Weekly Lender News from Dan Hrey of Chase

Although experts have speculated that the US may already by in a recession,the first hardcore signs appeared in Wednesday morning’s 3rd QuarterAdvance Gross Domestic Product report. The report showed that consumer spending declined at the fastest pace in 28 years. The report also reflected the largest quarterly decline since the end of the last recessionin 2001.

In other news, as expected, the Fed cut the Fed Funds Rate by .50% thisweek, lowering it to 1.00%. Initially, both Stocks and Bonds had little reaction to the Fed cut, but eventually Stocks had the second highest increase in history and Mortgage Bonds finished much lower on the day. Industry News According to Inside Mortgage Finance, new mortgage originations fell anestimated 33% between 2Q08 and 3Q08, to $300 billion; this is the lowest quarterly level in over a decade. On a year-over-year basis, 3rd quarter mortgage production was down 47%. IMF attributes the entire drop in the quarter to a decrease in agency loans – those ultimately sold to Fannie and Freddie.

FHA lending, on the other hand, continued to climb in the quarter, reaching a share of 25% of the total market. This compares to a14% share in 2Q08 and just a 3% share for all of 2007. During the first three quarters of this year FHA originations totaled $176 billion, up 225% from the same period in 2007. On a good note, there are pockets throughout the country that are starting to show increases in home sales. Dennis and Sunshine Smith, terrific realtors in San Diego California recently inserted this information into their September newsletter.“San Diego Home Sales Up Year-over-Year 2nd Month in a Row". The sale of single-family, re-sale homes rose 11.6% in August compared tolast August. This is the second month in a row home sales have been upyear-over-year.”

Interest write off deductions- Is real estate over subsidized?

Mortgage debt write-off serves a great purpose, to encourage home ownership and potentially make home ownership more affordable. Unfortunately, it has not worked out this way, as people have taken into account the money saved from the interest write-off to justify paying more and more for the home and taking larger and larger loans. The amount allowed for mortgage interest write off should be capped at $417,000 for a 2 person household and tiered based upon number of dependants with an overall cap of $555,000. All of these numbers should be adjusted for inflation using 3%/year for the history of the legislation. For example,Household

Size Cap

2 $417,000

3 $458,700

4 $504,570

5 $555,027

In addition, smaller caps should be placed in particular zip codes based upon income tax data from those zip codes. For example, if a zip code has an average income of $100,000, the interest write should be $100,000 x 3 (or 4,5) – 20%= $240,000. In this case mortgage interest would only be allowed to be deducted on $240,000 worth of a loan. Of course, this legislation will encourage more equity, and help to prevent some of the out of control price increases we saw recently that moved the dream of home ownership out of the grasp of many responsible potential home buyers. Of course this is not the time to put this type of legislation into affect, however, this legislation should be phased into action in a set date in the future ie. 5 years. In addition, this has potential to create more tax revenue and acts as a type of luxury tax on those buying above average homes using leverage. The interest write off cap should be limited to principle residents and should not affect investment properties so that it does not discourage investment.

The affect a raise in interest rates has on the cost of a home

Mark Twain said, "don't wait to buy real estate, buy real estate and wait". Real estate will continue to be a great long term investment when purchased correctly. The root of the problem we are facing today is the exotic mortgages that allowed borrowers to leverage more than they could afford. As people leveraged more and more prices increased higher and higher doubling and even tripling in a 7 year time frame in many areas of the country. The rapid, unsustainable increase in prices as a result of increased leverage is a major factor in the issues we're facing today. However, interest rates are still historically low and although, in my opinion, we are not at the bottom of the market, I also do not believe that the fed can keep interest rates this low indefinitely without major inflation. One factor in the cost of a home that some people overlook is the cost of the money. Let me explain, a home purchased for $1,000,000 with 10% would leave a loan balance of $900,000. $900,000 at 5.5% will cost approximately $893,600 over the life of the loan while at 6.5% will cost $1,147,885. This demonstrates important points. First, negotiating for a good loan is just as important and negotiating for the right price on a home, sometimes more important as seen in this example 1% of interest made over $250,000 in difference over the life of the loan. Second, when rates rise when they eventually will, even if they only rise one percent, when putting 10% down the loan will cost over $200,000 and nearly 20% more. Many smart investors and buyers that do not believe that the housing market will drop more than another 20% are watching rates, getting approved, shopping lenders and prepared for the right opportunity, and getting 30 year fixed, fully amortized loans.

The current status of Irvine real estate

According to DQnews.com DataQuick information systems three zip codes in Irvine actually appreciated from September of '07- September of '08! Zip code 92602 now has an average price of $653,500 a 5.4% increase, zip code 92604 increased 17.8% to $543,000, and zip code 92612 increased 19.7% to $580,000.

Prices down 25.4% and sales up 62.3% in Orange County

Prices are down 25.4% since September of '07 and sales are up 62.3%. Source http://www.dqnews.com/ DataQuick Information Systems

Loan modification is a slippery slope

Loan modification is a slippery slope that has potential to exacerbate the current economic crisis.

Example: Homeowner A and B are paying their mortgage. However, homeowner B calls his mortgage company requesting a loan modification. The mortgage company explains that he is not in default and therefore they will not complete a loan modification. Homeowner B quits paying his mortgage and calls the mortgage company back and gets a $100,000 principle reduction. Homeowner A expresses to homeowner B that he is upset that his home is worth $100,000 less than he paid for it, however B then explains that he received a $100,000 principle write down by not paying his mortgage and negotiating a loan modification. This encourages homeowner A to stop paying his mortgage and the problem grows.

Example two, perspective homeowner A and B both earn $100,000/year, have 20% to put down, have dreamed of owning a home and are actively looking in 2005. Perspective homeowner A and B both like the same neighborhood and look at two neighboring and identical homes, one home is for sale for $550,000 and the other is for lease for $2000. Perspective homeowner A, realizing that he would have to take an exotic mortgage and that his payment would be over twice as much as it would be if he leases chooses to submit an offer for $500,000 so that he can take a 30 year fixed fully amortized loan while perspective homeowner B knows that there are others interested in the home and offers $600,000 and takes an exotic loan knowing that’s the only way he can afford it. Perspective homeowner B gets the property and tax write off and other benefits that come with home ownership. As a result of the inflated prices perspective homeowner B, frustrated that even though interest rates are historically he can’t take advantage of them and is forced to rent, as prices have become too inflated, and rents the home next door for $2000.
Homeowner B, pays twice the taxes as A as he waits for prices to come down. In 2008 prices are coming down but still not affordable and the legislation that helps A to stay in his home through principle write down is passed and essentially makes homeowner B pay for it. Homeowner B is left wondering who’s looking out for him, it seems no one.

Tax incentives to create homeownership and re-strengthen the housing market

Loan modificatios appear to be a slippery sloap. Shevy Akason from Evergreen realty is surveying homeowners, legislators, attorney's, perspective homeowners, and others to see if there is support and to gain feedback regarding legislation that provides tax incentives to those that purchase and stay in their homes. The bill will allow prospective homeowners to put money into a designated HEA (Home equity account). Money placed into this account will be deducted from their tax returns for income tax purposes, similar to a SEP ira. Example: If a perspetive homeowner has $100,000 saved to buy a home and they place it into this account and purchase a home within the designated period of time they will be refunded $30,000 (if they are in the 30% tax bracket) This money must be used for the down payment or closing costs on a primary residence. In addition, this legislation will allow current homeowners that have less than 50% equity to place money into an HEA account designated for homes they purchased after January 1, 2000 and before Jan 1, 2009 or 180 days after this legislation takes affect, whichever is later. Finally, it allows current homeowners that participate in this program and remain current on their mortgage to go back as far as 2000 and claim an income tax deduction on any money paid toward the principle of their home including their original down payment. To participate in this program homeowner must be in or re-finance into a fully amortized fixed rate 1st mortgage. The legislation should take affect immediately upon passing and be limited to 360 days with options for extensions.

This is only a proposal and we are looking for support, sponsors, and for people to share this with others.