Congress with the Latest Bill and Help for Homeowners

By Carole Rodoni

Yes, it’s done. Congress passed and the President signed a bill to help homeowners. As a consumer who might benefit from this bill, it is important to know exactly what each part of the bill entails. From the $300 billion program, to a first time buyer credit, there is help on the way for homeowners and buyers.

First is a $300 billion fund available to current homeowners from October 2008 through October 2011. For the homeowner to qualify, you must be employed, have a decent FICO score, be current on your existing loan, never have lied on a loan application and not have a debt-to-income ratio of more than 35%. Here’s the way it will work: you have a home that once was valued at $400,000 but is now worth $300,000. The first step is to get the existing lender to agree (it’s voluntary) to forgive the loan. Then the fun steps in and depending on the current value of the home (based on a new appraisal), the fund will give you a new loan at 90% of the homes current value and give you a 10% equity stake free.

Next – what happens when you sell, transfer title, etc. If it is done in Year One the fun gets 100% of everything – the 90% of the loan payoff plus the 10% equity. If it is done in Year Two forward, then everything is split 50/50, the equity and any appreciation. And it applies going forward to your heirs.

So if you think you may qualify, there will be a number to call (not currently released) to initiate the process. This program is designed to help approximately 200,000 homeowners keep their homes.

Second is the First Time Buyer Credit of $7,500. It started April 9, 2008 and will end June 30, 2009. It is not a gift, but a no interest loan. It begins to get phased out at annual incomes of $75,000 for a single person and $150,000 for married couples. Here is how it works: if you are a first time buyer within the time frames (owner –occupied only), you may apply for the credit on your 2008 or 2009 tax return. IF you are granted the credit, then it must be paid back, usually over 15 years (at about a $500.00) a year hit to amount owed in following years) but if you sell or transfer the property within 15 years, all is due and payable on a pro-rated basis.

If you are a first time buyer and qualify under the government program, you may take advantage of a two year zero interest loan to help you get the American dream. With prices down and interest rates still low, this benefit is just another plus to help you get into homeownership.

Fannie & Freddie

• Yes, they now have a blank check from the government so they will not fail.
• Yes, they have $5 trillion in mortgages on the books.
• Yes, they have a 1.5% delinquency rate on loans or about $180 billion (actually quite low) but their reserves are only $80 billion, hence the need for government help.
• Also, the combined limit has been raised from $417,000 to $625,500. These loans will probably have higher rates and more fees, but at least the limit is higher.

The new combined limits for consumers has been raised to $625,500, which means that higher loan amounts should be easier to get as they will now be backed by Fannie and Freddie. And for FHA loans, Fannie and Freddie are really willing to help you. The new down payment will be 3.5% (and yes, PMI will be necessary) but the interest rates will be competitive. They will even look at consumers who have had to do short sales or foreclosures with some requirements and time limits. The down payment can be a gift. Your debt-to-income ratio can be as high as 43%.

Tale of Two Markets

• Yes, we are down in the San Francisco Bay Area: -22.9% from the peak in May 2006 (but not in all areas)
• Also NOTE last column – if you owned your home from 2000 to March 2008, even with the correction, you are still up 68%. Wow!
• Lastly, in all 20 largest areas, only the Detroit metro area declined in value during this period. So real estate does pay off if you give it TIME!

Metro Area Peak % Change Since Peak % Change 2000 to March 2008
Las Vegas Aug 2006 -27.9 69
San Diego Nov 2005 -26.0 85
Los Angeles Sep 2006 -24.4 107
Miami Dec 2006 -25.6 109
San Francisco May 2006 -22.9 68
Seattle July 2007 -7.3 78
Detroit Dec 2005 -24.8 -4

What this graph really tells us is that while real estate is down from its peak in our largest metropolitan areas, you should look back eight years (a good gauge for the real estate market) and see that in that time period ALL but one of the metro areas was still up in appreciation. From San Francisco, to Las Vegas, to Los Angeles, to Miami etc… anyone who owned a home over the last eight years is likely sitting with appreciation in the value of their property. WOW!! Compare that to some stocks, like those in the auto industry, the financial industry or the airline industry, which have all been down 50-90% over the same time period. Real estate, even in this correcting market, looks good. It just process that real estate is something every consumer needs in his or her portfolio. Buy in the right location, hold it for at least 5 to 7 years and real estate may create wealth for you and your family.

“Non Qualified Use” Provision

There is another new provision in a bill passed by Congress that will take effect January 1, 2009 that you need to know about. This involves rental properties that revert back to owner-occupied properties.

Old Rule: Rental > Owner-Occupied > Live in 2 out of 5 years > Sell and get $250,000 capital gains tax free if single, $500,000 if married.

New Rule: Rental (let’s say for 3 years) > Owner-Occupied > Live 2 out of 5 years > Sell – now the government says the 3 years of rental were “non-qualified” use so you will only get credit for the years that were owner occupied, or in this example: 2/5th of the gain is tax free. There is a formula: the top number is the amount of time it was owner-occupied and the bottom number is the time of total ownership of the property, this fraction then determines the amount of tax free gain and the balance that will be taxable up to the $250,000 or $500,000 limit.

Why is this important? If you own a rental or plan to buy one and then plan to revert it back to a principal residence at some point in time, you need to be aware that you will not be getting 100% of the taxable gain credit up to the $250,000 or $500,000 limit. You will only be entitled to a portion of it tax free, with the balance being taxed. Have a CPA help you with this if you are thinking of doing this or are in this situation.

Defaults/Foreclosures for Q2-2007 vs. Q2-2008

Yes, the numbers look large from one year over the previous year, but when comparing one quarter from the previous quarter, it looks better. Defaults Example: 2007 vs. 2008 > +124% - Q1-2008 vs. Q2-2008 > +6.6% Foreclosures Example: 2007 vs. 2008 > +261% -- Q1-2008 vs. Q2-2008 > +33.5%

So if there is some “good news” in the default foreclosure numbers, it is that maybe we are reaching the plateau when numbers will start to stabilize. That doesn’t mean that defaults and foreclosures are over, it means that as existing inventory sells, it starts affecting the new inventory from climbing so quickly. In many areas consumers and investors are jumping at properties in foreclosure so that we are seeing a multi-offer marketplace. So why is this good for us? First, it helps take inventory off the market as these properties sell. It brings price stability over time as multi-offers usually raise the bar for prices. It also means that real estate, even in the toughest corrected markets, eventually balances out and comes back. So don’t be afraid to start looking seriously at the market in your area – just know the inventory levels, who is buying, how lenders are responding to the area you are looking in, if you qualify, what kind of competition you face and what kind of market you are in from multi-offer, to stable, to still declining, etc.

Q2-2008 Defaults/Foreclosures

Yes, they are still going up but at a slower pace, one quarter over another. Statewide: Number of homes and condos = 8.4 million

121,341 Notice of Default (+124.6% from 2007, +6.6% from Q1-2008)
• Highest Number since 1992
• Most in specific areas
• Two out of five end up in Foreclosure
• Now only 22% pay up vs. 52% a year ago

Default By County

County Q1-2007 Q1-2008 % Change
Alameda 1,612 3,812 +136.5%
Contra Costa 2,316 5,046 +117.9%
Marin 118 284 +140.7%
Monterey 483 1,688 +249.5%
Napa 128 336 +162.5%
Sacramento 3,840 7,325 +90.8%
San Francisco 257 418 +62.6%
San Mateo 463 1,066 +130.2%
Santa Clara 1,275 3,751 +194.2%
Santa Cruz 155 531 +242.6%
Solano 1,065 2,427 +127.9%
Sonoma 462 1,376 +197.8%

Source: Dataquick

63,061 Foreclosures (+261% from 2007, +33.5% from Q1-2008)
• Highest Number since 1988

Foreclosures/Trustee Deeds

County Q1-2007 Q1-2008 % Change
Alameda 497 1,709 +243.9%
Contra Costa 777 2,965 +281.6%
Marin 25 128 +412.0%
Monterey 156 847 +442.9%
Napa 34 162 +376.5%
Sacramento 1,662 4.475 +169.3%
San Francisco 50 141 +182.0%
San Mateo 97 347 +257.7%
Santa Clara 255 1,560 +511.8%
Santa Cruz 46 232 +404.3%
Solano 324 1,406 +334.0%
Sonoma 163 788 +383.4%

Source: Dataquick

Lastly, here are some questions to ask any real estate agent if you are ready to sell: 1) What will you do different than other agents? 2) What is your marketing plan step-by-step? 3) Is it important to get home inspections prior to selling my home and why? 4) Do you do Open Houses? 5) If we have multiple offers what is your plan for capturing the best buyer? 6) What about staging – is it necessary and important? 7) Are you a member of the California Association of Realtors and/or National Association of Realtors? 8) Will you be at the sign-off at the title company? 9) How will you communicate with me? 10) Do you hear offers in person, via fax or just have them dropped off? 11) How many listings have you had this year, how many sold and at what percentage were the actual selling process either above or below the list prices?

There are many more questions to ask but these will give you a good idea as to the professionalism of the agent you choose. Choose wisely, but especially in this market, use a real estate agent – it is the best thing you can do to help yourself. Also, don’t forget to consult your CPA or tax advisor to find out what works best for your own personal situation.

*Carole Rodoni is past President of Alain Pinel in Silicon Valley, and past COO of Cornish & Carey Residential Real Estate (acquired by Coldwell Banker). She speaks frequently to realtors, and consults for First American Title nationally.

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