Happy New Year to All

 I hope that 2011 is a healthy and prosperous one. I can honestly say that 2010 proved to be a very educational year for me and many of my colleagues involved in real estate. It never fails to amaze me that just when you think you have the banks, financing, short sales, foreclosures or the market figured out,  something changes. We all  have persevered through the largest financial crisis in history. We are left wiser and  with a sense of responsibility to stay informed and not let others make decisions for us without a clear understanding of what effects these decisions will have on our lives. At least that is what I am taking from it and those of you that know me well,  know that I am trying to make lemonade out of lemons. But really, what choice do we have. Far too many of us complain without offering reasonable solutions.  The one thing that all of us can agree on and maybe even be thankful for, is that we have all learned more about finance, politics and the inner workings of Wall Street than ever before. We have realized that it is now a global economy with the effects of our economic crisis reaching far off lands and their debt crisis effecting our pension plans. Very interesting times we live in.

Recent analysis and stats say that real estate has not yet stabilized. That said, it is important to remember that real estate is all about location, location, location. NW real estate fluctuations usually follow that of the SW, in particular, California. It did as values increased , and it is doing so as values decline. What sets our area apart from others is that we are very fortunate to have had the amount of new infrastructure built in Gig Harbor, even after devaluation in real estate began. The new Narrows Bridge was a catalyst for large box stores, the hospital, largest movie theater in the state, YMCA, Boys and Girls Club etc. I mean really, where else in the NW do you find such development. The timing was incredible. Would this type of development occur now? Absolutely not. Because developers were already in permit process, walking away from approvals and entitlements would have been very costly. Therefore, most commercial development continued to fruition. We now enjoy the many amenities that our area has to offer and a very desirable place to live. Think about what real estate prices might look like without the new bridge, hospital, shopping etc. It would be very difficult to convince a professional to move into our area knowing he/she would have to wait 30 minutes to cross the bridge. I remember those days well. Just another thing to be thankful for.

To put real estate values in perspective for you , real estate values in the Pacific Northwest declined a total of 3.17% in the first 3 Quarters of 2010. It declined 24.03% in the last 5 years but rose 79% since 1991. What does this all mean? It means that the average appreciation should only be approx 3% per year. This keeps nasty real estate bubbles at bay and big banks and Wall Street minding their manners. A 79% appreciation in real estate in the last 19 years or a whopping 4.2% appreciation yearly is a good market…better than average. This includes our 24.03% depreciation since late 2007.

The anomaly that became routine was that in 2005 and 2006, our real estate values rose by 2% per month. That’s right per month. No wonder our bubble burst. We could not sustain such growth. It is important to understand this and remember it as the latest Banking Reform Bill does nothing to prevent it from happening again, therefore, it is up to everyone to keep their eye on the ball and not the dog and pony show going on in Washington D.C.

Tax Credit  Information

By Val Savino

First time homebuyers who purchased their home between April 9, 2008 and December 31, 2008 and took advantage of the $7500 credit, must start repaying the credit this year.  Beginning with the 2010 tax return, you will repay $500 per year for 15 years, assuming that you keep your home as your principal residence.  If you sell your home before the credit is repaid, the unpaid balance of the credit will be due in the year of the sale.

You can pay more than $500 each year if you so desire, but that does not lessen your obligation in subsequent years.  Even if you paid extra in one year, you will still need to pay at least $500 in each year that you have a balance due.

It may sound tempting in this economic climate to rent out your home instead of selling it, but be careful if you have this credit.  The house must be used as your principal residence or the entire credit becomes due in the year of the conversion.  If you choose to rent out your home, be aware that you will have to repay the entire credit at one time when you file your tax return for the year of the conversion.  This rule also applies if your home is converted to business or vacation property as well.

There are some exceptions or allowances to the repayment rule.  If the taxpayer dies, any remaining installment payments are not due.  If the taxpayer filed a joint return and dies, the surviving spouse is required to pay their half of the remaining credit amount.

For taxpayers with the 2008 credit who sell their home, the repayment is limited to the amount of gain on the sale, provided the home is sold to an unrelated taxpayer.  If there is no gain, or if there is a loss on the sale, the remaining credit due may be reduced or even eliminated.

If the home is transferred to the spouse, or as part of a divorce settlement to a former spouse, the spouse who receives the home in the settlement is responsible for repaying any remaining credit due.

An exception applies if the home was destroyed, condemned, or disposed of under threat of condemnation.  You have three years to replace the home with a new principal residence, or you must repay the credit with the tax return in which the three-year period ended.

Banks, States Near Deal on Foreclosure Fund

In my last newsletter I discussed the improper, if not fraudulent, processing of foreclosures by several of our largest lenders/banks or as the industry calls it “robo-signing”. The attorney general of many states contacted trustees and lenders to inform them that they would be investigated and would appreciate cooperation.

Since then, it appears that the state attorneys general and many of our nations largest lenders are working out details on setting up a fund that would compensate homeowners who can prove they lost their home in an improper foreclosure. The lenders will be setting up this fund to help inoculate themselves from thousands of individual lawsuits stemming from the improperly processed foreclosures identified in late 2010. Among the details to be finalized are whether banks would take a new stab at modifying the mortgages of home owners whose foreclosure was processed improperly and whether the modifications would include write-downs of the principal. Isn’t this what we have been saying all along? If you modify, their will be less default, less short sale, less foreclosure and, ultimately, less devaluation in the market.

Year End Statistics

                                                              2009                              2010

Gig Harbor and Key Peninsula

Closed Transactions                                657                                  661

Average Sales Price                            $388,000                         $398,000

Days on Market                                       122                                  183

South Kitsap County

Closed Transactions                                 221                                 223

Average Sales Price                             $281,000                        $291,000

Days on Market                                         67                                  141

Home Sales 

Existing home sales resumed on an upward trend since bottoming in July. Sales activity rose to a seasonally adjusted annual rate of 4.68 million in November. This was up 22% from July and 5.6% above the 4.43 million level in October, but remained 27.9% below the 6.49 million tax credit rush a year ago. As steady job creation is expected to continue, industry experts are hopeful for 2011.

Home Sales

Existing home sales resumed on an upward trend since bottoming in July. Sales activity rose to a seasonally adjusted annual rate of 4.68 million in November. This was up 22% from July and 5.6% above the 4.43 million level in October, but remained 27.9% below the 6.49 million tax credit rush a year ago. As steady job creation is expected to continue, industry experts are hopeful for 2011.

Home Price

Home prices continued to stabilize. Median home prices edged up slightly to $170,600, 0.4% above year-ago levels. Distressed homes have accounted for a fairly stable market share, representing 33% of sales in November. This is on par with the 34% in October  and 33% in November 2009. Historically favorable interest rates, coupled with attractive home prices, continue to offer advantageous buying opportunities .

 Inventory

The number of homes on the market continued to decline. Total inventory fell to 3.71 million in November  from 3.86 million in October. This reflects the increasing response from buyers to improved affordability conditions. As lending standards return to historical norms and consumers become more confident about their financial situation, more people will be able to buy their first home, move up, or invest.

 Affordability

Housing affordability set a new record in November. The relationship between mortgage rates, home prices, and family income is the most favorable on record for buying. The home price-to-income ratio, currently at 13.5%, continues to remain well below the historical standard. Stabilizing home prices and rising interest rates are expected to begin drawing affordability back up toward more normal levels.

CMBS Delinquencies Hit Record High Despite Market Optimism

The delinquency rate for loans held in commercial mortgage-backed securities (CMBS) rose again in December with the percentage of loans 30 or more days delinquent, in foreclosure, or REO climbing 27 basis points to 9.20 percent. It is the highest delinquency rate in history for U.S. commercial real estate loans in CMBS. The value of delinquent loans now exceeds $61.5 billion.  In November, there was a reported rise of 35 basis points. December’s 27 basis point jump comes despite the fact that new issues continued to make their way into the calculation and servicers continued to resolve troubled loans. The December delinquency rate underscored that there still may be some nasty surprises in store even as the market shows some signs of healing. Multifamily remains the worst-performing property type with a delinquency rate of 16.48 percent even though vacancy rates have declined to 5.6% from 7.4% in 2009. The delinquency rate for loans on industrial properties hit 8.97 percent in December, up 233 basis points from 6.64 percent the month before.The hotel sector registered a delinquency rate of 14.31 percent in December, retail space carried a rate of 7.86 percent, and delinquencies on CMBS loans for office space were 6.93 percent.

 

Why A Moratorium on Foreclosures?

 Just when you think things are settling down and the market is improving, a new waive of recession related consequences come to light.

The summer of 2010 saw fair market activity, in fact, sales rose over 23% in the Pacific Northwest and specifically in South Puget Sound. Inventories declined, interest rates are at historic lows and buyers are eager to take advantage of lower home prices. However, we are now looking at unchartered territories, again. Last week, GMAC, was the first bank to suspend their pending foreclosures in 23 states (this now involves all 50 states), to investigate the bank’s practices related to the forging of documents needed for home foreclosures. Apparently, employees of both GMAC, Bank of America and Chase have had their employees signing documents without reading any of it or “robo-signing”. A financial manager at GMAC testified in a deposition that his job involved signing his name 10,000 times a month to foreclosure related documents without reading what he was signing, as if reading were possible when signing 10,000 of anything a month. In any case, the Senate Banking Committee will hold hearings after next month’s elections to look into the allegations that the nation’s largest banks have improperly foreclosed on struggling borrowers. Old Republic Title, one of the nation’s largest title companies, declared that they would no longer title any REO property being sold by GMAC. It will only be a matter of time before other Title companies realize that they must protect themselves, as well.

The news of this moratorium perplexed me, at first, as there was no mention of the remaining 27 states or if they would be included as they are non-judicial foreclosure states. Meaning, it does not take a judge to approve a foreclosure. Washington State is a non-judicial foreclosure state and it should not make any difference if a state is judicial or non-judicial in its foreclosures if the banks are foreclosing without proper procedures. A paper trail must prevail and the note must be in hand. An example of illegal mishandling of foreclosures is a man who lost his home due to foreclosure who did not have a mortgage, that’s right, owned his home outright and a couple who were foreclosed on due to a $75.00 late fee that they were in the process of contesting.

April Charney, the nation’s top foreclosure fighter and an advocate for all homeowners who are dealing with banks who fail to hold themselves to the same standards of documentation and recordation as they expect from their customers, says that it is important to recognize that these robo-signers are not low level bank employees. The signing is taking place only a handful of floors below the C-Suite offices, and if you think about it, this would have to be the case. This is not an accident, or something that went on without the bank’s knowledge. They all knew it was wrong. We certainly do not need to wait for our judicial system to rule on whether the banks and servicers were in fact breaking the law…just the fact that they have robo-signers signing 10,000 of anything a month is evidence of criminal wrong doing on a massive scale.

You may ask how does this affect us, especially if you are not at risk of foreclosure. Everyone’s at risk of foreclosure as long as banks are foreclosing on homes using fraudulent documents. And why are banks using fraudulent documents to foreclose?  Because the notes were never assigned to the trusts that are now trying to foreclose on the homes. The trusts are empty. Certificates in the trusts that facilitated the sale of mortgage-backed securities to investors all over the world are missing the “mortgage backed part.” Now the trusts want to foreclose, but they can’t prove they hold the loans.

A mortgage consists of a note which is the IOU the borrower agrees to repay and the mortgage or deed of trust, which is the lien on the property. The note is where the money is found, the mortgage is where the real estate is described.

Now this gets interesting. During the credit bubble, the banks put mortgage titles into a privatized system called MERS or Mortgage Electronic Registry System. 60 million properties are recorded in the name of MERS or 60% of the mortgages in this country and 97% of the loans made between 2005 and 2008. MERS is merely a vehicle for loans to pass through to trusts that are supposed to be holding the pools of loans that MERS has been foreclosing on and legally should not be entitled to do so as they never owned the loans. Courts are now privy to this information and are becoming hostile towards this process.

Wells-Fargo has gone so far as to present prospective buyers with a supposed “standard” addendum on the day of closing. This addendum states, in not so many words, that the buyer agrees to hold Wells harmless no matter what happens in the future and are not responsible for anything Wells told the buyer in the sales process. The buyer is encouraged to use a Wells Fargo attorney and title insurer and reportedly offers to split fees. So the bank is taking steps to steer buyers not to get their own legal advice. It would seem that Wells would be wise to follow suit with the other large banks and stop foreclosures.

So the question comes back to, “Who does own the loans”? Not the originator, not the trust, nor can it be owned by the investor. Perhaps, the bond insurer, but you would never be able to tie their payments to an individual property. Some people may actually not owe their mortgages, and they may never have a clear title to the property either. It’s a mess, no question about it. Wouldn’t it have been easier to modify the loans or amend the loans in some way? One thing is for sure, litigation will go on for some time while the soon to be shadow inventory increases.

 Barb Magnuson

Tax Consequences of a Short Sale, Foreclosure or Loan Modification

 When you have a short sale, foreclosure or loan modification, you may also have a cancellation of debt from the lienholder.  Each time a financial institution cancels a debt of $600 or more, the entity is required to file a form 1099-C with the IRS, and send a copy to the person who had the debt discharged.  Any amount of cancelled debt on a 1099-C must be reported as income on your tax return.  Fortunately, there are a few circumstances under which home owners can exclude this amount from income. These include:

1)     Income from the debt is fully excludable if the debt is discharged in bankruptcy.

2)     Income from the cancellation of debt is excludable for an insolvent person outside of bankruptcy to the extent that the borrower’s liabilities exceed the fair market value of their assets immediately before the discharge.  Please note that retirement accounts, 401K’s and IRA’s are taken into consideration in the insolvency equation.

3)     A homeowner whose mortgage debt was party or entirely forgiven (between January 1,2007 and December 31, 2012) may be able to claim tax relief under the Mortgage Forgiveness Debt Relief Act of 2007.  Generally taxpayers are allowed to exclude up to $2 million ($1 million if Single or Married Filing separately) of mortgage debt forgiveness on their principle residence, which is reported on Form 982.  The debt must be acquisition indebtedness with respect to the taxpayer’s principle residence.  In other words, a home equity loan is not excludable under this provision.   This exclusion does not apply to a taxpayer in bankruptcy.  An insolvent taxpayer (not in bankruptcy) can elect to have the mortgage forgiveness exclusion not apply and can instead rely on the exclusion for insolvent taxpayers.

Valerie Savino

A Positive Gain

~Median Sales price was up 1.2% over 2009, down .5% from 2008

~22% more homes closed than 2009; 55% more than 2008

~20% fewer homes were on the market than 2009; 23% fewer than 2008

~Homes remained on market 20 days less than a year ago

~We have 9.5 months of inventory, down from 2009

~Our area has experienced a 24% drop in value since late 2007

~We have a strong military presence with many families moving into the area.

~Our unemployment rate is slightly lower than the average.

~Our foreclosure rate is lower than the national average.

Mechanic Liens

We have all heard about mechanics liens and most of us don’t worry because title will be cleared at time of closing. Mechanic liens are one of those liens that can linger beyond your closing. Here’s why: a mechanics lien begins at the time the contractor or subcontractor shows up at the property. He/She collects payment (usually) after the job is completed. If he/she does not get paid then they head down to the county annex and file a lien on the property. So, what if you are buying the property and the lien is not filed until after you close on it. You will be liable for the lien. Remember, mechanic liens follow the property not the owner of the property.

Hints to never have a mechanics lien haunt you.

Be proactive.

During the listing, repairs and improvements can be made to the property. Make sure the contractor gives a lien release or an invoice that shows paid in full.

Ask escrow to make sure they get a copy of all the paid invoices for any work done during the time of Purchase and Sale.

Barb Magnuson

90 Day Market Activity Summary – October 2010 

When Kenneth Lowman worked with a buyer on a multimillion dollar home purchase in Las Vegas in December 09, the transaction took an unusual turn: It closed, and quickly.

The buyer was able to get jumbo financing in just 22 days-a far cry from six months earlier, when getting such a big loan, even for a highly creditworthy buyer, would have taken months and still might not have closed.

“The jumbo market is opening up, says NAR Chief Economist Lawrence Yun. Thanks to solid gains in the lower end of the housing market, the first-time home buyer tax credit, and the rebounding stock market, lenders in late 2009 began cautiously lending money beyond the safe Fannie Mae, Freddie Mac, and FHA loans on which they relied for income during the credit crunch. “Lenders can make only so much money holding Treasuries,” says Chris Varvares, president of the national economic forecasting firm Macroeconomic Advisors in St. Louis. “They’ve been holding onto reserves and hoarding capital, in part because of the decline in their share prices and in the price of the assets they hold on their balance sheets. Now that these are turning up, and the risk-adjusted return on making loans is rising, they’re pursuing more aggressive lending.” Only the largest lenders are financing jumbo loans, presently, as they can afford to hold jumbos in their portfolios.

Smaller lenders remain financially incapable to lend on jumbos, at least in significant volume. For investors to start coming in, home prices will need to firm up more. “Price stabilization is happening, says Yun, but I don’t’t expect investors to regain their appetite for non-agency mortgage-backed securities until at least 2011.” Existing-home sales in 2009 rose to an estimated 5 million units for the year, a 2% increase over the 4.9 million sales in 2008. The average price of homes sold was $225,000. For 2010, Yun is forecasting sales of 5.7 million units sold, a 13.6% increase.

The key to recovery in 2009 was the lower end of the existing home market. This fueled by the huge numbers of distressed sales-which drove down prices nationally by an average of 13 % for the year – buyers returned to the market looking for bargains. Also helping were continuing low interest rates (5.2% on average for 2009) and the first time home buyer tax credit, which the IRS says had been tapped by an estimated 1.4 million households halfway through 2009, a figure that includes 350,000 to 400,000 consumers who wouldn’t have bought without it. Close to 2 million buyers used the credit by the end of  November. Estimations are not in for users of the credit for end April 2010.

As economists disagree about how the economy will fare in 2010, they do agree that we are seeing a healthy turnaround in real estate sales across the nation and predict a 3.6% growth in 2010. Improved stock market performance, the need for business to replenish inventories, and the continuing impact of the federal government’s stimulus efforts are all playing a role in boosting the economy. Lingering high unemployment is the major unresolved problem. The unemployment rate is expected to hold at an elevated 10% and won’t likely show notable progress until 2011 because job-cutting in recent years has been so severe.

On the commercial side, the forcast remains cloudy. Commercial mortgage-backed securities continue to be troubled, with few investors prepared to get back in the market. That makes it hard for owners to refinance their existing debt and for others to buy. Some $300 billion in debt comes due in 2010, followed by $500 billion in 2011 and then a whopping $1.8 trillion in 2012.

Multifamily properties are in the best shape – but only marginally. Vacancy rate for multifamily to remain unchanged at 7.3%, with rents moving toward positive territory.

Office slide eases. In the office sector, vacancies will continue to rise (to 18.9% from 16%), but the news won’t be all bad. Absorption is expected to improve, although it will remain in negative territory.

Watch Out for a Spring Spike In Mortgage Rates

All last year, mortgage rates were at historically low levels. This happened because the Federal Reserve, our country’s central bank, launched a huge program to purchase Mortgage

Backed Securities. Buying these mortgage bonds raises their prices, which brings mortgage rates DOWN. Ultimately, the Fed committed to purchasing $1.25 trillion worth of these bonds by the end of 2009.

The good news is, the Fed extended their buying program into 2010. But they also signaled that they intend to wind down the program by the end of the first quarter (March 31st, to us ordinary folks).

REDUCED BUYING POWER

Here’s the important thing to note. If rates were to move up 1%, that means about a 10% loss in purchasing power for a homebuyer. For example, a 30 year $300,000 mortgage at 5.02% has a payment of about $1,614.00 per month. If the rate were to go up to 6%, to keep the monthly payment the same, you would have to lower the mortgage amount to less than $270,000.

This is why people who are thinking of buying a home or refinancing their mortgage should act now. Homebuyers have the added incentive of a tax credit, which the government has extended to April 30th

The industrial picture is mixed. Vacancies will rise (to 15% from 13.3%) and rents will drop slightly but absorption will improve.

Retail decline slows. Vacancies will continue to rise (13% from 11.9%). Rents will decline. Absorption will improve.

Improving  Your Credit Score

In today’s mortgage world, borrowers need to have a FICO credit score above 720 to get the best mortgage rates and to qualify for many programs. So what does a borrower do if their credit is slightly less than perfect?  Standards for FHA loans are less stringent and so they have become increasingly popular, now accounting for about 30% of new home mortgages. That’s a huge increase compared to 2006 when only 3% of new home loans were backed by FHA.   But now the Federal Housing Authority’s finances have deteriorated. There is mounting political pressure to make FHA buyers adhere to higher standards including increased FICO scores.

There are credit repair agencies out there who will charge you quite a bit to help you improve your credit score, but that approach is not always necessary. Contact your lender and ask if they will access your credit and give you solid tips to help you improve your credit score by 20 points or more in 30 to 60 days. This may be enough to help you qualify for the low-rate mortgage you are seeking, and could save you many thousands of dollars in interest over the life of your loan. Many of today’s lenders understand the challenges of our present economy and will work with you over the long-run to help you obtain a good mortgage.