A ‘first look’ break for buyers

Dec 27, 2013 Kenneth R. Harney

WASHINGTON — An important resource for first-time and other homebuyers who find themselves in unfair competition with deep-pocket investors bearing cash just got better: The two biggest players in the mortgage market, Fannie Mae and Freddie Mac, are now giving non-investor shoppers 20-day exclusive rights to bid on and buy new listings they are selling.

During the 20-day “first look” period, investors will be excluded from submitting bids. To qualify, non-investor buyers will need to commit to make the home their principal residence for at least a year. The idea, according to Fannie and Freddie officials, is to encourage greater owner-occupancy, stabilize neighborhoods that have seen significant numbers of foreclosures, and generally help out shoppers who find it difficult to outbid all-cash investors.

All-cash purchases of homes hit a high mark last month, according to a new report from RealtyTrac, a housing data firm. A stunning 42 percent of all residential sales nationwide went to buyers who paid cash — the highest rate since RealtyTrac began measuring the phenomenon in early 2011, and nearly double what it was as recently as May.

First-time buyers looking for affordably priced homes have been hit especially hard by the profusion of investors waving cash at sellers. They locate a home that fits their budget, make an offer with a mortgage contingency, and then lose the sale to an investor who has no financing requirements. A mortgage contingency ties the contract to the ability of the bidder to obtain a loan, which slows the process and often makes the offer less attractive to the seller.

Fannie and Freddie have large inventories of previously foreclosed homes for sale — byproducts of the economic woes of 2008-10. As of last week, Fannie had roughly 35,000 houses listed for sale around the country through its “HomePath” (HomePath.com) program. Freddie Mac had 13,000 active listings in its “HomeSteps” (HomeSteps.com) program. Buyers can access the listings online by state, city and price range, then submit offers through a participating realty agent.

In California, for example, Fannie had 2,136 properties listed, many below $200,000. Current listings range from a $139,000, two-bedroom single-family house in Big Bear City to a $700,000 three-bedroom home in South San Francisco. Buyers in San Diego could pick up a two-bedroom condo for $394,000.

In Washington state, Fannie had nearly 1,900 listings including a three-bedroom, two-and-a-half-bath condo in Everett for $215,000 and a four-bedroom, three-bath house in Monroe at $445,000. Shoppers in Virginia had 742 houses to choose from, including a three-bedroom, three-bath house in Virginia Beach for $214,000 or a condo in Alexandria for $369,900.

Freddie also has active listings in every state through HomeSteps, ranging from a three-bedroom single-family home in Key Largo, Fla., for $485,000 to a $99,900 condo in Silver Spring, Md.

Both companies offer mortgage deals on some, but not all, properties. Freddie’s financing includes features such as 5 percent down payments, no required appraisals, and no mortgage insurance. Freddie also provides up to $500 toward new purchasers’ home warranty policies.

Fannie’s financing deals start at 5 percent down with no mortgage insurance or appraisal costs. HomePath listings that need some fix-up may also be eligible for “renovation mortgages,” where the loan amount includes funds for the purchase itself plus the estimated money needed for improvements.

Here’s the deal on “first look” exclusions of investors from bidding. On all homes listed on or after Dec. 17 (Freddie) and Jan. 2 (Fannie), owner-occupant buyers will get a shot at viewing houses and submitting bids with no competition from investors for 20 days after listing. Currently the exclusion is for the first 15 days.

If Fannie or Freddie receives acceptable offers from owner-occupant bidders, they will sign contracts to sell without seeing any competing bids from investors. Chris Bowden, Freddie Mac’s senior vice president for HomeSteps, said the extra time for exclusive bidding could be “especially important for buyers in markets where home inventories are shrinking.”

So if you or someone you know is thinking of a home purchase, check out HomeSteps and HomePath listings online. If you qualify and keep your eye on the clock, you just may get a chance to buy a new home with mortgage terms you can afford — without worrying about fat-cat investors muscling in and outbidding you with cash.

Read more at http://www.arcamax.com/homeandgarden/thenationshousing/s-1445354?print#GQbd3 jbfLCPwZY5j.99

Equity in homes surges in past year, allowing owners to sell, borrow and refinance

By Kenneth R. Harney December 20, 8:45 AM

The biggest story in American real estate in 2013 hasn’t gotten the attention it deserves, so let’s shout this out: Homeowners’ net equity holdings soared by $2.2 trillion between the third quarter of 2012 and the third quarter of this year, according to new data collected by the Federal Reserve.

This is a record rebound for a 12-month period. And it’s crucially important in personal financial terms for hundreds of thousands of owners who have been underwater on their mortgages for years. They now have options they didn’t have before: They can sell their homes and not have to bring money to the closing. They may be able to borrow against their equity to help pay for college tuition, home improvements and other purposes. They may be able to refinance their mortgages without having to use a government-aided program.

Home equity is the difference between the mortgage debt outstanding on a residence and the current market value of the home. If your house is worth $300,000 and you owe the bank $150,000 — whether from a single mortgage or multiple loans — you have $150,000 in equity. If your mortgage debt totals $350,000 on a $300,000 house, you have $50,000 in negative equity. Equity generally grows in several ways: You lower your debt by making payments to your lender, the value of your house increases because market conditions improve or you raise the home’s sales value by remodeling or upgrading it.

Growing home equity not only signifies widespread recovery in household personal wealth, it also provides an important boost for the ongoing economic recovery. Consumers who have a cushion of equity in their homes are more likely to spend money on goods and services than those who don’t. The latest Fed “flow of funds” calculations show that owners have now seen their equity stakes grow by more than $3.2 trillion from the post-bust low point in the first quarter of 2011.

During the financial crisis of 2008-11, millions of Americans fell into negative equity positions as the sale value of their homes plummeted. With the recovery that took hold in 2012, values began to turn upward again, dramatically so in some areas where prices had fallen fastest.

A study released this week by CoreLogic, a real estate and mortgage data firm, estimated that 791,000 homes moved from negative to positive equity status during the third quarter of this year alone, and more than 3 million have done so since the beginning of 2013. Though 6.4 million homes continue to be underwater on their mortgage debt — 13 percent of all homes with a mortgage — that is down from 7.2 million (nearly 15 percent) as recently as the end of the second quarter of this year.

CoreLogic researchers found that among the states that experienced the most severe property devaluations during the bust and have recovered impressively, some continue to have persistent hangovers of negative equity. In Nevada, nearly a third of all homes are underwater, despite price gains. In Florida, nearly 29 percent are still in negative equity, and in Arizona it’s nearly 23 percent.

In California, which suffered deep equity losses in non-coastal areas between 2007 and 2010, home values have roared back in the past two years. Now the state has just a 13 percent negative equity rate — significantly lower than Ohio (18 percent), Michigan and Illinois (both 17.7 percent,) Rhode Island (16.6 percent) and Maryland (15.6 percent).

The states with the highest rates of homeowner equity: Texas and Alaska, where 96.1 percent of all owners with mortgages are in positive territory, Montana (95.8 percent), North Dakota (95.7 percent) and Wyoming (95.4 percent).

Other findings from the CoreLogic study:

●People with higher-priced homes are somewhat more likely to have positive equity than owners of lower-cost houses. While 92 percent of all mortgaged homes in the country valued at more than $200,000 have positive equity, 82 percent of homes valued at or below $200,000 do.

●Though homeowner equity wealth has increased rapidly in the past year, 10 million homeowners still have only modest equity stakes — less than 20 percent — and that puts them at risk should property values tumble again.

But another bust is nowhere in sight, thanks to tougher underwriting and regulatory oversight. So whether you’re one of the recent arrivals to positive equity status or you’ve enjoyed it all along, the new year looks encouraging.

The Nation’s Housing: An unsettling time for real estate owners and investors

Kenneth R. Harney Dec 13, 2013

WASHINGTON — For one of the least productive congressional sessions in modern history, the final word about tax reform last week was entirely in character: Nothing’s happening.

But is that good news or bad news for homeowners, buyers and small-scale real estate investors? A bit of both.

When House Ways and Means Committee Chairman Dave Camp, R-Mich., announced that not only will he not reveal the details of his long-awaited comprehensive tax reform bill this year but he also will not seek passage of a so-called “extenders” bill for expiring tax code benefits, it was a sweet and sour mix for real estate interests.

Camp’s big reform bill — which would attempt to lower individual and corporate income tax rates to a maximum of 25 percent, is expected to call for significant cutbacks — possibly elimination — of prized real estate deductions for home mortgage interest, local property taxes and other write-offs in order to pay for lower marginal rates. With major changes like these now pushed back well into 2014 for even preliminary debate — in the middle of a re-election year for Congress — homeownership advocates are at least moderately relieved.

But there’s a key negative here as well: The failure of tax writers to put together an extenders bill means that important expiring Internal Revenue Code provisions affecting large numbers of homeowners — especially relief from taxation on mortgage debt forgiveness by lenders in most states, plus current deductions for mortgage insurance premiums and energy-saving home improvements — will lapse Dec. 31. California owners are not affected by the debt forgiveness expiration because state law exempts them from taxation when lenders cancel mortgage principal debt as part of short sales. The IRS has announced that it will not levy taxes on such transactions in California even if the federal exemption for owners elsewhere expires.

Complicating matters even more: Though they were tucked away in eye-glazing discussion drafts and attracted little attention before Thanksgiving, Senate tax writers’ reform-bill proposals for real estate should be unsettling for anyone owning residential investment property, such as rental houses.

Senate Finance Committee Chairman Max Baucus, D-Mont., would terminate one of the oldest financial planning techniques used by real estate investors — tax-deferred exchanges under Section 1031 of the code. In a 1031 exchange, property owners can defer taxes indefinitely when they swap “like kind” investment real estate within specified time periods following IRS regulations. Under current law, investors can exchange rental real estate without incurring immediate tax liability — even if they’ve racked up huge paper gains on their properties. Taxes generally are not due until the investors actually sell their real estate for money.

Baucus also would sharply increase the depreciation period for residential investment real estate from the current 27.5 years to 43 years. Stretching out the depreciation schedule means investors would be able write off less per year on their properties than at present.

On top of that, the Senate reform proposal would also tax so-called “recapture” of depreciation — where the IRS requires payback of a portion of an investor’s earlier write-offs — at property owners’ ordinary income tax rates, rather than at lower capital gains rates, as at present.

Under Baucus’ plan, mom-and-pop real estate investors — people who’ve purchased a small portfolio of rental houses or condos — could be hit hard. Besides the depreciation deduction stretch-out, the inability to exchange properties tax-free for others of similar or greater value would put a severe crimp on their ability to grow and manage their investments over time.

William Horan, president of Realty Exchange Corp. of Gainesville, Va., says “if Section 1031 of the code is repealed, then small investor owners would be facing massive taxes and most likely would not sell their properties. [Real estate] values for everyone would be lowered by removing vital investors from the market.”

A more immediate concern for homeowners, however, is Congress’ inability — or unwillingness — this year to extend key tax laws. Tops on the list is the mortgage debt forgiveness law. Unless Congress agrees to a retroactive extension, large numbers of owners could face big tax bills following short sales, foreclosures or loan modifications next year when lenders cancel a portion of the balances owed them. To bring that home: A $100,000 debt cancellation could lead to $28,000 in additional taxes for a short seller — all solely because Congress could not get its act together to extend a popular, pro-consumer law.

Appelate court throws out long-standing sniff test for ‘sham’ joint mortgage and title businesses

Kenneth R. Harney December 3, 2013

In a major reversal for government efforts to regulate business ventures among real estate brokerage, title insurance and mortgage companies, a federal appellate court has thrown out HUD’s long-standing 10-point test that defines key standards for affiliates under the Real Estate Settlement Procedures Act (RESPA).

The U.S. Appeals Court for the Sixth Circuit handed down its potentially far-reaching decision in Carter v. Welles-Bowen Realty Inc. the day before Thanksgiving. The ruling is certain to grab the attention of real estate industry executives nationwide, especially given the aggressive approach on affiliated businesses adopted by the Consumer Financial Protection Bureau, which inherited RESPA enforcement authority from HUD.

First enacted in 1974, RESPA bans kickbacks in exchange for referrals of business among settlement service providers in residential mortgage transactions. A 1983 amendment to the law created a safe harbor for affiliated businesses that disclose their arrangements to clients, allow consumers free choice to reject using an affiliate, and who receive compensation from the venture only in proportion to their ownership interests.

In 1996, HUD added a 10-point set of criteria to help determine which affiliates are “bona fide” under RESPA, rather than shams or shells intended to disguise referral kickbacks.

That policy statement has shaped the structures of thousands of affiliated businesses since its publication. It says that in determining whether an affiliated business is actually a “sham,” regulators will consider factors including whether the new entity has its own offices and employees, competes in the marketplace for business, and whether it sends business exclusively to one of the settlement service providers that created it.

Though HUD never formally issued the policy statement as binding regulations, real estate and mortgage industry participants have widely interpreted them as crucial guidelines to avoid legal attacks by the federal government.

During the past decade, HUD negotiated numerous legal settlements – some involving sizable financial payments to consumers and the government – with firms whose affiliate relationships did not meet these tests. More recently, the CFPB has used the policy statement in proceedings against a Texas homebuilder and mortgage affiliates, as well as a prominent Louisville law firm and its title and mortgage affiliates.

Though HUD never formally issued the policy statement as binding regulations, real estate and mortgage industry participants have widely interpreted them as crucial guidelines to avoid legal attacks by the federal government.” In the Carter v. Welles-Bowen Realty case, homebuyers claimed that an Ohio brokerage and Chicago Title Insurance Co. had created affiliate relationships that violated RESPA. Though the affiliated businesses may have met the three baseline RESPA statutory requirements for safe harbor, the buyers alleged that they did not conform to the HUD’s 10-point standard.

A federal district court concluded that the 17-year-old policy statement was unconstitutionally vague, did not constitute agency regulations and therefore did not merit deference by the courts. That decision was appealed, with the federal government weighing in strongly on the side of the buyers and HUD.

Now, the appellate court has upheld the lower court’s findings. Absent a successful appeal by the Justice Department to the U.S. Supreme Court, the decision carries the force of law for real estate affiliated businesses located in the Sixth Circuit, which includes Michigan, Kentucky, Ohio and Tennessee. Elsewhere around the country it serves as judicial precedent for other court cases involving the 10-point affiliated business test.

One piece of pending litigation brought by the CFPB will undoubtedly be affected because the defendants, the law firm of Borders & Borders, are located in Louisville, Ky.

In that case, the CFPB charged that the law firm operated multiple sham affiliates with real estate brokerages and mortgage company partners in violation of the HUD policy statement. Borders & Borders denied the CFPB’s allegations, and plans to fight the bureau in court proceedings this month.

Its arguments are now bolstered by the Sixth Circuit appellate decision. T. Morgan Ward, Borders & Borders’ outside counsel in the case, told me Friday that the new decision “confirms everything we’ve been saying” to the CFPB – “that they are wrong about the law” and that “their effort to crush my client” by taking the firm to court “has been over the top.”

The CFPB had no immediate comment on the Sixth Circuit appellate court decision.

Prompt foreclosures may spur recovery of housing prices overall , appraisal firm finds

By Kenneth R. Harney, Friday, November 29, 8:40 AM

Why have many of the local housing markets that were hit hardest during the bust – especially in California – bounced back so vigorously and quickly, with prices close to or exceeding where they were in 2005 and 2006?

And why have many others along the East Coast and in the Midwest had a slower move toward recovery, with sluggish sales and gradual increases in values?

Although multiple economic factors are at work, appraisal industry experts believe they have isolated a crucial and perhaps surprising answer: Real estate markets rebound much faster in areas where state law permits foreclosures to proceed quickly, moving homes with defaulted loans into new owners’ hands expeditiously rather than allowing them to sit and deteriorate, tied up in court procedures for years. Prices of foreclosed homes in areas where foreclosures can be done more speedily typically are depressed and negatively affect values of neighboring properties, but they don’t remain depressed for lengthy periods because investors and other buyers swoop in and return them to residential use rapidly.

By contrast, in states where laws allow large numbers of homes in the process of foreclosure to remain in legal limbo, often empty and unsold, home-price recoveries are hindered because lenders are prevented from recovering and reselling the units to buyers who will fix them up and add value.

Pro Teck Valuation Services, a national appraisal firm based in Waltham, Mass., recently completed research in 30 major metropolitan areas; its findings dramatically illustrate the point. All the fastest-rebounding markets in October – those with strong sales, price increases and low inventories of unsold houses – were located in so-called nonjudicial states, where foreclosures can proceed without the intervention of courts.

All the worst-performing markets – where prices and sales have been less robust and there are excessive numbers of houses available but unsold – were located in judicial states, where post-default proceedings can stall foreclosure completions for two to three years or even more in some cases.

Among the best-performing areas were California markets such as Los Angeles and San Diego. California is a nonjudicial state. Among the worst performers were Florida markets such as Tampa and Fort Myers, as well as parts of Illinois and Wisconsin. All of these are judicial states.

Twenty-two states are classified as judicial foreclosure jurisdictions: Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Vermont and Wisconsin. All other states handle foreclosures without court participation.

Tom O’Grady, chief executive of Pro Teck, says the differing rebound patterns of judicial and nonjudicial states jumped out of the study data dramatically. “When we looked closer” at rebound performances state by state, “we observed that nonjudicial states bottomed out sooner” – typically between 2009 and 2011 – “versus 2011 to 2012 for judicial states, and have seen greater appreciation since the bottom,” typically 50 percent to 80 percent, compared with just 10 percent to 45 percent for judicial states, O’Grady said in comments for this column.

“Our hypothesis,” he added, “is that nonjudicial states have been able to work through the foreclosure [glut] faster, allowing them to get back into a non-distressed housing market sooner, and are therefore seeing greater appreciation.”

California, for example, experienced severe price declines immediately after the bust hit in 2007 and 2008: Thousands of foreclosed homes flooded the market, depressing values of other real estate in the area. O’Grady calls this a “concentrated foreclosure effect” that is painful while it’s happening but that relatively quickly purges the marketplace by turning over distressed units to new ownership.

Judicial states, on the other hand, tend to be still struggling with homes flowing out of the foreclosure pipeline, prolonging the negative price effects on other houses for sale.

O’Grady noted that in nonjudicial states such as California, foreclosures now account for just 10 percent of all sales, and home listings amount to a four-month supply – well below the national average. In slow-moving judicial states, by contrast, anywhere from 25 percent to 50 percent of all sales are foreclosures, and unsold inventory represents anywhere from a five-month to a 10-month supply.

The takeaway here? Though real estate prices are popularly thought of as reflecting the “location, location, location” mantra, inherent in that concept is something less well known: State laws governing foreclosure also affect market values and govern how well they bounce back after a shock. Prices take much longer to recover when foreclosures drag out for years.