First Ohio Home Finance

Franklin County Commissioners, Treasurer, and Prosecutor announced a collaborative county program yesterday that is designed to assist Franklin County residents struggling to save their home from foreclosure. The Homeowner Helpline is a $2.7 million dollar program that will use delinquent tax and assessment collection (DTAC) money from the Treasurer and Prosecutor, and community partner and Community Development Block Grants (CDBG) funds from the Commissioners.

With the passage of HB 562 and HB 359 earlier this year, the Treasurer and Prosecutor are now authorized to use DTAC funds for foreclosure prevention programs, nuisance abatement, and demolition.

The Homeowner Helpline program will include a public awareness campaign, as well as funding for housing counselors, nuisance abatement, rescue funding, mortgage fraud prosecutions, and homebuyer assistance. Homeowner Helpline will also fund a mediation program with the Municipal and Common Pleas Courts. The purpose of mediation is to encourage homeowners and lenders to come to the table and work out options for payment in order to prevent the homeowner from losing their home to foreclosure.

So sound off here, folks! What do you think of the state or county getting into the business of counseling, rehabing homes, or demolition? Is this a common sense proposal?

By now, surely you’ve heard of the nationalization of our industry. Fannie Mae and Freddie Mac were “seized” by the Federal government and put into “conversatorship” over the weekend as it became apparent these secondary markets for the mortgage industry had come to the point of bankruptcy.

Short-term, that means mortgage rates are heading lower – MUCH lower. The loans on your home and mine are now backed by the full faith and credit of the United States Treasury now. What seems like zero risk means that more investors will buy mortgage bonds and rates will continue to decline.

An interesting facet of this bailout, though, is that the “solution” is having the opposite effect as the intended purpose of the grand vision for Fannie and Freddie to improve the lives of average Americans. Peter Schiff doesn’t pull any punches in a recent column:

The original idea that gave birth to Freddie and Fannie, which is to make housing more affordable to average Americans, should now be seen as farcical. Their new goal is to keep housing prices high. Absent Freddie and Fannie, housing prices would fall sharply and the mortgage market would stabilize. Americans would once again be able to buy affordable houses with mortgages they could actually repay –just like their grandparents did. Instead they will keep overpaying for houses, burdening themselves with excessive payments in the process, and ultimately sticking taxpayers with the bill when they default.

What’s your opinion?

Regardless of our second guessing of massive policy decisions, this is an excellent time to refinance your home. Call us if your mortgage rate on your first or second loan is more than 6.5%! We’ll give you the straight scoop every time.

Like most government programs, FHASecure is not having the results that were intended. That means it’s not effective at saving Ohio homeowners who have fallen on hard times after their adjustable rate (ARMs) reset – and here’s my top three reasons why.

1. The program continues baseline FHA requirements, including the stipulation that mortgage payments must be timely BEFORE the borrower’s teaser rate expired and loans reset. They also want to see good credit otherwise – credit cards, auto loans, etc. Easy enough, right? Here’s the rub: Americans have been taught for years that the LAST thing to pay late is the mortgage. If you fall on hard times, push a credit card payment but NEVER be late on your mortgage. So many of the people who would be helped by this program have already made late payments due to hard economic times before ever running late on a mortgage payment. So they, in fact, get turned down on this program.
2. The interest rate environment is not generally increasing ARM payments on reset. That’s a little known secret the mortgage industry has been less-than-forthcoming about - reset interest rates are roughly equal or lower so your payment might actually become less than while in the “fixed” period of their ARM. So this program is creating an unnecessary incentive for the middle class to “let go” in the struggle to rising living expenses. Faced with the stigma of late mortgage payments, most would probably continue the juggling act as they wait for better economic times.
3. The equity requirements of FHA are not going away - in fact, as of Oct 1, they increase to 3.5% - whether purchase down payment or refinance equity. That’s a huge problem for people living on the edge, financially. Think about it. If Joe Six-pack is having trouble making his house payment, chances are he has other debt and little home equity. So many of our customers who need FHASecure, don’t qualify because they don’t have enough equity.

For these reasons, I can’t understand why the program is offered. It’s either poorly conceived or a political gimmick – I suspect some of each.  In fact, our firm has not been able to close one of these loans.  They have all been rejected for one reason or another.  And we’ve been able to help some of the people through other means.

For my readers who are not familiar with FHASecure, the program was announced by President Bush in early 2008 to help ease the mortgage crisis. Like all FHA loans:

• underwriting takes into account the borrowers’ ability to repay,
• fixed rates are overtly promoted,
• escrow of taxes and insurance are required,
• real human appraisals are required,
• full-documentation is critical,
• mortgage insurance is included, and
• there is gads of foreclosure prevention assistance.

FHASecure is available for loans that reset between June 2005 and December 2009.  So there is still time for this program to kick in and help families in Ohio.  I hope it helps.

Did you know that Ohio families need no-money-down loans?

The number one incoming search term for this website is 100LTV and 100% loans. People are really looking hard to buy a home with no down payment. No problem, right? There’s 100%, 80/20 split loans, FHA, and the list goes on.

Unfortunately, that’s wrong! Most of these loan products have dried up in the last 12 months – FHA with down payment assistance (DPA) being the only survivor.

Here’s how it works. Sally Buyer wants a home but has no savings. So she writes a contract on a home that includes a line about qualifying for an FHA mortgage. In that negotiation, Sally offers to pay 3% more than list price for the home if John Q. Seller will “donate” 3% of the purchase price of the home plus $400 to a certain “charity.” John Q. Seller agrees because Sally Buyer seems solid and this is a full-price contract – a sale! Sally Buyer also signs an agreement with the “charity” to accept a 3% “gift,” contingent on the sale closing and the seller donating.

These non-profit organizations have been under fire for years because DPA is a loophole that allows home purchases with “no skin in the game” while inflating home prices. But legal challenges from the assistance providers themselves have kept the life support on.

Under the Housing and Economic Recovery Act (HR 3221) recently passed into law, DPA programs will no longer be available as of October 2008. That’s right: no more AmeriDream, Nehemiah or other “charity” gifts to get you an FHA mortgage with no money down!

Using down payment assistance is entirely normal, and many of our clients have used it to good advantage. But it should be remembered that what can help a single family may be a recipe for disaster when it becomes common practice across the country. Mortgages with down payment assistance go into default and foreclosure at nearly three times the rate of those borrowers with some money out of pocket, according to FHA.

And while some groups are trying to save DPA, the solvency of the banking system and FHA is at risk now, so it’s understandable that they would try to stop the bleeding. Especially when you consider that we - the taxpayers - are ultimately holding the bag when it comes to bailing out banks or funding HUD and FHA through our tax dollars.

Nevertheless, this is going to be a blow to our mortgage company, as well as a blow to the entire market here in Ohio.  Maybe it’s smart given the rise of foreclosures.  But 0-down loans are 64% of our FHA purchases, or 13% of total business. So yeah, it hurts when 13% of your company revenue goes whoosh!

If you are looking to buy a home, now is your chance to find a no-money-down loan! You don’t have to be a first-time buyer.  Call before it’s too late!

Well it appears the new housing bill had some concessions for home buyers, but at the expense of home sellers. So what’s up with capital gains tax and mortgage and real estate? Check this out.

With HR 3221, Congress created revolutionary new rules to capture more tax revenue on capital gains - rules that could prove detrimental to many families holding mortgage loans in Ohio. You see, under the old rules, sellers were tax-exempt on up to $250,000 of home sale gains as long as they lived in the home for 2 of the last 5 years.

However, under the new rules effective January 1, 2009, exemptions from capital gain taxes are a more complicated formula based on the actual number of days a home was “primary” residence during the last 5 years.

So if you only lived in a home for 2 years, you will be paying taxes on 60% (3 divided by 5) of gains under $250,000. Would you rather have 40% (2 divided by 5) of your honest gain tax-free — or the current 100%?

Are lawmakers assuming very few are still making real estate gains?  Are they trying to encourage a flurry of sales this year?   How will the IRS determine residency date?  Doesn’t this seem like a raw deal for the average homeowner who ends up renting their old home since they are having a hard time selling?

Check out this sample analysis from AgentGenius.

You bought a home in January 15 2004 and paid $500,000. This has been your primary residence until this year, January 15 2008, when you bought another property and moved your primary residence. Say you sell your original property next year, January 15 2009, for $600,000. Your capital gains are $100,000. Your capital gains exemption formula:

1460 [days] / 1825 [days] = 0.80 x $100,000 = $80,000 Capital Gains Exclusion

Which means you would pay capital gains tax on $20,000. Capital Gains Tax is currently at 15%, so you would pay $3,000 in new taxes that you would have avoided prior to this new law. *Please note this does not account for the state portion of capital gains…

It may sound like a small number when you profit $100,000 to only pay $4200, but what happens if the new government leaders change the Capital Gains Rate? This rate has been as high as 45.5 percent in the past. This is not good for future sellers of real estate.

As always, remember we are a mortgage company.  If you think the new Capital Gains Exclusion rules will impact you personally, get professional advice about it.   If you do not have a qualified accountant, (which we think that’s a critical part of building wealth) we would like to refer one to you.

h/t Dan Green

If you’ve dodged the dust-up between John McCain and Paris Hilton, you probably heard this week that the Federal Open Market Committee left interest rates untouched last Tuesday. That means the Prime Rate remains at a low 5.0%. What does it mean for mortgage rates? What does it mean for you?

For those who’ve followed the gurus Greenspan and Bernanke, you’ll remember that when the Fed announces a decision on Discount and Fed Funds rates, the decision is less important than the accompanying policy statement. These statements are short reviews of the Bank’s view on the economy and inflation – and therefore give clues to future monetary policy decisions.

Those opaque statements are what move mortgage bond markets, and thus mortgage rates. You can read the whole thing in less than 30 seconds right here.

A policy decision for the status-quo does signal to investors that market forces are in balance – or at least rates cannot be safely lowered. Because the Fed talks of an economic slowdown with no end in sight, rates will be stable to lower until inflation picks up. To further illustrate this, consider that one year ago, Prime Rate was at 8.25%.

The immediate result of the current decision was for stock markets to rally and rates to rise.
If there is good news here, it’s that slow economic times mean mortgage rates will not be rising significantly. I’d say that perspective is here for another 6-12 months at least.

If there is bad news here, as the economy slows and foreclosure rates rise in Ohio, credit standards will continue to tighten and the cost of financing will creep up. Tight credit standards – like the end of down payment assistance and 100% financing programs – will be discussed in the next few posts about the new Housing and Economic Recovery Bill (HR 3221).

Starting today and continuing for the next handful of posts, I want to explore some of the interesting parts of this new law. How will it help homeowners? How will it help first-time buyers? How will it help America? And what are its drawbacks? It’s only right that we get an understanding of what’s going on in real estate.

Here are the highlights:

• First-time home-buyer tax credit up to $7,500
• Major increases in capital gains tax
• FHA Foreclosure Rescue
• Prohibition of Seller-funded downpayment programs
• Conforming loan limit increases to $625,000 in high-cost areas
• Neighborhood revitalization funds (up to $4 Billion)

The first part of HR 3221 to understand is the Homebuyer Tax Credit. Now you will undoubtedly hear this touted from Realtors, builders and others. But you would do well to read the fine print. Here’s how I see it working.

• Only available for first-time home buyers – no homeownership for past 3 years
• Get a tax credit of 10% of your home purchase price, up to $7,500
• The credit must be repaid on your federal income taxes at the rate of 6.67% per year
• If the home is sold, the pro-rata remainder must be collected and returned to the IRS
• Applies to purchases between April 2008 and July 2009
• Buyers must have income below $75,000 single, $150,000 couple.

So what do you think?  Sound like a good deal?

Well, you get to reduce your federal tax bill in the year you purchase, so you are essentially borrowing from the government. This is going to generate enormous tax refunds to Americans. So its not only an incentive to buy, it will stimulate the economy. Just be sure you realize it has to be paid back.

Taking an average central Ohio example, the Smiths buy their first home for $250,000, and fit the income guidelines for this tax credit. They get to claim $2,500 tax credit on their taxes files in April 2009. When you wash their tax liabilities against their payroll deductions, they end up getting a $4,200 tax refund in May ($1,500 normal refund plus $2,500 homebuyer credit). If they are like most Americans, the money will disappear into vacations, home improvements and debt reduction before the end of summer.

When they file taxes in 2010 (and going forward), they have to pay back the credit by adding $167 (remember, 6.67%/year) to their tax bill. This reduces their refund in the summer of 2010 from $1,500 to $1,333. No big deal.

Ohioans, on average, move every 4-5 years. If the Smiths follow that average, they would sell the home in 2013 and have an IRS charge of $1,665 (6.6% x 5 years) on their settlement statement. Again, that’s not going to make or break most home sales.

Assuming that there are a million first time home buyers next year, that means the U.S. Treasury will lend without interest about $2.5 BILLION. Those are your dollars!

As always, though, remember that I am a mortgage guy and not a qualified accountant. If you think the new tax credit rules will impact you personally, get professional advice about it.

Think it’s a strange time to invest in real estate? Well, think again. With the discounts offered by home builders and competent Realtors, there are a number of good ways to become invested in real estate.

Some clients are surprised when I mention investing in new homes. Most people think of real estate investment as the rougher multi-family units, such as near college campuses. But those situations are not for everyone.

The hard part about investing – having your units torn up, chasing down rents, patching up 60-80 year old homes – can go away when you buy a new unit. And with builders stinging from a plunge in new buyers, they have begun to offer some genuine discounts that make cash flowing an investment that much easier.

One of these programs is with long-time local builder Dunmoor Homes. Gary Dunn and Bill Moorhead have worked hard to build quality homes and place lease option clients in them. With two-year leases and reasonable cash flow already in place, it’s a good time for investors to step up.

The other thing that really sets Dunmoor Homes apart from a mortgage and personal finance perspective is Bill understands the financial condition, perspective, and traps for average Ohioans. He’s even held countless seminars in the Columbus market called Seven Steps to Smart Homeownership. He makes a personal investment in setting up tenants to succeed so one day they, in turn, can own the place they’ve called home.

I personally can’t think of a better answer to the current foreclosure mess, than to have men with integrity doing everything possible to ensure your neighbor can succeed in the American Dream!

The best way to find out more about this easy way to invest in real estate is to shout out to Bill.Moorhead@DunmoorHomes.com or visit their website at www.1031homes.com.