Housing BUZZ

Foreclosures coming in 2010

Heading into 2010 the national unemployment rate is at 10.2% (California’s rate even higher) and still climbing, foreclosure activity is finally decreasing, a large volume of ARM resets are looming, and banks have yet to release an unknown volume of foreclosed homes onto the market.  But are things really this bleak…I suggest not.

There are positives looking forward, the first time homebuyer tax credit was just extended and improved to include previous homeowners, the temporary loan limits from 2009 have been extended into 2010, and the government is still sticking with their mortgage backed security purchase program that is keeping interest rates at incredible levels. But there are definitely some unknown factors that will affect our housing market in 2010.

The number one anticipated factor to affect our market this coming year is another anticipated round of foreclosures sure to flood our local markets and kill any price stability we may have gained through the end of this year.  But, although it has been speculated that banks have an insurmountable stockpile of foreclosures on their books, I don’t believe that we’ll see the same affects on the housing market that foreclosures had in 2008.

Market conditions for one should keep banks from flooding the markets with their inventory of REO properties. While local market conditions may seem plausible for banks to begin releasing their stockpiled foreclosure inventory, they may not be willing to release them until broader housing markets show better signs of recovery.

Other reasons may be more logistical in nature… I think it’s more than obvious that banks (that are left) have a lot on their plates at the moment. You may recall that some nationally (some internationally) held banks have recently consolidated with failing banks over the past year (Bank of America acquiring Countrywide, Chase acquiring Washington Mutual, Wells Fargo acquiring Wachovia) and may not be able to liquidate much of their foreclosure holdings until they have implemented systems to handle the workload.

Also considering added strict government oversight due to previous bank failures, banks must now show signs of recovery or face lack of government support. When a bank brings a foreclosed home to market they must simultaneously write down the loss from the asset (the home) which will then show up on their balance sheet and thus affect their gross worth as a company. 

And many banks have finally realized the benefits of short sales and have been implementing new policies in order to expedite these sales. Think about it, if the bank never has to foreclose and market the property as an REO then they don’t have write down the asset on their books until the short sale has been finalized. This will help them avoid being cut off from possible federal lifelines.

Recalling the first wave of foreclosures that rocked our housing market over 2008, the majority of those loans were mostly subprime mortgages from banks that no longer exist (Lehman Brothers, First Franklin, Indy Mac Bank, etc.). Current foreclosure activity is being linked to more stable loan programs from lenders who can offer alternatives for the homeowners to avoid foreclosure, such as loan modifications, short sales, or even lease back programs aimed at keeping families in their homes. All of this will lead to better housing stability.

Taking into further consideration with the recent recovery in the stock market (if you can call it recovery), we are now seeing levels near 10,000 points in the DOW, which means people are beginning to regain losses on their investments. So, unlike homeowners who suffered mortgage delinquency earlier this year when the stock market tanked out at 6,500 points back in March, today’s homeowners have the ability to dip into their stock investments and help pay for homeownership expenses.

Foreclosure activity has also been steadily decreasing for a few months now (according to RealtyTrac.com) from March of 2009 which was the peak of foreclosure activity for CA. This means there will be less defaults moving forward and hopefully the real estate market will gain some real ground moving into 2010.

Legislative Update – What can we expect for the housing market come 2010?

As 2009 winds down lawmakers are discussing which key ingredients of last year’s economic stimulus plan to reinstate for next year. Looking back over 2009, the real estate markets have reacted better than expected to the legislatives’ efforts to stimulate the housing market:

• the continuance of the temporary high balance loan limits for both the GSE’s (Fannie Mae and Freddie Mac)and for FHA,
• the implementation of the $8,000 first time homebuyer tax credit,
• as well as the Treasury’s budgeted purchase of mortgage backed securities to artificially keep interest rates at historic low rates

 

But as we head towards 2010 much of the aforementioned has been headed towards an end with no clear hope of extension.

 

Temporary Loan Limits

 

You may recall that these temporary loan limits, set at 125% of local area median home price and capped at $729,750, were first introduced in 2008 and then re-extended in early 2009,  as a way to make up for a fall-out in the jumbo loan market. Up until 2008, the conforming loan limits that allowed Fannie Mae and Freddie Mac to purchase loans were capped at $417,000. Any loans that were more than $417,000 were considered a “jumbo” mortgage and were funded by money invested in Wall Street.

 

When Wall Street failed due to the subprime mortgage meltdown and resulting real estate bubble, jumbo loans all but disappeared creating a huge lack of credit for those homeowners looking to purchase or refinance loans that were higher than $417,000. So, as part of the first stimulus plan back in 2008, the legislature gave Fannie Mae and Freddie Mac the ability to “temporarily” purchase loans up to 125% of local area median home price and capped at $729,750. But this legislature was scheduled to expire at the end of 2008.

 

By the end of the year the legislature had agreed to set the permanent conforming loan limit to 125% of local area median home price but capped at $625,000.  Then, as part of President Obama’s stimulus package at the beginning of 2009, the conforming loan limit was once again “temporarily” reinstated to as much as $729,750 dependant of local area median home price.

 

And now as we head into 2010vwe are faced once again with loosing these higher limits. Currently the temporary loan limits will expire on December 31, 2009 in which case loan limits will be reduced in many markets, the loan limit for Santa Clara County will be reduced to $625,000.

 

That was of course until last week when the House and Senate passed legislation to extend the current loan limits for FHA and Freddie Mac and Fannie Mae (the government sponsored enterprises, or GSEs) through December 31, 2010. The extension is included in the Continuing Resolution (CR) to fund the government for the remainder of 2009. The CR is part of the Department of Interior FY2010 Appropriations bill. As of the deadline for filing this report, the President was expected to sign the bill into law over the weekend.

 

Extending the Tax Credit

 

Currently first time homebuyers are eligible to receive a tax credit equal to 10% of the purchase price (maximum credit of $8,000) of their home when they purchase through December 1, 2009. The tax credit is in addition to any income tax refunds that they may already qualify to receive. But, even though there has been an over whelming response to the credit (as more buyers have taken advantage of the credit than previously anticipated) there has been no clear message that the tax credit will remain an option come 2010 until just recently.

The extension and expansion of the homebuyer tax credit is currently the pending business in the Senate. And after a long week of negotiation on the credit, an agreement on the scope of both expansion and extension has been reached.

 

The extension is part of a larger bill that has not yet gone to a vote, however. A Senate vote on the underlying bill will occur in the Senate during the week of November 1. The package will then go back to the House. The House is expected to accept the Senate amendments, vote on the package and send it to the President for signature.

 

The underlying bill is an extension of unemployment benefits. Other provisions in the bill include expansion of the net operating loss carry-back rules, new requirements for some tax return preparers and noncontroversial provisions that "pay for" these changes.

The agreement on the extension and expansion of the credit is as follows:

• Credit available for purchases before May 1, 2010. Prospective purchasers with binding contracts in place as of April 30, 2010 will be allowed an additional 60 days to complete the transaction.
• Credit remains at $8000 for first-time purchasers. No change to definition of first-time purchaser.
• New $6500 tax credit for repeat buyers who purchase between December 1, 2009 and May 1, 2010. Repeat buyers must have lived in their homes consecutively for 5 of the previous 8 years.
• Income limits are expanded to $125,000 on a single return and $225,000 on a joint return. Current law $20,000 phase-out retained.
• New anti-fraud limitations are imposed.

The White House has indicated that President intends to sign the legislation.

What to Know About Inheriting Property

Inheriting real estate can be one of the most painful ways to acquire property. You've lost a loved one and now you have to settle their estate. Unless you're the surviving spouse – in which case legal transfer of the property to you should occur relatively quickly and seamlessly and without tax penalties – receiving an inheritance can be a long and complicated process. It could take several weeks for the executor of the estate and the courts to divvy up the deceased's assets and property, including the home.

If you plan to sell the property make sure you read on to get a general idea about what to do next as inheriting property can be exceedingly confusing for the heirs.

Transferring the property. Getting legal advice should be your first step. Depending on where you live, the legal process will vary, but all states allow those who inherited property to have the property transferred from the previous owner's name to theirs. Sometimes a lawyer will be needed for this process and other times the clerk of courts office can guide you through the process. Since the property isn't being sold to those inheriting it, it's unlikely that there would be any transfer tax.

Transference of real-estate property can become exceedingly sticky when more than one beneficiary is named. Unless the will is very clear about the percentage of ownership each beneficiary receives or includes provisions about what will happen if one beneficiary wants to sell the home while the others do not, be prepared for disputes that may arise.

Meeting of the minds. After a death, most people are upset and not always able to think clearly about what they should do with the property. Some family members may want to keep it while others may want to sell the property right away and still others may think it should be sold after some time has passed. So if there are multiple heirs to the property then this is the time to have multiple round-table discussions to come together and try to have a meeting of the minds. Allow everyone to express their opinions and ideas about what should happen with the property. Depending on how different everyone's thoughts are, this could take several attempts to reach a decision. However, it's worth the time to try to determine who might want to keep the property and who wants to sell it immediately. Finding a viable solution for all could avoid a lawsuit that forces the sale of the property.

Check the condition of the property. Go to the house and see what condition the property is in. Sometimes inherited property can be badly run down and need a tremendous amount of work before it is ready to be sold. There are cases where those who inherited the property find they have inherited a huge mess that needs immediate attention. If immediate attention isn't necessary, before you dive into fixing up the home, consult with a real estate agent to see which improvement projects might help the home sell faster. Be sure to keep good records of any and all costs for improvements; this will be important when determining if capital gains and state taxes apply.

Get financially organized. Right away it is crucial to figure out if the mortgage has been paid and if there are any liens on the property. Some lenders treat the death of a borrower as a trigger for immediate repayment of the loan, however given the current climate of the market most lenders will not immediately accelerate the note as long as they continue to receive payments. And, if there are provisions for survivorship either through a trust or deed, then the loan will remain in effect.

Your legal advisor or even real estate professional can help you conduct a title search against the property to determine any and all possible liens that may be against the property. Also, check to make sure the property taxes and homeowner's insurance are current and paid until the property is sold or transferred to its new owner occupant.

Get the property appraised. It's very critical to get an accurate appraisal so everyone understands the value of the home. This helps the inherited parties to see how much they can expect to receive after the home is sold. Once the appraisal comes in, have another meeting to determine your low-end offer that will be accepted.

Taxing situations. Inheritance tax may be imposed on the transfer of assets, including real estate. The tax rate is dependent on the relationship between the descendent and the inheritor. Estate taxes, meanwhile, are imposed on the value of the property at death. The Federal government currently has an estate tax for estates in excess of $2 million dollars.

It's easier to sell the home after death as inherited property is taxed on the value of the property the day the owner died and therefore less capital-gains tax. If you are required to pay capital-gains you will be taxed on the difference between what you net from the sale and your taxable basis (the fair market value at time of inheritance plus improvements minus depreciation). Currently, the federal capital-gains tax is 15 percent.

Contact professionals to help. Inheriting a home or other property is an incredibly complex issue with ramifications that can vary from state to state. If you're due to inherit real estate, be sure to contact professional for advice on all areas of the inheritance.