Short sales are gaining traction among lenders because of a new federal incentive. In essence, the government has agreed to absorb a part of the loss that a bank sustains whenever they do a short sale.
"In May, the Treasury Department said it would offer a streamlined framework for short sales and incentive payments of $1,500 to homeowners, $1,000 to loan servicers and $1,000 to second-lien holders," The San Francisco Chronicle reports.
Just 18 months ago, the term "short sale" was not widely known. Today, it's gaining some currency as more and more short sales get done, but it's still a misunderstood concept.
Short sales are when you need to get out of a house and you get the lender to agree to take market value on the sale -- instead of what you actually owe on it. You'll take a hit of about 120 or 130 points on your credit score for doing one.
Are banks doing this as a charity effort? No, it's cheaper for them to do a short sale versus a foreclosure. Some of the biggest lenders now have "war rooms" with specialists to process short sales. Certain lenders even take requests for short sales electronically nowadays.
Our associate producer Joel started looking to buy a home last winter. He immediately began honing in on short sales, much to Clark's dismay. The consumer champ knew that banks were notoriously incompetent when it came to processing short sales.
Naturally, Clark urged Joel to steer clear of them. But being a young man, Joel completely ignored Clark! So much of the market was short sales that it would have been very hard to ignore them in his search.
Joel was right in this case; he bought a short sale for $89,000 with a 15-year loan at 4.375 percent. The property had last sold for $155,000. So his patience was rewarded, but it took the better part of a year. And that's now made Clark himself reconsider the short sale as a viable option for struggling homeowners. It's for real this time!
Clark has always despised cash-out refinances -- the kind where you refi your mortgage for more than you owe so you walk out with cash. This was very common over the past 10 years and it's been a part of the foreclosure problem.
That's why the consumer champ was pleased to learn that cash-out refis are going away as of April 1, 2009. You won't be able to do them except under the strictest of circumstances through the FHA program.
So if your heart is set on one despite Clark's reservations -- and he can't believe he's saying this -- you've got to hurry and do it right now before the deadline.
Meanwhile, the best rates on refinances of all types remain fairly elusive. The great rates that the penny-pinching guru quotes from time to time on the show are contingent on an applicant having great credit (a minimum of 720); good equity in their home; and solid proof of income.
It's hard for Clark to find much that he likes about the $787 billion stimulus package. But there is at least one benefit for military homeowners not being widely reported.
Military families that have sacrificed so much frequently face the added burden of having to move posts every 3 years or so. That means buying a home at each duty station and selling the home at your previous post.
The stimulus package actually offers compensation for those who are forced to sell at a loss -- for up to 95% of that loss. This applies to your primary residence purchased before July 1, 2006.
Why that specific date? That's the generally accepted marker at which housing is considered to have peaked in the United States.
Meanwhile, the government can also underwrite the cost of buying a house up to 90% of the home's previous value under a separate provision of the stimulus package.
The Washington Post has a detailed story that fleshes out additional information.
And the cost of these provisions? The best guesstimate puts it at $555 million, an amazingly minor sum that's just a fraction of 1% of the total package.
The consumer champ is glad he has something positive that he can report about the stimulus package. This is one ornament on the Christmas tree that he can believe in!
We in America have historically enjoyed cheap energy prices. Of course that's all reversed now. There's a lot of evidence to suggest that energy could be costly in the future. While people are clamoring about finding more supply, what we really need to do is reduce our demand for energy.
One way to do that is build efficient structures. Architects who focus on "green" building can create savings of about 30% to 50% for the end user.
One American city that knows all about energy costs is Houston. In the heart of oil country, they're requiring commercial builders to construct energy-efficient properties. They're also trying to put those same standards on residential builders. The pushback from the residential sector has been intense so far. Montgomery County in Maryland is one place that has already successfully established mandatory green building standards.
Clark applauds Houston's efforts and hopes the city extends the standards to new residential homes. This can make a huge difference in energy costs. It's not about whether you buy into the idea of global warming or not; the reality is we're spending a fortune on energy. Green building is not about the environment, it's about your wallet.
Do you have money that hasn't been touched in a while in a bank account, brokerage house, insurance policy or company stock? After a period of time, the State eventually rules that account dormant, and that money gets sent to an unclaimed property office. The state office it gets sent to depends on where the company involved is based.
Recently, USA Today reports that certain states suffering from budgetary problems have decided it's ok to steal these leftover funds from you. Washington, Delaware, Alabama, Oregon, South Carolina, Louisiana and Kentucky changed their laws so that it would be legal to seize unclaimed money and not give it back.
But there's good news: there's a way to find out whether you have dormant money, so you can claim it before the state does. A website called Missingmoney.com allows you to pop in your name and see if you (or your relatives) are due a refund. Do a multi-state search to include the state you live in and the headquarter states of all your previous employers. Always search in Delaware and Connecticut too, as most stock and insurance companies are based there. Another website to check is unclaimed.org and if you've ever had an FHA loan, be sure to see if there are leftover assets waiting for you at hud.gov. You could be a hero to a loved one, or be the beneficiary of money you didn't even know you had!
CLARKONOMICS: Clark is not a man who's afraid of the condo market. He knows the value of a condo typically fluctuates like an EKG -- up and down in rapid cycles. Single-family homes, by contrast, tend to rise slowly but steadily over time, barring a bubble market. The problem is that people usually buy condos the wrong way. They own them for short periods of time and then can't get the value they paid when they resell.
Because of general market malaise, lenders are increasingly getting spooked about making loans for condos. New rules and requirements are being established that reflect the fear. It's getting tougher to refinance a condo loan or get one in the first place. Some lenders have even begun redlining -- that's where they take whole zip codes and refuse to make loans in them regardless of credit score.
Other lenders won't make loans in condo communities where there are more than 25% rentals. Some owners have become unwitting landlords so they can meet their monthly payments. Yet if a condo association allows a high percent of rentals, the condo community won't be exempt from future financing.
Compounding the problem are new Fannie Mae and Freddie Mac guidelines. Lenders are being required to make a decision about whether or not a condo association has solid books before making a loan. The practice hurts lenders who may want to sell out their loans out of portfolio, and Clark says it will have a further chilling effect on condo lending.
The pendulum swung too far with irresponsible lending; now it's swinging too far the other way. It all creates a hardship for those condo owners who want to sell. The good news is that there's great opportunity right now to buy a condo for cash or if you're able to get a loan. Condos go through phases of incredible pessimism followed by ill advised optimism. Right now we're in a pessimistic cycle, so look for the deals and pounce. Do you smell what Clark is cooking?
Yesterday, Clark reviewed some changes that are coming in the housing market because of new housing laws.
This lobbyist-laden bill is already befuddling some. One provision in the housing rescue bill even has a subsidy for railcars. Kudos to syndicated financial columnist Kathleen Pender for digging that tidbit out of the more than 700 pages of rules.
Here are some more key provisions, most of which become effective in October:
• Reverse mortgages will now have a 2% maximum on fees (1% for mortgages above $200,000) -- with a cap at $6,000. This is good news for "house rich, cash poor" seniors contemplating a reverse mortgage. It should reduce the number of people getting ripped off with huge fees.
• Interest rate rescue for those in jumbo loans is on the way. Fannie Mae and Freddie Mac will be allowed to buy loans up to 115% of the local median home price. That means access to lower interest rates for those in loans above $417,000.
• There will be new protection for active military and veterans against foreclosures. Lenders will be required to wait 9 months -- instead of 90 days -- before beginning proceedings. Plus, there are new rules on interest rate adjustment. For too long, banks had unwittingly violated laws on interest rates for military. Visit Military.com to learn your rights.
• Vacation homes will be the subject of new scrutiny. No more loopholes about avoiding capital-gains taxes by living in a vacation or rental property as a primary residence for 2 years before selling it. Now you may owe tax on a portion of the gain, based on the years you didn't live there full-time.
The housing market woes continued unabated while Clark was on vacation. We've now seen the greatest drop in home values since records were kept. But there are some bright spots. Dallas, Charlotte, Portland and Seattle are among the cities that are doing OK with housing.
The typical housing value in Miami is down 30% from its peak. Phoenix is down 26%, and Las Vegas is down around 30%. New stats also show that every 1 in 8 people in Alt-A loans -- typically those who are one step below having solid credit -- are going delinquent.
Meanwhile, Clark is upset about taxpayers having to bail out private investors in Freddie Mac and Fannie Mae. Most Americans don't know the first thing about Fannie and Freddie. They're the "money" behind the scenes that allow you to buy a home. The unfortunate reality is that their political connections may buy them taxpayer-funded bailouts. Private gain, public risk; it's just not right.
In related news, Clark wants to break down some key points of the new housing rules that Pres. Bush recently signed:
• If you're delinquent on your primary home, you'll be potentially eligible for a workout -- funded by taxpayers -- in the fall. This voluntary measure allows lenders to write down loans to current market value plus 10%. So let's look at the example of a $150,000 home that's now worth $120,000. The lender would mark it down to $120,000; take a further haircut to $108,000; and then write a new loan for that amount. The homeowner must then split the profits with taxpayers upon eventual resale.
• As a first-time homebuyer, you can get a $7,500 credit courtesy again of taxpayers. This also is a loan, which you as a borrower get interest-free. You pay it back over time interest-free, and it is retroactive for those who bought from April 9, 2008 onward. There's also an oddball loophole that allows non-first-timers to qualify for the credit. Former homeowners who recently have been renting for a couple of years may be eligible.
• Down-payment assistance programs will no longer be legal beginning in October. These programs allowed builders to raise the price of a house, say, from $100,000 to $105,000. Then the builder would make a $5,000 donation to a supposed charity. That charity would in turn give you $5,000 toward the home. The end result was that it looked like you had a $5,000 down-payment when you really did not. But the rate of foreclosure involved here was extremely high.
These new housing rules are more than 700 pages long. Look for more info tomorrow on other provisions that affect upper-middle and high income earners with some gotchas.
There's new hope for those who are behind on their mortgages and either want to stay in their homes or do a short sale. As Clark told you months ago, a collective of the nation's largest lenders are pushing The Hope Now initiative.
The lenders' interests are purely monetary as they face a critical mass of some 2 million potential foreclosures. The reality is that lenders don't want you out on the street because it's expensive for them and they're notoriously bad property managers. Under the voluntary Hope Now program, participating lenders will help you to do a short sale or get a loan modification.
By the end of July, participating lenders will be required to confirm receipt of your request for either option within 5 business days. Then they'll have 6 weeks to accept or decline your request. This is a major change because it puts a timeline on the procedure for the first time.
The biggest beneficiary here will be your fellow neighbors. Their home values won't automatically plummet with your foreclosure, now that there are more options available to you. Keep in mind that home values decline about 1% for every foreclosure in a neighborhood.
The other beneficiary is the bank. They lose a minimum of about $70K on every foreclosure. That's why they're willing to do these workouts. For you as borrower, the benefits are obvious. But the big unknown is how it will all work for people who have 2 loans on a home.
One thing Clark doesn't want to see is a Congressional bailout for the mortgage lenders, which may be disguised as being in the best interest of homeowners.
Don't attempt to adjust your radio if you hear some ambient noise this hour. That's just Clark broadcasting on location as part of Christmas Kids 2007! Interested in helping out a needy child this holiday season? Clark will be personally accepting donations at stores throughout the Atlanta area until Dec. 15. If you're not able to make it out, why not donate online? By working with the Salvation Army, your gifts can be distributed to children right in your own state or area!
Switching gears for a moment, Clark wants to discuss President Bush's announcement about a voluntary plan for people in mortgage meltdown to receive assistance from their lender. Those who took out blow-up mortgages like 2/28 loans in the last few years and have been current on their payments are most likely to benefit. 2/28 loans are typically offered to first-time homebuyers or people with damaged credit. The homebuyers were conned into 2-year loans at a decent rate that becomes outrageous after 24 months. Sometimes the blow-up rate will put the annual payments near or equal to the homeowners' annual income.
Under Bush's plan, lenders can voluntarily freeze the interest rate for 5 years if it's a homeowner's primary residence and they've made timely payments for the first 2 years. This will not help speculative buyers who got into 2/28 loans. Ironically, there are protections under bankruptcy law for spec buyers that don't apply to owner-occupied property. Clark thinks it's reasonable that there shouldn't be any coercion on lenders to freeze the rate. If the government were to try to impose its will, it would have a negative effect on the confidence of investors making loans. After all, why should an investor take on the risk if the government will just come in and decide how much money they'll be able to earn back? Some lenders would be wise to freeze the interest rate; it's a much cheaper option than having to pay to foreclose on tons of properties. Nobody wins in those situations.
A lot of people in real estate love doing 1031 Exchanges. If you're not familiar with the term, 1031s allow you to sell an investment property and roll your gains over into a new investment property -- rather than paying taxes on your capital gains. There are certain rules governing 1031s. The money must go directly into the hand of a qualified intermediary. You have 45 days to identify a new property, and you have 180 days to actually acquire that property. But there have been a lot of problems with 1031s because some qualified intermediaries are running off with the cash. Now The Washington Post reports that the IRS is retroactively disallowing some 1031s as a precaution.
Clark's real advice is to not do a 1031. People are so obsessed with avoiding tax that they lose sight of the bigger financial picture. For example, right now the max tax you'll pay when you sell a property is 15 percent. That's the best deal we've had in years. With the Democrats likely to get into office in 2008, most of their candidates are talking about capital-gains taxes of 28 percent. So doing a 1031 now to defer paying 15 percent when you'll later pay 28 percent is not "Clark Smart." Instead, just harvest your gains and pay your taxes! Clark knows everyone will tell you the opposite. But he believes the tax rates are only likely to go higher. This is best it's ever been; it's probably not going to get better -- only more expensive.
There's a big push and shove going on right now to determine who should help out people who are in over their heads with mortgages. The Federal Reserve had issued some weak guidelines, known as workouts, to try to lend a hand. That's OK, so long as it doesn't become a federal bailout. Clark is opposed to a plan that's been floating around Congress to use federal money to keep people in their homes. This whole problem came about because lenders were greedy and/or foolish in the loans they wrote, while borrowers were also foolish for believing they could handle loans that they really couldn't. There needs to be a change in how mortgage brokers are overseen -- they can't be the Wild West part of the market anymore. Lenders and mortgage brokers should be liable, along with defaulted borrowers, if they wrote unsuitable loans just to pad their pockets. Then they'll be forced to police their own industry. Taxpayers should not be on the hook to bail things out. When more than 90 percent of homeowners conscientiously meet their mortgage obligations, why should they subsidize the others who don't?
It's no secret that the nation's housing market is in bad shape. Foreclosures in California are at an all-time high, and the market is equally hurt in Nevada, Arizona and Washington D.C. How did we get in this mess? Well, after 9/11 people became nesters and saw their homes as safe harbors. The tech bubble in the stock market had just burst and people psychologically started clinging to "real" estate in the tangible form of their homes. The home improvement industry enjoyed a surge in popularity as a result. But in the middle of it all, the standards for home lending fell apart. People with bad credit who had no money got horrible loans with low teaser payments that were like ticking time bombs. After two years, there was a huge increase in the mortgage payment and they could no longer afford it. Foreclosures started to become more common. There was a false demand for houses, and speculators bid up the prices. Also, all speculative buyers used to have 30 percent down. But that requirement was relaxed during this time, too. Clark says he knew we were in trouble when he started hearing about people buying houses they'd never seen and property in states they've never visited.
Thankfully, the teller window is now closed for people with bad credit and no money down; those who can't document their income; and those who want to buy on spec with no money down. Clark thinks this a good thing. He's just amazed that now the feds are starting to make noise about wanting to ban these kinds of lending so late in the game. Capitol Hill wants to make it so that when you take out a loan, you have to get an explanation of all the details in plain and simple language. But the funny thing is that the feds aren't considering making hard-and-fast rules -- just some proposed guidelines. Well, the American Enterprise Institute beat them to the punch by drawing up a mortgage cheat sheet (and definition of terms) that tell you exactly the right questions to ask of your lender. Clark really likes the AEI's version because it helps homebuyers avoid getting ripped off. He also thinks it's so much easier to understand than the feds' guidelines.
Projections about the year’s foreclosures are always a guess at best. The most conservative guess is about 1 million homes, while the high estimate is 2.25 million. That’s a lot of families that could end up on the street. Congress has even suggested that the government should help out and offer people grants. But Clark doesn’t agree. He doesn’t think that is their role. A member of the FDIC took a different tack on the matter. That person suggested that - when a person takes out an option-payment loan or teaser rate loans – that person must qualify at the worst rate the loan could have. Typically, people just look at the beginning rate and jump in. But they don’t understand that rate could double or even triple down the road. Lenders should be required to qualify people based on what the loan could become. No one wants to see people put out on the street. But banks are allowed to make all kinds of risky loans that harm the consumer. Unless things change, taxpayers will be on the hook to bail out the banks again at some point.
Should you buy title insurance when buying a home? Clark tells you that plus more. Just remember to disable your pop-up blocker to hear Clark. (Editor's note: This clip is no longer available because of a change in audio servers.)
Have you heard about the prescription drug benefit for senior citizens that is launching next year? It’s going to be provided by private companies to Medicare-eligible seniors, and they’ll have up to 20 choices for programs depending on where they live. The plans will have a monthly premium and it’s important to get in on the early side or there are financial penalties for signing up later. Enrollment starts Nov. 15 and the program goes into effect Jan. 1, 2006. It can get quite confusing, so it’s important to go over the terms with your parents. Seniors will pay a monthly premium that will vary from company to company. For every prescription a senior buys, the first $250 comes out of pocket. After that, Medicare covers 75 percent of the next $2,000 in drug purchases. The program pretty much stops there. If you go beyond $3,000 in drug purchases, it comes out of the senior’s pocket. And, after $5,000, the government gets involved again. So, you and your parents need to read up on this. The one thing you don’t want to do is to make no decision at all. Now, there is one group of people that should not participate in a Medicare benefit plan. The small number of people who are offered a good plan as a retiree should not get involved. It’s a potential break from the exorbitant prescription drug costs out there, but you need to do your homework. Click here for more information.
Clark has a very strong bias regarding energy legislation and the need to create alternative sources of energy in the U.S. An electric utility, PG&E, believes this too and is offering incentives to buy energy efficient appliances. This is great news because it’s hard to get companies to see the benefits of getting more bang for the buck in this area. Consumers are sold on it. We know it’s worth it to spend a little more to get a longer lasting, more efficient product. But companies are reluctant to do that. In actuality it saves them money because those last kilowatts of energy they must produce cost much more than the first kilowatts they put out. So the less energy used the less it costs them. Find out more about it here.
The federal government has started a program called the “American Dream Down Payment Initiative,” and it could mean free money for you. If you’ve never owned a home, you are potentially eligible for a grant of up to $10,000 toward the price of a home. You can buy either a quadplex, a condo, co-op or mobile home. You must be a first-time homeowner, and you must me income eligible. That means you can’t earn more than a certain amount, usually $40,000 to $50,000. The program has a limited number of slots available, and it will be a little while it goes into effect. But it’s a terrific idea. PHAs and LHAs, public housing authorities and local housing authorities will administer the program. Hud.gov has information about the program. But you’ll want to get in early because the money is limited. And remember, it’s a grant not a loan. You don’t have to pay it back. Why is this a good thing for taxpayers? People who own a home have more of a stake in their community and tend to do more to keep it clean and fight against crime. Therefore, the value of the homes increase and the quality of life is much better for everyone.
