a year from each of the three bureaus at annualcreditreport.com, and if you live in certain states, you may be entitled to additional copies. Monitoring your report regularly not only cuts down on your risk of identity theft (since you'll be able to see if someone is trying to obtain credit in your name) but gives you a better sense of how your financial activities are displayed to lenders.
Checking your score won't lower it!
Myth: You can improve bad credit quickly.
You really can't blame ordinary Americans for falling prey to this myth, given that there's an entire industry that purports to boost your credit at warp speed. "One common myth is 'If I want to improve my credit, I have to go to a credit repair agency,' " says Barry Paperno, consumer operations manager for MyFICO.com. As we've discussed before, companies that promise to "clean up," fix or increase your credit score are bad news. At best, they'll blanket your creditors with frivolous requests to review your outstanding debts, which might raise your credit score for a few weeks at most. As far as correcting any erroneous information that might be dragging your score down, you can fix that yourself - for free - by following the instructions on each bureau's website.
While negative notations do stay on your credit report for seven years, Paperno says this doesn't mean your credit will be low for nearly that long. The scoring formula places more weight on recent transactions, so if you had a period of financial instability or irresponsibility in your past, the best way to see your score improve is just to keep paying everything on time now, and paying down big balances to improve your utilization ratio. "The best way to improve your credit score is work with your local bank or credit union and then make timely payments," says Opperman.
Myth: A divorce dissolves jointly-held credit accounts.
When in the midst of a divorce, too many Americans fail to ask how their creditworthiness could be harmed by their former spouse. This is unfortunate, because joint liabilities can come back to haunt you. "Divorce attorneys are not financial counselors," says John Ulzheimer, president of consumer education for SmartCredit.com. "That's not their job, but that's something you have to address."
"If you're a joint account holder, you're equally responsible for that balance," says Paperno. "You need to keep an eye on it, and you need to check your credit regularly to make sure that bill is getting paid." If your spouse promises to keep current on payments on a jointly-held account and fails to follow through, Paperno warns, "Be aware that will impact your score."
"We're seeing a lot of myths out there and a lot of misperceptions consumers have about their credit scores," says Melinda Opperman, senior vice president of community outreach and industry relations at Springboard Nonprofit Consumer Credit Management.
Financial educators and industry experts share and dispel here the most common fallacies surrounding credit scores. Here's the real truth about your credit score-
Myth: Paying your bills on time and carrying a balance on your credit cards will give you a good credit score.
Yes, making payments on time is important, since late payments can drag down your score significantly, but it's not enough to ensure that your score will be high. That's because 30% of your credit score is based on what's called your utilization ratio - how much of your available credit has been tapped at any given point.
"Folks think they have to carry a balance on their cards in order to get a good credit score," says Opperman. "We let them know they just have to make a purchase and then make a timely payment." If you have cards with high balances, even if you make your minimum payments promptly every month, the large amount of debt you're carrying makes you look like a higher risk to the credit bureaus and will reflect poorly on your score.
Myth: You have to make a huge financial mistake for your credit score to be negatively affected.
Bankruptcy? Foreclosure? Sure, those kind of economic calamities will deliver a big hit to your score, but you don't have to be fielding collection calls at all hours for your score to suffer. In fact, just one late payment can be detrimental, and something as innocuous as opening a slew of store credit cards for the promotional discount can make you look like a credit risk, according to the credit scoring formula.
"One common myth is that credit scores are static, that they don't change that often or that you have to do something huge for them to change," says Natalie Lohrenz, director of counseling at the Consumer Credit Counseling Service of Orange County. But since a credit score is just a snapshot of your credit's health at any given time, it's going to vary at least a little bit from time to time. To put it in more concrete terms, you wouldn't expect your blood pressure to be exactly the same every time you go to the doctor, right? Your credit score goes up and down just a little bit the same way. Conversely, since your score is in constant fluctuation, you shouldn't stress over a point here or there, Lohrenz says.
Myth: The only part of your credit history that matters is your three-digit score.
Terry Clemans, executive director of the National Credit Reporting Association, says many Americans only focus on their score number, to the exclusion of their actual credit report, from which the score is derived. Lohrenz agrees and add, "People shouldn't really obsess so much about the score. Watch the report." In fact, the report is at least as important as the actual number, which is why experts recommend checking it regularly for outdated or erroneous information that can lower your score.
If you don't want to pay for a credit report, you can get one free once a year from each of the three bureaus at annualcreditreport.com, and if you live in certain states, you may be entitled to additional copies. Monitoring your report regularly not only cuts down on your risk of identity theft (since you'll be able to see if someone is trying to obtain credit in your name) but gives you a better sense of how your financial activities are displayed to lenders.
Checking your score won't lower it!
Myth: You can improve bad credit quickly.
You really can't blame ordinary Americans for falling prey to this myth, given that there's an entire industry that purports to boost your credit at warp speed. "One common myth is 'If I want to improve my credit, I have to go to a credit repair agency,' " says Barry Paperno, consumer operations manager for MyFICO.com. As we've discussed before, companies that promise to "clean up," fix or increase your credit score are bad news. At best, they'll blanket your creditors with frivolous requests to review your outstanding debts, which might raise your credit score for a few weeks at most. As far as correcting any erroneous information that might be dragging your score down, you can fix that yourself - for free - by following the instructions on each bureau's website.
While negative notations do stay on your credit report for seven years, Paperno says this doesn't mean your credit will be low for nearly that long. The scoring formula places more weight on recent transactions, so if you had a period of financial instability or irresponsibility in your past, the best way to see your score improve is just to keep paying everything on time now, and paying down big balances to improve your utilization ratio. "The best way to improve your credit score is work with your local bank or credit union and then make timely payments," says Opperman.
Myth: A divorce dissolves jointly-held credit accounts.
When in the midst of a divorce, too many Americans fail to ask how their creditworthiness could be harmed by their former spouse. This is unfortunate, because joint liabilities can come back to haunt you. "Divorce attorneys are not financial counselors," says John Ulzheimer, president of consumer education for SmartCredit.com. "That's not their job, but that's something you have to address."
"If you're a joint account holder, you're equally responsible for that balance," says Paperno. "You need to keep an eye on it, and you need to check your credit regularly to make sure that bill is getting paid." If your spouse promises to keep current on payments on a jointly-held account and fails to follow through, Paperno warns, "Be aware that will impact your score."
Thursday, February 24, 2011
Rent Payments Can Now Appear on Experian Credit Reports
For those of you without credit cards or mortgages, there may be a new way to build your credit: Pay your rent on time.
In January, credit reporting agency Experian started including residential rental payment data on its credit reports. Previously, only mortgage payments were recorded because banks report monthly to the credit bureau.
This change will not, however, affect every consumer's credit because most landlords still do not report payments to Experian. But the company does expect the number of people impacted to be in the "low millions."
"For many, rent was their biggest monthly expenditure, and they never got the credit they deserved for making those payments," said Brannan Johnston, vice president and managing director of Experian's Rent Bureau. "Historically only negative information showed up for renters through collections or evictions."
So far, Experian has collected histories from more than 45 property managers across the country through its Rent Bureau division, which it said covers more than 8 million residents nationwide.
But Experian doesn't provide a list of participating properties. If you want to know if your credit will be impacted, you have to ask your management company or order a credit report from Experian.
Renting with bad credit
Through the addition of rental data, one in three consumers falling in the lowest rung of Experian's Vantage Score credit scoring model (receiving a letter grade of an F and scoring between 501 and 600) will move up to at least the next level (with a D-grade and a score between 601 and 700), the agency said.
And not only will including rental data help many consumers improve their credit, it has led Experian to open new files for a third of consumers with rental data in its system -- including college students and anyone without a bank account or credit history.
How to establish your credit score
For those of you who aren't as responsible with your monthly payments, you're safe -- for now. Only positive accounts are currently being included on Experian reports. But the agency hopes to begin adding negative accounts to its reports next year.
While credit card issuers typically consider a payment late after 30 days, you're usually considered late after only 5 days with rental properties, said Johnston.
So instead of including negative data for consumers who have been late paying their rent from time to time, Johnston said Experian is likely only to include negative data if someone moved out of an apartment while still owing money, for example.
Experian is currently the only credit reporting agency to include rental payment data, so your FICO score and credit scores or reports from TransUnion and Equifax won't reflect how good -- or bad -- a renter you are.
In January, credit reporting agency Experian started including residential rental payment data on its credit reports. Previously, only mortgage payments were recorded because banks report monthly to the credit bureau.
This change will not, however, affect every consumer's credit because most landlords still do not report payments to Experian. But the company does expect the number of people impacted to be in the "low millions."
"For many, rent was their biggest monthly expenditure, and they never got the credit they deserved for making those payments," said Brannan Johnston, vice president and managing director of Experian's Rent Bureau. "Historically only negative information showed up for renters through collections or evictions."
So far, Experian has collected histories from more than 45 property managers across the country through its Rent Bureau division, which it said covers more than 8 million residents nationwide.
But Experian doesn't provide a list of participating properties. If you want to know if your credit will be impacted, you have to ask your management company or order a credit report from Experian.
Renting with bad credit
Through the addition of rental data, one in three consumers falling in the lowest rung of Experian's Vantage Score credit scoring model (receiving a letter grade of an F and scoring between 501 and 600) will move up to at least the next level (with a D-grade and a score between 601 and 700), the agency said.
And not only will including rental data help many consumers improve their credit, it has led Experian to open new files for a third of consumers with rental data in its system -- including college students and anyone without a bank account or credit history.
How to establish your credit score
For those of you who aren't as responsible with your monthly payments, you're safe -- for now. Only positive accounts are currently being included on Experian reports. But the agency hopes to begin adding negative accounts to its reports next year.
While credit card issuers typically consider a payment late after 30 days, you're usually considered late after only 5 days with rental properties, said Johnston.
So instead of including negative data for consumers who have been late paying their rent from time to time, Johnston said Experian is likely only to include negative data if someone moved out of an apartment while still owing money, for example.
Experian is currently the only credit reporting agency to include rental payment data, so your FICO score and credit scores or reports from TransUnion and Equifax won't reflect how good -- or bad -- a renter you are.
Tuesday, February 8, 2011
Housing Recovery Predicted to Start in 3rd Qtr. 2011
Many Markets Set to Improve Starting Around September of This Year
Local Prediction -
1. State: CT
2. City/Market: Bridgeport-Stamford-Norwalk, CT
Forecast change: third quarter, 2011 – third quarter, 2012 / +1.0%
Market fundamentals -
Median Family Income (2009) $104,000
Median Home Price (Third quarter 2010) $515,000
Change in Home Prices (From 3rd quarter 2009 thru 3rd quarter 2010) +1.2%
Worst 1-Year Home Price Change (1980-2010) -11.7% (2009:Q2)
Local Prediction -
1. State: CT
2. City/Market: Bridgeport-Stamford-Norwalk, CT
Forecast change: third quarter, 2011 – third quarter, 2012 / +1.0%
Market fundamentals -
Median Family Income (2009) $104,000
Median Home Price (Third quarter 2010) $515,000
Change in Home Prices (From 3rd quarter 2009 thru 3rd quarter 2010) +1.2%
Worst 1-Year Home Price Change (1980-2010) -11.7% (2009:Q2)
Wednesday, February 2, 2011
10 Things That Will Go Mainstream in 2011
What's new about the soon to be norm? Read on to see what products are about to become mainstream.Less than a decade ago, environmentalists were labeled "tree huggers," or called "granola" and "crunchy." Today, "being green" is no longer on the fringe -- it's a cultural norm. Recycling is a standard practice (mandatory in many places). Martha Stewart just announced her plans to launch a line of green homes and kids' television stations promote programs like Disney's Friends for Change to encourage youngsters to "Green Their Scene."
Another trend we've seen go front-and-center is frugality. Beginning around 2009, the U.S. recession made thrift commonplace. People who once mocked coupon-cutting turned to it in droves. Economically chastened Americans said goodbye to conspicuous consumption and hello to living within their means.
This past year was also when e-readers (like the Kindle) and gourmet food trucks exploded onto the scene and worked their way into the hearts of Main Street Americans. So what niche items or practices are set to go mainstream?
Here are 10 that we expect to gain mass acceptance in 2011 -
1. Paying With Your Cell Phone
We will likely to begin paying for items just like other countries have already done such as China and European countries. Need a caffeine fix, but forgot your wallet? No worries. Stroll into any Starbucks in America and you can now pay using your iPhone or Blackberry smartphone. The pay-by-phone service is free and works via a mobile app tied to your existing Starbucks card. In early 2010, Target launched a similar app where users can access their gift cards from their smartphones. And then there's Apple. Rumors abound that the next version iPhone and iPad will contain "near field communication" (NFC) chips which would allow users to make purchases by just waving their devices. CNNMoney has gone as far to say that "credit cards may soon be as outdated as vinyl records." We agree.
2. Tablets
A little more than a year ago, there was virtually no market for tablet PCs. Then came the iPad. Announced on Jan. 27, 2010 and debuting in April, Apple shipped 7.33 million of the devices by year's end. And while iPad sales etimates for 2011 vary widely, some analysts predict that as many as 65 million units could be shipped this year. And that's not to mention the flood of competitors entering the tablet computer market. Let the tablet wars begin!
3. Bolder Beers
Go bold or go home. That should be the mantra of today's brewers. A quarter of a century ago, the American beer landscape was dominated by light lagers. Then smaller brewers began gathering fans as they crafted beers with bolder flavors. Now Portfolio.com reports that in the first half of 2010 these craft breweries saw a 12% year-over-year growth, while the U.S. beer industry overall fell by 2.7%. Major brewers, like MillerCoors LLC, have taken notice. In August 2010, it launched an independent corporate division to focus attention on its craft and import beer business, which includes brands like its successful Blue Moon Belgian-style wheat ale. We expect to see more major breweries innovate as they try to keep up with beer-drinkers' changing palates.
4. Mobile TV / Users Canceling Cable TV Service
In 2010, for the first time ever, pay TV subscriptions in the U.S. declined. That downward trend is not likely to be reversed, and may even accelerate. As mobile TV providers improve their services, more and more users will find it less painful to cut those (cable) cords that bind. In addition, your options for TV-on-the-go will be plentiful this year.
5. Black Rice
CNN asks, is black rice the new brown? Like brown rice, it's full of antioxidant-rich bran, but it also contains "anthocyanins" which have been linked to reducing blood levels of LDL cholesterol and helping to fight heart disease. Lotus Foods first introduced black rice to the U.S. market in 1995. They explain that the ancient grain was once eaten exclusively by the emperors of China. Today you can find it supermarkets like Whole Foods. We expect to see it on more grocery-store shelves and restaurant menus in the coming year.
6. Clean Eating
Wait, what is clean eating you ask? It's a nutritional lifestyle centered around eating foods that are minimally processed and as close to their original sources as possible. Once just the stuff of weight lifters, fitness competitors and health-food fanatics, this way of eating has reached a whole new audience thanks to people like Tosca Reno. At the age of 40, Tosca transformed herself with clean eating. She has since created a media empire based on her Eat-Clean Diet that includes 10 books, a magazine, a blog, a reality show, seminars and more. You will see this clean-eating trend mirrored in manufacturers and restaurants touting products with "simplified ingredients."
7. Tube-Free Toilet Paper
In October 2010, Kimberly-Clark rolled out the first tube-free toilet paper product, under the Scott brand. This environmentally-friendly invention eliminates the wasteful brown cardboard tube which contributes up to 160 million pounds of trash in the U.S. each year. We expect this to catch on with consumers, and that competitors like Procter & Gamble, SCA and Georgia Pacific will follow suit and begin manufacturing their own tube-less brands.
8. Home Automation
It's worth noting that the technologies to link your home appliances with WiFi and smartphone apps have been around for many years, but 2011 may really be the year that it all comes together. For example, in January LG announced a new line of Thinq appliances that will allow users to control and monitor their oven, washing machine, refrigerator and vacuum from outside the home. Get ready, the future is now.
9. 4G Wireless
4G networks offer faster wireless broadband speeds than have been available before. The first claim to this speed was by the Clearwire/Sprint partnership. Next was T-Mobile. Verizon launched its 4G network (using Long Term Evolution or "LTE" technology) in a few dozen markets in late 2010. According to Forbes, it has promised full network coverage by 2013, as will AT&T. But, in general, we anticipate an explosion in 4G-compatible handsets and increased coverage areas in 2011.
10. Mobile Coupons
Cutting out and remembering to bring along paper coupons is tedious. Maybe that is why smartphone users are so receptive to receiving digital coupons. Regardless of the reason, mobile coupon spending is expected to reach $1 billion by 2011. In addition, Daniel Schock, retail industry director for Google says, "We can tell you searches for mobile coupons have more than doubled since 2008." With a primed-and-ready audience, we expect more and more retailers to adopt mobile coupons this year.
Another trend we've seen go front-and-center is frugality. Beginning around 2009, the U.S. recession made thrift commonplace. People who once mocked coupon-cutting turned to it in droves. Economically chastened Americans said goodbye to conspicuous consumption and hello to living within their means.
This past year was also when e-readers (like the Kindle) and gourmet food trucks exploded onto the scene and worked their way into the hearts of Main Street Americans. So what niche items or practices are set to go mainstream?
Here are 10 that we expect to gain mass acceptance in 2011 -
1. Paying With Your Cell Phone
We will likely to begin paying for items just like other countries have already done such as China and European countries. Need a caffeine fix, but forgot your wallet? No worries. Stroll into any Starbucks in America and you can now pay using your iPhone or Blackberry smartphone. The pay-by-phone service is free and works via a mobile app tied to your existing Starbucks card. In early 2010, Target launched a similar app where users can access their gift cards from their smartphones. And then there's Apple. Rumors abound that the next version iPhone and iPad will contain "near field communication" (NFC) chips which would allow users to make purchases by just waving their devices. CNNMoney has gone as far to say that "credit cards may soon be as outdated as vinyl records." We agree.
2. Tablets
A little more than a year ago, there was virtually no market for tablet PCs. Then came the iPad. Announced on Jan. 27, 2010 and debuting in April, Apple shipped 7.33 million of the devices by year's end. And while iPad sales etimates for 2011 vary widely, some analysts predict that as many as 65 million units could be shipped this year. And that's not to mention the flood of competitors entering the tablet computer market. Let the tablet wars begin!
3. Bolder Beers
Go bold or go home. That should be the mantra of today's brewers. A quarter of a century ago, the American beer landscape was dominated by light lagers. Then smaller brewers began gathering fans as they crafted beers with bolder flavors. Now Portfolio.com reports that in the first half of 2010 these craft breweries saw a 12% year-over-year growth, while the U.S. beer industry overall fell by 2.7%. Major brewers, like MillerCoors LLC, have taken notice. In August 2010, it launched an independent corporate division to focus attention on its craft and import beer business, which includes brands like its successful Blue Moon Belgian-style wheat ale. We expect to see more major breweries innovate as they try to keep up with beer-drinkers' changing palates.
4. Mobile TV / Users Canceling Cable TV Service
In 2010, for the first time ever, pay TV subscriptions in the U.S. declined. That downward trend is not likely to be reversed, and may even accelerate. As mobile TV providers improve their services, more and more users will find it less painful to cut those (cable) cords that bind. In addition, your options for TV-on-the-go will be plentiful this year.
5. Black Rice
CNN asks, is black rice the new brown? Like brown rice, it's full of antioxidant-rich bran, but it also contains "anthocyanins" which have been linked to reducing blood levels of LDL cholesterol and helping to fight heart disease. Lotus Foods first introduced black rice to the U.S. market in 1995. They explain that the ancient grain was once eaten exclusively by the emperors of China. Today you can find it supermarkets like Whole Foods. We expect to see it on more grocery-store shelves and restaurant menus in the coming year.
6. Clean Eating
Wait, what is clean eating you ask? It's a nutritional lifestyle centered around eating foods that are minimally processed and as close to their original sources as possible. Once just the stuff of weight lifters, fitness competitors and health-food fanatics, this way of eating has reached a whole new audience thanks to people like Tosca Reno. At the age of 40, Tosca transformed herself with clean eating. She has since created a media empire based on her Eat-Clean Diet that includes 10 books, a magazine, a blog, a reality show, seminars and more. You will see this clean-eating trend mirrored in manufacturers and restaurants touting products with "simplified ingredients."
7. Tube-Free Toilet Paper
In October 2010, Kimberly-Clark rolled out the first tube-free toilet paper product, under the Scott brand. This environmentally-friendly invention eliminates the wasteful brown cardboard tube which contributes up to 160 million pounds of trash in the U.S. each year. We expect this to catch on with consumers, and that competitors like Procter & Gamble, SCA and Georgia Pacific will follow suit and begin manufacturing their own tube-less brands.
8. Home Automation
It's worth noting that the technologies to link your home appliances with WiFi and smartphone apps have been around for many years, but 2011 may really be the year that it all comes together. For example, in January LG announced a new line of Thinq appliances that will allow users to control and monitor their oven, washing machine, refrigerator and vacuum from outside the home. Get ready, the future is now.
9. 4G Wireless
4G networks offer faster wireless broadband speeds than have been available before. The first claim to this speed was by the Clearwire/Sprint partnership. Next was T-Mobile. Verizon launched its 4G network (using Long Term Evolution or "LTE" technology) in a few dozen markets in late 2010. According to Forbes, it has promised full network coverage by 2013, as will AT&T. But, in general, we anticipate an explosion in 4G-compatible handsets and increased coverage areas in 2011.
10. Mobile Coupons
Cutting out and remembering to bring along paper coupons is tedious. Maybe that is why smartphone users are so receptive to receiving digital coupons. Regardless of the reason, mobile coupon spending is expected to reach $1 billion by 2011. In addition, Daniel Schock, retail industry director for Google says, "We can tell you searches for mobile coupons have more than doubled since 2008." With a primed-and-ready audience, we expect more and more retailers to adopt mobile coupons this year.
Should I Take Out a Reverse Mortgage?
A reverse mortgage can be a good way for people 62 and older to turn their home equity into extra spending cash that can supplement Social Security and withdrawals from savings, making retirement more enjoyable than it otherwise might be.
Typically, you can take the loan proceeds in a lump sum, monthly payments for life, as a credit line or a combination of these.
One of the big appeals of this type of arrangement -- as opposed to, say, tapping your home equity by refinancing or opening a home equity line of credit -- is that you don't have to repay the loan until you die or move out of your house.
Another plus is that the payments you receive from a reverse mortgage don't affect your Social Security benefits (although they could affect your eligibility for programs like Medicaid and Supplemental Security Income, or SSI, the program that provides income to people with low incomes and disabilities).
Until recently, though, there's been a practical problem for anyone who plans to use a reverse mortgage primarily as a line of credit that could be drawn upon when and if needed, versus taking out a large amount for some immediate need (renovating a home, replacing a car, whatever).
That problem: In addition to interest expense and an annual insurance charge (now 1.25% a year) on the outstanding balance, the Department of Housing and Urban Development's popular Home Equity Conversion Mortgage reverse mortgage program (aka HECM Standard) also levies an initial one-time insurance premium of 2% of the value of your home.
That amounts to $6,000 for a $300,000 home. You don't have to pay this charge out of pocket. Still, it boosts the overall cost of borrowing, and can significantly drive up the effective annual interest rate you pay if you wind up drawing very little against the reverse mortgage or if you die or move from your home shortly after taking out the loan.
But in October, HUD unveiled a new reverse mortgage program, known as HECM Saver, that whittles down the initial insurance premium from 2% to 0.01% of your home's value, reducing that one-time charge from $6,000 to just $30 on a $300,000 home.
You'll still incur interest charges and the annual insurance fee. But by lowering the upfront cost, the HECM Saver potentially makes a reverse mortgage a more viable option if you intend to use it primarily as a back-up line of credit or an emergency fund, or if you think you will use it sparingly or not remain in your home for many years.
I say "potentially" for two reasons. For one thing, you'll still have to pay closing costs on the loan, which can include such expenses as an appraisal, title search and insurance, credit checks, mortgage taxes and a loan origination fee.
Lenders can charge an origination fee of as much as $2,500 if your home's value is less than $125,000. If your home is worth more than that, lenders can charge 2% of the first $200,000 of your home's value plus an additional 1% on the amount over $200,000.
That translates to a $5,000 origination fee on a $300,000 home. (The origination fee is capped at $6,000.) Some lenders may be willing to waive origination fees and pick up a portion of other upfront costs, such as the initial insurance premium.
But you'll still want to take a close look at what you're being charged upfront and decide if that amount makes sense given the likely amount you'll be borrowing.
You should also know that because it levies a lower initial insurance premium, the HECM Saver doesn't allow you to borrow as much as you can with a HECM Standard reverse mortgage.
For example, a 62-year-old who owns a $300,000 home with no mortgage debt might qualify for just under $102,000 with an adjustable rate HECM Saver.
Under the HECM Standard program, that same person might be able to borrow almost $141,000. (To see how much you might get under each program given your age, where you live and the market value of your home, check out AARP's reverse mortgage calculator.)
No matter how enticing getting money on the house might seem, remember, a reverse mortgage isn't something you should take on lightly. As part of the deal, you're required to pay homeowners insurance premiums and property taxes. You must also maintain the property in good condition.
Fail to do so, and you could be forced to repay the loan even if you're still living in the house. If you don't have other resources to do that, you would have to sell. So before signing up for a reverse mortgage, consider whether there are other options for you and your spouse.
In some cases, retirees can be better off tapping a cash-value life insurance or freeing up their home equity by downsizing to smaller or less expensive digs that have lower ongoing maintenance and utility costs.
Fortunately, HUD has beefed up the mandatory no- or low-cost counseling that borrowers must get before taking out a reverse mortgage.
And to help people considering a reverse mortgage more fully understand the pros and cons of such a loan, counseling agencies must now provide potential reverse mortgage borrowers with a packet of information before the counseling session, including material for assessing these loans' true costs and a booklet from the National Council on Aging that outlines how reverse mortgages work.
Remember too that while HECM reverse mortgages are insured by the federal government, the loans themselves are made by private lenders who do not set identical terms.
So compare the offerings of several lenders before settling on a loan. You can find tips on choosing the best loan by clicking here. I also suggest you peruse the material on the reverse mortgage section of AARP's website.
Finally, a recent Consumers Union report contends that some unscrupulous reverse mortgage lenders push these loans on people who might be better off without them or even use reverse mortgages to perpetuate various financial scams.
I've also warned about such abuses as putative advisers recommending reverse mortgages and then persuading borrowers to invest the money in high-cost investments like annuities. So certainly, you and your wife should look into a reverse mortgage as a way of getting some extra income.
But don't commit until you've thought about other options, you understand all the costs and you're convinced that the person making the loan is on the up and up.
Typically, you can take the loan proceeds in a lump sum, monthly payments for life, as a credit line or a combination of these.
One of the big appeals of this type of arrangement -- as opposed to, say, tapping your home equity by refinancing or opening a home equity line of credit -- is that you don't have to repay the loan until you die or move out of your house.
Another plus is that the payments you receive from a reverse mortgage don't affect your Social Security benefits (although they could affect your eligibility for programs like Medicaid and Supplemental Security Income, or SSI, the program that provides income to people with low incomes and disabilities).
Until recently, though, there's been a practical problem for anyone who plans to use a reverse mortgage primarily as a line of credit that could be drawn upon when and if needed, versus taking out a large amount for some immediate need (renovating a home, replacing a car, whatever).
That problem: In addition to interest expense and an annual insurance charge (now 1.25% a year) on the outstanding balance, the Department of Housing and Urban Development's popular Home Equity Conversion Mortgage reverse mortgage program (aka HECM Standard) also levies an initial one-time insurance premium of 2% of the value of your home.
That amounts to $6,000 for a $300,000 home. You don't have to pay this charge out of pocket. Still, it boosts the overall cost of borrowing, and can significantly drive up the effective annual interest rate you pay if you wind up drawing very little against the reverse mortgage or if you die or move from your home shortly after taking out the loan.
But in October, HUD unveiled a new reverse mortgage program, known as HECM Saver, that whittles down the initial insurance premium from 2% to 0.01% of your home's value, reducing that one-time charge from $6,000 to just $30 on a $300,000 home.
You'll still incur interest charges and the annual insurance fee. But by lowering the upfront cost, the HECM Saver potentially makes a reverse mortgage a more viable option if you intend to use it primarily as a back-up line of credit or an emergency fund, or if you think you will use it sparingly or not remain in your home for many years.
I say "potentially" for two reasons. For one thing, you'll still have to pay closing costs on the loan, which can include such expenses as an appraisal, title search and insurance, credit checks, mortgage taxes and a loan origination fee.
Lenders can charge an origination fee of as much as $2,500 if your home's value is less than $125,000. If your home is worth more than that, lenders can charge 2% of the first $200,000 of your home's value plus an additional 1% on the amount over $200,000.
That translates to a $5,000 origination fee on a $300,000 home. (The origination fee is capped at $6,000.) Some lenders may be willing to waive origination fees and pick up a portion of other upfront costs, such as the initial insurance premium.
But you'll still want to take a close look at what you're being charged upfront and decide if that amount makes sense given the likely amount you'll be borrowing.
You should also know that because it levies a lower initial insurance premium, the HECM Saver doesn't allow you to borrow as much as you can with a HECM Standard reverse mortgage.
For example, a 62-year-old who owns a $300,000 home with no mortgage debt might qualify for just under $102,000 with an adjustable rate HECM Saver.
Under the HECM Standard program, that same person might be able to borrow almost $141,000. (To see how much you might get under each program given your age, where you live and the market value of your home, check out AARP's reverse mortgage calculator.)
No matter how enticing getting money on the house might seem, remember, a reverse mortgage isn't something you should take on lightly. As part of the deal, you're required to pay homeowners insurance premiums and property taxes. You must also maintain the property in good condition.
Fail to do so, and you could be forced to repay the loan even if you're still living in the house. If you don't have other resources to do that, you would have to sell. So before signing up for a reverse mortgage, consider whether there are other options for you and your spouse.
In some cases, retirees can be better off tapping a cash-value life insurance or freeing up their home equity by downsizing to smaller or less expensive digs that have lower ongoing maintenance and utility costs.
Fortunately, HUD has beefed up the mandatory no- or low-cost counseling that borrowers must get before taking out a reverse mortgage.
And to help people considering a reverse mortgage more fully understand the pros and cons of such a loan, counseling agencies must now provide potential reverse mortgage borrowers with a packet of information before the counseling session, including material for assessing these loans' true costs and a booklet from the National Council on Aging that outlines how reverse mortgages work.
Remember too that while HECM reverse mortgages are insured by the federal government, the loans themselves are made by private lenders who do not set identical terms.
So compare the offerings of several lenders before settling on a loan. You can find tips on choosing the best loan by clicking here. I also suggest you peruse the material on the reverse mortgage section of AARP's website.
Finally, a recent Consumers Union report contends that some unscrupulous reverse mortgage lenders push these loans on people who might be better off without them or even use reverse mortgages to perpetuate various financial scams.
I've also warned about such abuses as putative advisers recommending reverse mortgages and then persuading borrowers to invest the money in high-cost investments like annuities. So certainly, you and your wife should look into a reverse mortgage as a way of getting some extra income.
But don't commit until you've thought about other options, you understand all the costs and you're convinced that the person making the loan is on the up and up.
Monday, January 31, 2011
Banks Have Been Repurchasing Sub-Par Loans from Boom Years
Leaning on the Megabanks Can Pay Off, if You've Got a Little Muscle and a Lot of Patience
Banks had paid $21 billion through this past summer to repurchase souring home loans from Fannie Mae and Freddie Mac, the taxpayer-backed mortgage companies, under contracts that oblige lenders or loan servicers to buy back loans that aren't up to snuff.
That covers about 13% of the mortgage companies' credit losses since their government takeover, according to a report released this month by the Financial Crisis Inquiry Commission.
Yet it's just a sliver of the $529 billion of profits U.S. banks booked during the heyday of the housing bubble, between 2003 and 2006 -- and it may be just a small fraction of the sums they will fork over in looming mortgage battles with insurers and private investors.
Banks That Have Repurchased the Most Loans from Fannie Mae -
Bank of America - $5.8 Billion
JP Morgan Chase - $3.6 Billion
Wells Fargo - $2.9 Billion
GMAC/Ally - $1.2 Billion
Suntrust - $1.1 Billion
Citigroup - $1.1 Billion
Estimates of bank exposure to so-called private label mortgage put-backs run into the tens of billions. Settling remaining claims by Fannie and Freddie, by contrast, may not cost much more than a few billion - which makes it that much more exasperating to see the banks playing their foot-dragging games.
The bank that has gotten the most bad mortgages bounced back to it by Fannie and Freddie is, no surprise, Bank of America, the North Carolina-based owner of the notorious Countrywide subprime mill. Over the past four years, it got $6.9 billion in repurchase requests from Fannie alone – as much as its next four competitors combined.
Data released by the FCIC show the bank paid Fannie and Freddie almost $6 billion over the past four years to settle mortgage repurchase requests – and that was before the settlement this month under which it forked over an added $2.8 billion.
Yet despite that show of comity, the banks aren't going quietly. For every three bad loans repurchased as of September, there were two more requests from Fannie and Freddie that the banks hadn't honored.
That number has come down some since Bank of America and Ally, formerly known as GMAC, agreed to settlements with Fannie and Freddie. Even so, some $10 billion of repurchase requests remain open – and there is some evidence the banks have been dragging their feet in paying up.
As of September, about a third of the outstanding repurchase requests issued by Fannie and Freddie had been outstanding for at least four months, the companies said in their latest quarterly filings with regulators. Banks, "including many of our larger seller/servicers, have not fully performed their repurchase obligations in a timely manner," Freddie noted in its filing.
The firm went on to say the banks' tardiness had caused it to "begun to require certain of our larger seller/servicers to commit to plans for completing repurchases, with financial consequences or with stated remedies for non-compliance, as part of the annual renewals of our contracts with them."
The struggles of Fannie and Freddie to collect on their repurchase demands are remarkable because rules are on the government-sponsored entities' side. The contracts they sign with mortgage originators and servicers give Fannie and Freddie the clear right to force bankers to buy back loans that fail to meet the companies' guidelines.
By contrast, the rules in private label disputes – ones pitting the banks with investors such as pension funds that bought mortgage-backed bonds without Fannie and Freddie's involvement – are much murkier, a situation the banks expect to use to their advantage.
Even so, analysts at Deutsche Bank, for instance, expect Bank of America to shell out $15 billion or so to settle private label mortgage disputes in coming years -- well above the $9 billion analysts expect it to pay to settle its Fannie-Freddie liabilities. That's because the underwriting on the private label bonds tends to have been so much worse, which has translated into many more suspicious-looking early defaults to make good on.
In contrast, the numbers presented in the FCIC report make most of the big banks' exposure to Fannie Mae mortgage repurchases look downright manageable. Were they to settle on the same terms as BofA, for instance, Wells Fargo would pay Fannie $321 million, Citi $247 million and JPMorgan Chase $193 million. Unlike Fannie, Freddie Mac didn't disclose outstanding repurchase requests by bank in its FCIC submissions.
But now that the worst actor, Countrywide, has cleared up many of its disputes with the GSEs, the stakes are apparently so low that no one is in a hurry to settle.
"It's kind of the moot point, but if [Fannie and Freddie] wanted to settle it all at once, it'd be fine with us," JP Morgan Chase chief Jamie Dimon said.
Banks had paid $21 billion through this past summer to repurchase souring home loans from Fannie Mae and Freddie Mac, the taxpayer-backed mortgage companies, under contracts that oblige lenders or loan servicers to buy back loans that aren't up to snuff.
That covers about 13% of the mortgage companies' credit losses since their government takeover, according to a report released this month by the Financial Crisis Inquiry Commission.
Yet it's just a sliver of the $529 billion of profits U.S. banks booked during the heyday of the housing bubble, between 2003 and 2006 -- and it may be just a small fraction of the sums they will fork over in looming mortgage battles with insurers and private investors.
Banks That Have Repurchased the Most Loans from Fannie Mae -
Bank of America - $5.8 Billion
JP Morgan Chase - $3.6 Billion
Wells Fargo - $2.9 Billion
GMAC/Ally - $1.2 Billion
Suntrust - $1.1 Billion
Citigroup - $1.1 Billion
Estimates of bank exposure to so-called private label mortgage put-backs run into the tens of billions. Settling remaining claims by Fannie and Freddie, by contrast, may not cost much more than a few billion - which makes it that much more exasperating to see the banks playing their foot-dragging games.
The bank that has gotten the most bad mortgages bounced back to it by Fannie and Freddie is, no surprise, Bank of America, the North Carolina-based owner of the notorious Countrywide subprime mill. Over the past four years, it got $6.9 billion in repurchase requests from Fannie alone – as much as its next four competitors combined.
Data released by the FCIC show the bank paid Fannie and Freddie almost $6 billion over the past four years to settle mortgage repurchase requests – and that was before the settlement this month under which it forked over an added $2.8 billion.
Yet despite that show of comity, the banks aren't going quietly. For every three bad loans repurchased as of September, there were two more requests from Fannie and Freddie that the banks hadn't honored.
That number has come down some since Bank of America and Ally, formerly known as GMAC, agreed to settlements with Fannie and Freddie. Even so, some $10 billion of repurchase requests remain open – and there is some evidence the banks have been dragging their feet in paying up.
As of September, about a third of the outstanding repurchase requests issued by Fannie and Freddie had been outstanding for at least four months, the companies said in their latest quarterly filings with regulators. Banks, "including many of our larger seller/servicers, have not fully performed their repurchase obligations in a timely manner," Freddie noted in its filing.
The firm went on to say the banks' tardiness had caused it to "begun to require certain of our larger seller/servicers to commit to plans for completing repurchases, with financial consequences or with stated remedies for non-compliance, as part of the annual renewals of our contracts with them."
The struggles of Fannie and Freddie to collect on their repurchase demands are remarkable because rules are on the government-sponsored entities' side. The contracts they sign with mortgage originators and servicers give Fannie and Freddie the clear right to force bankers to buy back loans that fail to meet the companies' guidelines.
By contrast, the rules in private label disputes – ones pitting the banks with investors such as pension funds that bought mortgage-backed bonds without Fannie and Freddie's involvement – are much murkier, a situation the banks expect to use to their advantage.
Even so, analysts at Deutsche Bank, for instance, expect Bank of America to shell out $15 billion or so to settle private label mortgage disputes in coming years -- well above the $9 billion analysts expect it to pay to settle its Fannie-Freddie liabilities. That's because the underwriting on the private label bonds tends to have been so much worse, which has translated into many more suspicious-looking early defaults to make good on.
In contrast, the numbers presented in the FCIC report make most of the big banks' exposure to Fannie Mae mortgage repurchases look downright manageable. Were they to settle on the same terms as BofA, for instance, Wells Fargo would pay Fannie $321 million, Citi $247 million and JPMorgan Chase $193 million. Unlike Fannie, Freddie Mac didn't disclose outstanding repurchase requests by bank in its FCIC submissions.
But now that the worst actor, Countrywide, has cleared up many of its disputes with the GSEs, the stakes are apparently so low that no one is in a hurry to settle.
"It's kind of the moot point, but if [Fannie and Freddie] wanted to settle it all at once, it'd be fine with us," JP Morgan Chase chief Jamie Dimon said.
Friday, January 28, 2011
Reuters Poll: Housing Bottom Seen in Mid - 2011
U.S. house prices are likely to continue to slide before bottoming out sometime in the middle of this year but will rise just over two percent in 2011 as a whole, according to economists polled by Reuters.
Asked when they see a bottom for U.S. house prices, 14 of 26 economists said they would trough in either the second or third quarter of 2011. Three saw the bottom coming as early as this quarter, while one did not see a bottom until the first three months of 2014.
"A pullback in prices following the expiration of the homebuyers tax credit was not a surprise. Ultimately, a recovery in the housing sector will depend critically on the job market, which should improve over time," said Scott Brown at Raymond James.
The Standard & Poor's/Case-Shiller composite index of 20 metropolitan areas, which has struggled since home-buyer tax credits expired earlier this year, declined 0.5 percent in November from October on a seasonally adjusted basis, the fifth straight monthly decline in home prices.
Asked how much further prices would fall before stabilizing, the median response of 24 economists who answered was another 3.3 percent drop from current levels. Two economists saw a further decline as sharp as 10 percent.
But medians showed prices, which economists say will have lost a third of their value from peak to trough, would rise 2.1 percent this year, up from the 1.0 percent prediction in a poll taken in November.
Economists saw house prices as fairly valued now. Asked to rate current prices on a scale of 1-10, with 10 being overvalued and 1 being undervalued, 27 of 32 respondents answered with a 4, 5 or 6. Just one responded with a 7 and one responded with a 2.
The average home sales price in the United States was $169,800 in the fourth quarter of 2010, according to the National Association of Realtors.
Sales of U.S. new homes raced to their highest level in eight months in December, but gains were driven by a surge in the West. Even with last month's gain, new-home sales are down 75 percent from their peak of 1.283 million-unit pace in 2005.
"Housing is showing a ray of hope, but is still far from healed," said Diane Swonk of Mesirow Financial. "The level of activity in the market, in particular new home sales, will take much longer to recover to reasonable levels."
The poll was conducted over the past week and included a total of 33 economists.
Asked when they see a bottom for U.S. house prices, 14 of 26 economists said they would trough in either the second or third quarter of 2011. Three saw the bottom coming as early as this quarter, while one did not see a bottom until the first three months of 2014.
"A pullback in prices following the expiration of the homebuyers tax credit was not a surprise. Ultimately, a recovery in the housing sector will depend critically on the job market, which should improve over time," said Scott Brown at Raymond James.
The Standard & Poor's/Case-Shiller composite index of 20 metropolitan areas, which has struggled since home-buyer tax credits expired earlier this year, declined 0.5 percent in November from October on a seasonally adjusted basis, the fifth straight monthly decline in home prices.
Asked how much further prices would fall before stabilizing, the median response of 24 economists who answered was another 3.3 percent drop from current levels. Two economists saw a further decline as sharp as 10 percent.
But medians showed prices, which economists say will have lost a third of their value from peak to trough, would rise 2.1 percent this year, up from the 1.0 percent prediction in a poll taken in November.
Economists saw house prices as fairly valued now. Asked to rate current prices on a scale of 1-10, with 10 being overvalued and 1 being undervalued, 27 of 32 respondents answered with a 4, 5 or 6. Just one responded with a 7 and one responded with a 2.
The average home sales price in the United States was $169,800 in the fourth quarter of 2010, according to the National Association of Realtors.
Sales of U.S. new homes raced to their highest level in eight months in December, but gains were driven by a surge in the West. Even with last month's gain, new-home sales are down 75 percent from their peak of 1.283 million-unit pace in 2005.
"Housing is showing a ray of hope, but is still far from healed," said Diane Swonk of Mesirow Financial. "The level of activity in the market, in particular new home sales, will take much longer to recover to reasonable levels."
The poll was conducted over the past week and included a total of 33 economists.
Adjustable-rate Mortages May be Making a Comeback
5/1 Hybrid is the Most Popular ARM Today
After years of virtual exile from the home loan arena, is the adjustable-rate mortgage staging a quiet comeback? Could an ARM be on your shopping list the next time you need to buy a house or refinance?You might be surprised.
A new survey of 112 lenders by mortgage giant Freddie Mac found that ARMs are starting to attract applicants again. Adjustables accounted for just 3 percent of new home loans in early 2009, but are projected to be the final choice for nearly one out of 10 borrowers in 2011. In the jumbo and super-jumbo segments, the share will be even larger, according to Freddie Mac chief economist Frank Nothaft.
How could this be, with fixed 30-year rates at half-century lows, hovering just under 5 percent? Isn't it axiomatic that it's always smarter to lock in a low fixed rate for as long as possible rather than to gamble on a loan whose rate might bounce around in the years ahead?
That logic still holds up for most people, but not for everybody. Here's why. The boom-era models of the ARM have pretty much disappeared -- there are no more of the two-year adjustables that hooked record numbers of consumers in 2003 and 2004 with teaser rates that needed to be refinanced with heavy fees within 24 months. No more "pick-a-pay" ARMs that were mass-marketed with loosey-goosey underwriting and negative amortization.
The most popular ARM in the market today, according to the Freddie Mac survey, is the "5-1" hybrid. Its rate is fixed for the first five years of the loan, then adjusts annually for as much as the next 25 years, with protective rate caps to cushion payment shocks if rates suddenly spike. There are also "7-1" and "3-1" hybrids. The antique one-year ARM still is available but doesn't get a lot of takers.
The real key to the growing popularity of hybrid ARMs is in their pricing.
Rates are significantly lower than fixed 30-year alternatives, with no teasers or negative amortization involved. In some cases, they also come with other attractive terms, such as more flexible underwriting standards.
According to data supplied by Dan Green, a loan officer with Waterstone Mortgage Corp. in Cincinnati and author of TheMortgageReports.com blog, the rate spread between 5-1 hybrid ARMs and 30-year fixed-rate loans has now widened to around 1.625 percentage points.
To illustrate, say you're interested in a $250,000 conventional loan to buy a house. You've got a 740 FICO credit score and want to close in 45 days. You could opt for a 30-year fixed loan at 4.75 percent, requiring a monthly principal and interest payment of $1,304. Alternatively, you could opt for a 5-1 ARM fixed at 3.125 percent, costing $1,071 in principal and interest per month - a $233 saving.
But now check out the niche where hybrid ARMs really shine: Jumbo and super-jumbo mortgages.
Generally jumbos range from $417,000 to $729,750, depending on home prices in your local market. Super jumbos can go into the millions.
Say you need a $450,000 mortgage with a 45-day closing and you have a 740 FICO.
According to Green, you should be able to get a 30-year fixed rate jumbo today for around 5.625 percent. Monthly principal and interest on a fixed rate jumbo would total $2,590 a month. Compare that with a $450,000 hybrid 5-1 ARM: 3.5 percent for the initial five years, requiring $2,020 a month in principal and interest. That's a rate spread of 2.125 points -- "the best we've seen in years," said Green in an interview. "It's very aggressively priced" by banks who want to originate them to hold in their own portfolios.
The savings go even higher in the super-jumbo space -- a $1 million 5-1 ARM goes for 3.5 percent and saves a borrower $1,266 a month compared with a competing $1 million fixed rate 30-year loan at 5.6 percent.
Cathy Warshawsky, president and senior loan officer of Bay Area Loan Inc. in San Jose, Calif., cites another advantage for some jumbo borrowers -- special enhancements in payment terms. For example, a client of Warshawsky's needed a $950,000 mortgage at the lowest rate and monthly payment.
She signed him up for a 5-1 hybrid at 5.75 percent, interest-only.
None of this is to suggest, of course, that hybrid adjustables make financial sense for everybody.
They don't.
But if you fit one of the niches -- you need a jumbo, you know you're likely to be transferred or you expect to sell the house within the coming five to seven years -- they merit a serious look.
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