Realtor Coaching & Training: Columbia
HREU Students and Future students…we strive to bring you the real estate related news stories that could impact your real estate business.
There is a growing national backlash towards housing. It appears that the mortgage interest deduction is on the new Presidents chopping block..
whats next?
Read this article and let me know what you think:
Kai Ryssdal: So you grow up, get a good job, marry, you have a couple of kids, and buy a house. It’s the American dream, right? But a lot people got in trouble chasing that last part and helped take the economy down with them. In today’s installment of Taking Stock, our series of occasional conversations with people who can give us the longer view of our economic situation, Columbia University economist Edmund Phelps and American attitudes toward home ownership. Phelps says that dream of owning a house has been fueled, in large part, by the government.
EDMUND PHELPS: Democrats and Republicans have been very keen to make home ownership almost a national purpose. President Clinton got through Congress a 1997 act to force mortgage lenders to relax the conditions on loans for low-income people. And then there were tax breaks on capital gains and houses in 1998. But I have to say that it isn’t just public policy. The banks, which used to have something to do with business lending, sorta of lost their expertise in that area, and they began to focus all their lending efforts on residential mortgages and other soft targets.
Ryssdal: Let me ask you this, though. Because if the government gets rid of the home-mortgage interest deduction, I for one will be extremely annoyed, and so will the 70 percent of Americans who own their own homes. I mean, it would be a sea change in the way we look at homes in this country.
PHELPS: Yes, it would be. But to me it makes a lot of sense. Because, look, this is a very funny kind of asset in which the owner of the asset gets the services of the asset — the shelter and the comforts and so forth that the asset provides — and at the same time, as if the owner was paying income tax on those services, the owner gets to deduct the mortgage costs.
Ryssdal: Is that a bad thing?
PHELPS: Yeah, to me that is quite crazy. There are only two logical ways to go: one is to deny mortgage-interest deductibility because no tax is being paid on the benefits, or start taxing the benefits.
Ryssdal: You’re a renter, aren’t you?
PHELPS: I am a renter, you caught me. But that’s not why I have these positions. It just happens that I’m a renter.
Ryssdal: Well, when you live in New York City it can be tough to own, right?
PHELPS: Lots of us here in New York City are renters, yes. We’re a very strange breed.
Ryssdal: Well, even though you’ve made peace with the idea of renting, for a lot of people it is a dirty word out there. I mean you have to make the rent every single month. You’re just giving this check over to the land lord, and you’re not getting anything out of it. Do me a favor and weigh the pros and cons of renting or not.
PHELPS: If you rent, that’s it. You don’t have to pay any interest to anybody. You don’t have to pay any maintenance costs to anybody. You don’t have to worry about whether the boiler is going to break down. While if you own your own home, you have a hundred aggravations. Maybe the roof will leek while you’re overseas. In strict money terms, there is no reason to think there is a systematic, long-run, sustainable, durable difference between the two.
Ryssdal: Is this home-ownership obsession that we’ve had, has it affected the rest of our economic lives? Does it change the way we save? Does it change the way we spend in other regards?
PHELPS: Of course, while house prices were going up, that became a substitute for saving. People would refinance their homes, take the profit and spend that, hoping that prices would go up again. And then they would do the same thing and spend that. But I do think this home-ownership craze does tie in with a newfound fashion for spending rather than saving. I’m old enough to remember in the 1930s and the 1940s when thrift, frugality was considered an important virtue. In those days we all knew Benjamin Franklin’s aphorism, “A penny saved is a penny earned.” Today, the official doctrine seems to be that a penny spent is a penny earned.
Ryssdal: Do you think professor that there’s a way to change the housing paradigm in this country? That it is the American dream, and if you have the material means, you ought to buy a house.
PHELPS: I’m hoping that the administration and other thought leaders will succeed eventually in bringing the country back to the older idea that the American dream is having a career, getting a job, and getting involved in it, and doing well. That was the core of the good life. That’s what we have to get back to, and get away from this mystique that the most important thing in your life that could ever happen to you is to be a home owner.
Ryssdal: Edmund Phelps at Columbia University. Thanks so much for your time.
PHELPS: You’re welcome. Good to be here.
Ryssdal: Edmund Phelps won the Nobel Prize in economics in 2006. He’s the director of Columbia University’s Center on Capitalism and Society.รง
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With 1 in 5 homeowners underwater, many pundits predict a flood of people walking away from their homes. Five readers talked to us about why they are – and are not – sticking around.
Fewer walking away than you think
Almost 20% of homeowners – or 8.3 million people – are “underwater” on their mortgages, owing more than their properties are worth. Another 2.2 million are near that drowning point, known as “negative amortization.”
A basic cost-benefit analysis predicts that these people will abandon their homes and accept foreclosure. But there is little data measuring whether that logic holds true. In fact, Eric Johnson, a business professor at Columbia University, believes it doesn’t. After years of studying behavioral economics – essentially the economics of choice – he argues that people will simply not make such rational decisions.
“There are two effects that suggest [walk aways] won’t happen so easily,” he says. “The first is the endowment effect. People tend to value their own house above its market price. Owners don’t want to sell at a loss. They have what we call a loss aversion.”
The second is that people weigh the importance of immediate outcomes more heavily than long-term effects. Walking away involves upfront expenditures of time, money and effort, while the benefits of walking away are back-loaded.
“People are impatient and weight present costs and benefits more, so they will walk away less often than we might think,” Johnson says.
Following are some homeowners who have thought hard about the costs and benefits of walking away from their mortgages.
Won’t walk: Rich Foretich
My wife, Tara, and I live in Pass Christian, Miss. We began building our `dream home’ in mid-2007 in one of the nicer, new subdivisions on the Coast. Halfway through construction, the house appraised for about $835,000.
In June 2008, we moved in and sought a permanent mortgage on the house. We owed $640,000 on the construction and had a loan-to-value ratio (the amount owed versus the value of the house) of 76.6% until the bank’s re-appraisal came in at $575,000. This put us underwater. We owe $65,000 more than the house is worth. We seriously considered walking away from the house and letting the bank take it.
But doing this is not in my nature. I borrowed the money. I built the house. I owe the money. As long as I have the means to pay it back, I plan to do so. I believe it is sad that people see an easy way out and simply do not lie in the bed they made. I believe I am a classic case for a walk-away, but what’s `right’ about doing that? I could have easily walked away and contributed to the economic mess we are currently in. This would have helped my family out financially but it’s not the right thing to do.
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Considering: Pat Conroy
As a first-time homebuyer, I bought a condo in West Los Angeles. I worked hard and put 20% down on the $465,000 price and took a 30-year fixed mortgage. My credit score is 700 plus. I’m a lender’s dream – you would think.
But the value of the condo has dropped 20%, which isn’t terrible. I’m still slightly on the plus-side, supposedly, but there’s no market; no one is buying. Meanwhile, my income – I’m an executive recruiter – has dropped 75%.
The kicker is that banks won’t refinance my loan. My savings are almost exhausted, and I’m considering walking away. It’s interesting that I can’t get a refi from my original lender.
I’ve always been a hard worker, paid my way through college and scrimped to save for a downpayment. If I could get a refinance to lower my interest rate – I’m paying 6.25% right now – and extend the term out to 30 years (I have 27 years left on my mortgage), I could save $400 a month.
If I walk away, I would look at it as a business decision. But I also look at it from a responsibility viewpoint, and as long as I can afford my mortgage, I’ll pay it.
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Considering: Ben Franklin
My wife and I have a condominium in Denver. I purchased in December 2005. I was a young bachelor with meager income, poor credit and no down payment. I had not intended to purchase at that time, but because the loan qualifications were so minimal and the prospect of rebuilding my credit so attractive, it seemed like a smart decision at the time to pay a high interest rate for two years and then refinance.
I drastically improved my credit – and married my beautiful wife. When the time came to refinance, I did not have enough equity to qualify. The appraisal at the time of purchase was $106,000, and my loan was only for $100,000. Now I would be lucky to get $85,000, so refinancing without bringing $13,000 plus closing costs to the table is unrealistic.
Our family, we have a daughter, has simply outgrown the condo. We can’t lease it without losing hundreds of dollars monthly, and we can’t sell without bringing thousands of dollars to the table. My wife is not on the loan, so if we were to just say “forget it” and walk away, only my credit would be damaged. I’ve spent four years being financially responsible and have excellent credit now, but that’s not what has prevented us from walking away. While it seems like the government is only helping the irresponsible folks who are able to stay in their homes while not paying their mortgage, families like mine are equally affected but our moral standards don’t allow us to not send out that monthly check.
If the current trend continues, we may have to put morals aside in order to do what’s best for our family. So the question is: Do we continue to be responsible and stay in a situation that will take us years to get out of, or just walk away like so many other Americans?
Won’t walk away: Mike Files
I have been in my house for five years, and I paid $82,000. The house next door just sold at auction. It was listed for $55,000 and sold for $51,000. The houses selling here in South Dallas are all foreclosures.
I’m sure I’m underwater, but I would never walk away due to the damage that would do to my credit score. I will be looking at whether I can refinance under the president’s plan. I would like to free up more money each month.
I have a first mortgage, a 30-year fixed at 6.5% and a second; the total payment is $745 a month. I also have credit card debt and a car loan. If I could refi down to a 5% or so, it would give me more money to spend.
SOURCE: CNNMoney.com
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The next wave of foreclosures is going to be with Alt-A mortgages. Alt-A mortgages are starting to reset now. Many of these home owners are finding that they can’t afford their new re-set payment. When they try to refinance the loan they are being told “no” by their lender because their home has depreciated and wont appraise. Clearly there will be a dramatic rise in the home sellers who must sell and will need to list with agents who are short sale certified. Learn the exact skills and secrets to become short sale certified now and be the agent with all the great priced short sale listings. Download the free 7 part Agent Short Sale Secrets crash course now.
Homeowners lured by low introductory rates to Alt-A mortgages, which typically require little or no proof of a borrower’s income, may fuel the next wave of foreclosures and further delay a recovery from the worst housing decline since the 1930s. Almost 16 percent of securitized Alt-A loans issued since January 2006 are at least 60 days late. Defaults will accelerate next year and continue through 2011 as these loans hit their three- and five-year reset periods, according to RealtyTrac Inc., an Irvine, California-based foreclosure data provider.
About 3 million U.S. borrowers have Alt-A mortgages totaling $1 trillion, compared with $855 billion of subprime loans outstanding, according to Inside Mortgage Finance, a trade publication in Bethesda, Maryland. Agents, read that again…there are more Alt-A mortgage than there were Sub-Prime! Of the Alt-A borrowers, 70 percent may have exaggerated their income, said David Olson, president of mortgage research firm Wholesale Access in Columbia, Maryland.
While subprime home loans describe a type of borrower –those with bad or limited credit histories — Alt-A, or Alternative A- paper, are shorthand for a type of loan developed in the mid- 1980s.
`No Doc’ Push
Many Alt-A loans go to borrowers with credit scores higher than subprime and lower than prime, and carried lower interest rates than subprime mortgages.
Alt-A loans were used to expand home ownership among first- time buyers as prices climbed out of reach for many of them, according to Rick Sharga, executive vice president for marketing at RealtyTrac.
“To grow, the market had to embrace more borrowers, and the obvious way to do that was to move down the credit scale,” said Guy Cecala, publisher of Inside Mortgage Finance. “Once the door was opened, it was abused.”
Some mortgage brokers and loan officers urged borrowers to inflate incomes, exaggerate job titles or increase loan size because lenders could profit by selling riskier Alt-A loans to investors, said Jim Croft, founder of Reston, Virginia-based Mortgage Asset Research Institute.
“When homes prices were going up, people were saying, `If I don’t buy now, I’ll never be able to buy,”’ Croft said.
The Alt-A market grew more than seven-fold to $400 billion in 2006 from $55 billion in 2001, according to Inside Mortgage Finance.
Since home prices peaked in July 2006, they have fallen 18.8 percent nationally, leaving an estimated 29 percent of borrowers who bought in the last five years with houses worth less than what they owe on their mortgages, according to Zillow.com, an Internet real estate valuation site.
Seriously Delinquent
The “serious delinquency” rate for Alt-A mortgages issued in 2007 hit 10 percent in half the time it took for those from 2006 to reach the same level, Moody’s Investors Service said in a report last month.
“Alt-A loans have turned toxic,” Cecala said. The combination of exaggerated income, falling home prices and payments that reset higher is “a recipe for disaster,” he said.
The loans accounted for 8.9 percent of the almost $3 trillion in U.S. home loans made in 2006, according to an estimate by Inside Mortgage Finance.
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Some content from Bloomberg
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Interest rates are INCREASING for the best borrowers….
Rates on average 30-year fixed mortgages rose to 6.37 percent this week, about the highest in six years. More than 70 percent of new home loans are bought or guaranteed by the government-chartered companies, known as “prime” mortgages.
Higher rates for the safest borrowers may exacerbate the worst housing market since the Great Depression and thwart efforts by Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson to bring mortgage rates down. The slowest-growing economy since 2001 is already shutting out some buyers and increasing costs for those seeking to borrow with smaller down payments or below-average credit scores.
“New home buyers are going to have to get credit at reasonable terms for the decline to stop,” said Christopher Mayer, a real-estate professor at Columbia University’s business school in New York. “The price issue alone is having a very, very big effect.”
As rates rise, sellers are forced to lower prices for buyers seeking to make the same monthly payments. A rate of 6.37 percent equates to a monthly payment of $1,871 on a $300,000 mortgage, up from $1,739 when rates were as low as 5.69 percent in May, according to data from Bankrate.com in North Palm Beach, Florida.
Record High
Applications for mortgages fell 34 percent to the lowest level since 2000 in the week ended Aug. 15 from a year earlier, partly because of the increase in loan rates, according to the Washington-based Mortgage Bankers Association.
Paulson received authority from Congress last month to pump unlimited amounts of capital into Fannie and Freddie in an emergency after the debt yields rose and their shares tumbled 90 percent from a year earlier. Freddie paid its highest yields over Treasuries on record in a debt sale Aug. 19.
Fannie, the largest mortgage-finance provider, was created as part of Franklin D. Roosevelt’s New Deal in the 1930s and became a publicly owned company in 1968. Freddie was started in 1970, when the economy was strained by the Vietnam War.
The economy’s growth is forecast to slow to 1.5 percent this year, the slowest since 0.8 percent growth in 2001.
Outside People
Home foreclosure filings rose 55 percent in July and banks repossessed almost three times as many homes as a year earlier as falling prices made it harder to sell or refinance, according to RealtyTrac Inc., an Irvine, California-based seller of foreclosure data. U.S. home prices fell 15.8 percent in May, the most since at least 2001, according to the S&P/Case-Shiller home- price index.
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