In the spirit of Independence day, we decided to get a little more independent too.  We have now completed setting up our new independent real estate brokerage firm – called Veritus Realty Group.  Chuck is the managing broker. 

The reason for setting up an independent brokerage is simple – we would like to continue to provide the same great service we always have to our friends and clients without the constraints of big brokerage procedures and overhead. 

So your agent is now called your real estate broker, and people like me who run the brokerage company or office are called designated brokers, or managing brokers.   I’ll bet that was more than you wanted to know about all that, but it was worth mentioning  

With the dramatic fall in home values in most major cities (but not all, by the way) over the past three or four years, many people have become very sensitive to what is happening in their local market.  Some are the potential buyers thinking about the price they might have to pay, and whether or not their new home will hold its value.  Some are the potential sellers thinking about the price they can get, and whether or not they should wait in the hope that prices will get better.  And some are just watching the prices and thinking about their equity and how that impacts their retirement plans.  So home prices are obviously a hot topic, and there are lots of organizations trying to predict what’s next.

One of those organizations is Goldman-Sachs, who arguably may be one of the lead causes of this mess  (if you want the rest of the story, read The Big Short by Michael Lewis).  Their report, titled Home Prices Have Not Bottomed Yet  (skip past the first page in Japanese unless you can read Kanji) suggests that our Seattle housing market has significantly farther to fall – perhaps as much as another 20% in the next two years.  Ouch!

Another organization is MacroMarkets, a firm that sells macroeconomic analysis and reccomendations to major investment firms.  Their report, titled U.S. Home Prices Overshoot Down, posits that our Seattle housing market has already over-corrected, and that now, almost three years after the peak, their gap analysis methodology suggests that our current price level may be about 20% below its long term baseline trend, and represents an investment updside opportunity.  Hmmm..

What is particularly interesting is that both studies use Case-Shiller data to develop their analyses, and Robert Shiller is in fact the Chief Economist for MacroMarkets

The big difference between these two studies, other than their conclusions, is that the Goldman Sachs version is explicitly short term, and the MacroMarkets may be a longer term view.  The basis for the Goldman Sachs strongly negative view seems to be their assessment of our local vacancy rate, and a rising foreclosure rate.  I note that we didn’t even make the Top-20 Highest Foreclosure Rate Cities list in 2009, and we have one of the strongest economies in the nation.  The vacancy rate factor is a puzzler.  Unlike many of the poster-child problem areas, we didn’t have the chance to overbuild so that we had more houses than people, unlike San Diego, Las Vegas and South Florida.  Not that we are smarter or nobler, it’s just that the builders couldn’t get permits to build those excess houses – the Growth Management Act and the King County Building Department scotched that.  Except for the glut of high-end condos in Bellevue and Belltown.  Lots of money being lost there, but it’s being lost by the developers, not individual sellers, and it doesn’t hit the Case Shiller statistics.

The MacroMarkets view is strongly dependent on their estimate of the long-term baseline appreciation rate, which they estimate at 3.58% for the US as a whole and 5.51% for the Seattle area.  While I agree and have always believed that Seattle has a long term appreciation rate that is 2 to 3% better than the US overall due to our strong economy and attractive climate and geography, these baseline rates feel a bit high to me. 

So I wind up stuck in the middle, still thinking that we are just going to muddle through at about the same price level for the next 3 or 4 years, and then start to recover.  That is essentially what I said in my Predicting the Housing Market Recovery post back in March.  We shall see… 

Best Regards,

Chuck

            

 
But sometimes it is interesting to take a look at the market in a more specific area, and see how the market is doing by price range.  We are all aware that high-end houses have been selling more slowly than modestly priced houses, but the real question may be “What does that mean in my area?”  So if you live in the central eastside area of greater Seattle – Bellevue, Redmond, Kirkland, Newcastle – here’s what it looks like:

The first chart shows the distribution of recent sales by price range, with the great bulk of sales (80%) in the $300,000 to $800,000 range.  In fact, only 8% of the sales are at prices of $1 million or over.   The second chart shows Months Supply by price range.  Note that the homes in the under $700,000 range are selling quite well, with an average Months Supply reading of about 5 months.  A 6-months supply is considered to be a balanced market, so at this point buyers should expect to have to pay real market price, but have plenty of time to look, and sellers should be able to get near real market price, but should not expect a quick sale unles they price aggressively. 

In contrast to that solid section of the market, the more expensive homes are still clearly in oversupply, getting up to 20+ months supply in the over-$1.5 million range.  Anything over 10 months supply is considered a Buyer’s market, so Sellers in this range have to compete with each other to try to get sold, and prices in that range are still easing down because of that competition.  Since overall prices in the county are holding up very well, prices in the lower range must be pushing up a little to keep the median steady.

I don’t have an easy explanation for why the $1.1 to $1.2 million places are selling better, but it does show up both as a low spot in Active Listings and in a corresponding higher Sales Volume, thereby creating a lower Months Supply number.   I checked the actual sales records, and there doesn’t seem to be an abnormally high new home/builder sales number that might be driving this – the percentage of new homes in the mix at the $1.1 million range (30%) is only a little higher than the percentage of new homes in the $600,000 range (25%).  I’m sure that the improved availability of  jumbo mortgage money from big bankers like Bank of America and Wells Fargo is a factor, but why doesn’t it apply to the $900,000 range?  We’ll look again in a few months to see if this anomaly persists.  In the meantime, if you have a home in the $1.1 to 1.2 million price range that you’d like to sell, this might be a good time :-)

If you have questions about any part of this analysis, or something more specific, please give me a call.

Best Regards,

    Chuck Reiling

(206) 850-3507

Truly an unpleasant situation.

Just for some rough numbers on the scale of the problem: there are about 110 million households in the U.S.  Of that, about 70 million are in owned homes, not rentals.  Of that 70 million homes, about 30% are owned outright – no mortgage.  Of the roughly 50 million homes with a mortgage, about 25%, 12 million or so, are under water.

But you probably don’t care near as much about the other 11,999,999 mortgage holders as you do about yourself.

If you are one of those unfortunate underwater folks, this note will outline what some of your choices are, and what they might mean to you.  Many of the choices are dependent on the question of whether you are financially solvent or insolvent.  Insolvent means you do not have enough income or savings (excluding IRAs & 401Ks) to make the payments.

Here’s the topics, and the options.  Each title is also a link to a more detailed write-up

1. Sit Tight – If have the income or the reserves to make the payments, you may just want to sit tight and ride it out for however long it takes for prices to recover.  For some, an unpleasant but practical option may be #5 below.
2. Loan Modification – If you are insolvent, but have sufficient income to pay at least most of the mortgage, your lender may be willing to agree to a modification of your loan terms that allows you to make a lower monthly payment and still stay in your home.
3. Short Sale – If you are insolvent and cannot make a substantial regular payment, your lender may agree to let you sell the house, and accept the proceeds (short pay) as full payment of the debt.  There are some new government guidelines for lenders to help this along.
4. Deed in Lieu – If you are insolvent as in the Short Sale case, your lender may also be willing to simply take the keys back, and accept the property in lieu of payment of the debt.  This is more likely if a Short Sales has been attempted and was unsuccessful.
5. Strategic Default – If you are not insolvent, but are so far underwater that you seriously want out of the house and the mortgage, and don’t care what happens to your credit score and your ability to borrow for several years, you may simply choose to walk away and let your lender foreclose.
6. Foreclosure – If you cannot, or will not, make the mortgage payments, your lender, or current owner of your mortgage loan, can choose to foreclose (a minimum 6-month legal process), take possession and sell the property.

Please keep in mind that I am a real estate agent, not an attorney.  I know about this stuff because I’ve dealt with it quite a bit, and I have a fair amount of training on it.  But if you need specific legal advice, consult your attorney, and if you need specific tax advice or financial advice, consult your accountant or your financial advisor.

If you would like to talk a bit more about any of this, please give me a call.

Chuck Reiling, Associate Broker, RE/MAX Metro+Eastside
(206) 850-3507

In this post we will talk about Option 6 – Foreclosure, voluntary or involuntary.  The better you understand the foreclosure process, the better able you are to manage it and minimize the negative effects on yourself and your family.  In many ways, the foreclosure laws are set up to protect you, the borrower, as well as your lender, and so it is an orderly process that you can work within to try to minimize those negative effects, other than the basic big ones of giving up your house and getting a very big black mark on your credit. 

Washington state has provision for two kinds of foreclosure, called Judicial Foreclosure and Non-Judicial Foreclosure.  Almost all mortgage foreclosures in Washington are Non-Judicial foreclosures, and that is what is described in these notes.  The key to understanding the process is the required notices and statutory minimum timelines.

Please keep in mind that foreclosure is a legal process, and I am not an attorney.  So this is meant to be a overview guide to the process and some of the issues.  If you think you are going to have to go through foreclosure, read this guide and then talk with an attorney – I think it will help you to ask better questions and make more sense out of the answers.

Almost all residential ‘mortgages’ written in Washington are actually ‘deeds of trust’, and it is the deed of trust that sets up the non-judicial foreclosure capability.   Unlike a true mortgage, which is a two-party document, the deed of trust has a third party ‘trustee’ who actually holds the deed to your house.  The deed of trust includes an ‘acceleration clause’ which allows the lender to demand payment in full ‘immediately’ if the borrower defaults on the payments, and a ‘power of sale clause’ which says that if the borrower has defaulted, and cannot pay, then the lender can initiate  Non-Judicial Foreclosure.  A Non-Judicial Foreclosure is executed by the ‘trustee’, meaning it doesn’t have to go through the courts; the trustee can simply follow the notification procedures and minimum timelines defined by state law, and proceed to sell the property at a public foreclosure auction held at a county courthouse. 

Here are the key terms, notices and timelines:

• Default – the date your mortgage payment becomes overdue, and you do not pay it
• State law says the Trustee’s Sale, i.e. the foreclosure sale of your property, cannot occur sooner than 190 days after the actual Default date.
• Notice of Default – at any time after you default, your lender can send you a Notice of Default and statement of intent to Foreclose.  The lender decides when to send this notice and start the foreclosure process, and it could be soon after default, or delayed for weeks or even months.  They must first correspond with you and assess your ability to pay the debt and explore with you other options for avoiding foreclosure – a new statutory requirement as of 2009.
• Notice of Trustees Sale – this is a public document which is recorded in the County Recorders Office and published.  It is a public statement that your home is being foreclosed and will be auctioned to the highest bidder unless you stop the process by some payment agreement with the lender.  The lender does not have to agree to anything other than payment in full.  It cannot be issued sooner than at least 30 days after the Notice of Default is sent to you.
• Trustee’s Sale – the actual sale of your home on the county courthouse steps.  The sale cannot occur sooner than 90 days after the Notice of Trustee’s sale is recorded and published, and also not sooner than 190 days after the original Default, whichever comes last.  Once the sale is done, you cannot redeem the property.
• After the sale, the law provides 20 additional days for you to move out.  If you are paying attention to the timelines, you will have already planned, and perhaps executed, your move to your new home on your own schedule.

In Washington state law, when a home is sold at a Non-Judicial Foreclosure Sale, the lender cannot later pursue you, the borrower, for a deficiency judgment for the difference between the value of the property and what you owed them at the time of foreclosure.  Your debt on the original ‘mortgage’ is simply wiped out, along with most liens on the property, and you no longer have any rights or obligations to the property.  In the past, the IRS has said that you have to count forgiven debt as taxable ‘income’; however, the Mortgage Forgiveness Debt Relief Act of 2007 changed that so at least for now, and through 2012, you can generally exclude that debt-forgiveness ’income’.

Note that the lender also has the right to instead choose to pursue a Judicial foreclosure, through the courts, and in that case they can also pursue a deficiency judgement.  The main reason lenders don’t do this is that in a Judicial Foreclosure, you retain the right to redeem the property for a period of one year.  While it is pretty unlikely that you would do that, the possibility of such a redemption claim would certainly create a big problem in the mind of a potential buyer when the lender tried to re-sell the property, so generally lenders don’t try to go the Judicial Foreclosure route.

If you want to talk about this further, please give me a call.  I understand that it is a very uncomfortable and private thing, but if I can help you sort through it, I will.  I have talked with a lot of people sliding into foreclosure, dealt with a number of short sales, taken a lot of training, and am a designated Certified Distressed Property Expert.  And in the end, if you are going to go through this, you really do need to also talk with an attorney to make sure you’ve got all the facts straight.

If you really can’t make your mortgage payment, not even reduced ones, and you’ve tried to do a short sale and it hasn’t worked, then maybe by now you feel like you are running out of time.  But there is one more option that may get you out with less damage to your credit record than a foreclosure.  That option is to get your lender to make a Deed in Lieu of Foreclosure agreement with you.  In essence, the lender is acknowledging that you can’t pay, and you can’t get it sold, so maybe they are better off to take the property back now, rather than go through the whole foreclosure process and wind up taking it back later anyway.  The logic for them is that the property is likely to be in better condition if you turn it over to them voluntarily now, and they may be able to shorten the time that they have to hold a non-earning asset, i.e. a ‘problem loan’, on their books.  

A key point in either a short sale agreement or a deed-in-lieu agreement is to ensure that you have the lender’s specific statement that they will not pursue a Deficiency Judgement against you for the difference between the value of the property and what you owe them at the time of the agreement.  My recommendation is that you have an attorney read the agreement to make sure that it is clear on that point before you sign it.  If you want to review some of the legal framework for this, refer back to the  Option 3 – Short-Sale article and the paragraph starting “Bear with me on a bit of legalese…”

If your lender will not give up the right to a deficiency judgment, and that would be a significant overhanging debt for you,  maybe you are better off just letting the propety go into foreclosure and wipe the slate clean that way.  Once again, if you are in this kind of situation, talk with an attorney.  My only purpose here is to give you an idea of how things work, and help you ask the right questions if the time comes.  If your lender is participating in the HAFA process described in the Option 3 – Short-Sale article, the deficiency judgement problem should not arise, but check to make sure.  That HAFA process provides for doing a Deed in Lieu of Foreclosure as a fallback from an unsuccessful Short Sale . 

If you want to talk about this further, please give me a call.  I understand that it is a very uncomfortable and private thing, but if I can help you sort through it, I will.  I have talked with a lot of people sliding into foreclosure, dealt with a number of short sales, taken a lot of training, and am a designated Certified Distressed Property Expert.  Your lender may not be willing to discuss Deed-in-Lieu if you have not at least tried a Short Sale, since that would in fact be the fastest path for them to get this non-earning asset off their books.  There is more information on the short-sale process posted on our website.  You can read through what you would have to do, and what I would have to do, to make that work.  If you are past that point, I can’t help directly, but I’m happy to swap ideas and pointers if it would help you sort this out.

 Banks and other mortgage lenders may be willing to consider a loan modification if you can’t afford your mortgage as it is now.  What ‘loan modification’ means is that they may be willing to reduce the amount of your monthly payments, reduce the principal (the amount you owe), or both.  There are two reasons they might be willing to do this:

 1. If you can’t afford the current payment, you are probably going to default (get way behind or stop paying altogether) and they will have to foreclose.  Foreclosure is not good.  It takes a long time, and doesn’t recover much of the money they loaned you.  If they take the property back at the foreclosure sale, then they have to fix it up and try to sell it.  That takes more time and money, and they don’t really want to be in the real estate business anyway.

2. The second reason is that the government is pushing all mortgage lenders hard to make loan modifications that help people stay in their homes and helps them continue to make their (reduced) mortgage payments.  And it would mean that your mortgage is would still be an earning asset for the bank, instead of a non-earning asset, and they wouldn’t have to report it in their loan loss category.

The name of the government program that fosters the Loan Modification programs is Home Affordable Modification Program (HAMP) and here is the HAMP website that will tell you a lot more about it, including how to tell if you qualify.  Basically they figure that if your mortgage, taxes and insurance total more than 31% of your gross income, you are probably in trouble – and if so, you may be able to get a loan modification conversation going with your lender.

Part of the loan modification process will be a be a 3-month trial period that your lender will set up with you to help both of you to decide if you can keep up at the new payment level.  If it works out, then the lender will modify the terms of your loan to fit the new plan.

To get started, what you need to do is call your lender, or whoever is the loan servicer that you currently send your mortgage payments too.  If they are willing to consider a loan modification, and not all of them are, they will probably send you some forms to fill out about your income and assets, and ask for copies of things like pay stubs and bank statements.  In essence, you are de-qualifying for your loan.

If you want to talk about this further, please give me a call.  I understand that it is a very uncomfortable and private thing, but if I can help you sort through it, I will.

The caveat on all these programs is that your loan may not even be held by a lender who can make a decision.  It may have been ‘securitized’ and packaged into a bundle of some kind that could have been sold to an investor almost anywhere in the world.  It will take quite a bit of time to untangle the more complicated pieces of this mess.

Truly an unpleasant situation.

Just for some rough numbers on the scale of the problem: there are about 110 million households in the U.S.  Of that, about 70 million are in owned homes, not rentals.  Of that 70 million homes, about 30% are owned outright – no mortgage.  Of the roughly 50 million homes with a mortgage, about 25%, 12 million or so are under water.

But you probably don’t care near as much about the other 11,999,999 mortgage holders as you do about yourself. 

In this series of articles over the next few days I’ll outline what some of your choices are, and what they might mean to you.  Here’s the topics, and the options:

1. Sit Tight
2. Loan Modification
3. Short Sale
4. Deed in Lieu
5. Strategic Default
6. Foreclosure

Please keep in mind that I am a real estate agent, not an attorney.  I know about this stuff because I’ve dealt with it quite a bit, and I have a fair amount of training on it.  But if you need specific legal advice, consult your attorney, and if you need specific tax advice or financial advice, consult your accountant or your financial advisor.  And if you don’t have any of those people in your pocket, I can help you find them. 

Now, here’s the first article:

Option 1 – Sit Tight

When you bought your home, the monthly payment probably seemed affordable, and a fair price to pay for the place you wanted to live in.  Unless your financial situation has changed, it probably still is.  Or unless you got one of those adjustable rate mortgages like an Option ARM which is now biting you.  But if you are only a little bit underwater, and you can still afford the payments, you may want to just Sit Tight. 

If you are insolvent, meaning you can’t make the payments, and don’t have enough savings to make up the difference, then the Loan Modification, Short Sale or Deed in Lieu options may be available to you, and Foreclosure is the worst case scenario.

If you are not insolvent, then you can Sit Tight, or you can consider a Strategic Default, which is really a voluntary Foreclosure path, painful but practical sometimes.

If you Sit Tight, you may come out of this situation pretty well in the long run.  Historically, inflation carries the prices of homes upward, and if we get a bout of serious inflation, as we did in the 1970’s (ask your folks what they paid for their house in the early ‘70’s), you’ll be paying back an ever smaller looking mortgage with very cheap dollars, and accumulating some serious-looking equity.  Here’s some thoughts on interest rates.  I don’t think we’ll start that inflationary run right away, but there are some pretty smart people who say the smartest thing you can do right now is buy a big sound asset with a low-rate long-term fixed-rate mortgage.  For an idea of what might happen to the real estate market in the nearer term, see Predicting the Housing Market Recovery for some projections of the housing market by Moody’s Investor Services.

Please keep in mind, again, that I am a real estate agent, not an attorney.  I know about this stuff because I’ve dealt with it quite a bit, and I have a fair amount of training on it.  But if you need specific legal advice, consult your attorney, and if you need specific tax advice or financial advice, consult your accountant or your financial advisor. 

If you would like to talk a bit more about any of this, please give me a call.

Chuck Reiling, Associate Broker, RE/MAX Metro+Eastside – (206) 850-3507

Tax Credit for Homebuyers

First-Time Homebuyers (FTHBs): First-time homebuyers (that is, people who have not owned a home within the last three years) may be eligible for the tax credit. The credit for FTHBs is 10% of the purchase price of the home, with a maximum available credit of $8,000.

Single taxpayers and married couples filing a joint return may qualify for the full tax credit amount.

Current Owners: The tax credit program now gives those who already own a residence some additional reasons to move to a new home. This incentive comes in the form of a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a primary residence for a period of five consecutive years during the last eight years.

Single taxpayers and married couples filing a joint return may qualify for the full tax credit amount.

What are the New Deadlines?

In order to qualify for the credit, all contracts need to be in effect no later than April 30, 2010 and close no later than June 30, 2010.

Tax Credit Versus Tax Deduction

It’s important to remember that the tax credit is just that… a tax credit. The benefit of a tax credit is that it’s a dollar-for-dollar tax reduction, rather than a reduction in a tax liability that would only save you $1,000 to $1,500 when all was said and done. So, if a first-time homebuyer were to owe $8,000 in income taxes and would qualify for a tax credit of $8,000, she would owe nothing.

Better still, the tax credit is refundable, which means the homebuyer can receive a check for the credit if he or she has little income tax liability. For example, if a first-time homebuyer is eligible for a tax credit of $8,000 but is liable for $4,000 in income tax, she can still receive a check for the remaining $4,000!

Higher Income Caps

The amount of income someone can earn and qualify for the full amount of the credit has been increased.

Single tax filers who earn up to $125,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, single filers who earn $145,000 and above are ineligible

Joint filers who earn up to  $225,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, joint filers who earn $245,000 and above are ineligible.

Maximum Purchase Price

Qualifying buyers may purchase a property with a maximum sale price of $800,000.

Tax Incentives to Spur Energy Savings and Green Jobs

This provision is designed to help promote energy-efficient investments in homes by extending and expanding tax credits through 2010 for purchases such as new furnaces, energy-efficient windows and doors, or insulation.

Landmark Energy Savings

This provision provides $5 Billion for energy efficient improvements for more than one million modest-income homes through weatherization. According to some estimates, this can help modest-income families save an average of $350 a year on heating and air conditioning bills.

Repairing Public Housing and Making Key Energy Efficiency Retrofits To HUD-Assisted Housing

This provision provides a total of $6.3 Billion for increasing energy efficiency in federally supported housing programs. Specifically, it establishes a new program to upgrade HUD-sponsored low-income housing (for elderly, disabled, and Section to increase energy efficiency, including new insulation, windows, and frames.

Expanding Housing Assistance

This provision increases support for several critical housing programs. It includes $2 Billion for the Neighborhood Stabilization Program to help communities purchase and rehabilitate foreclosed, vacant properties.

The credit, which is really a straight $8,000 rebate, only applies to purchases closed and recorded by November 30, which means they need to have a signed contract in escrow by about October 16 to expect to be closed by the end of November. 

Less than 30 days to arrange financing and find the right house is cutting it a little short already

Let us know if we can help.

Sincerely,