When the real estate bubble burst, many home builders and house flippers were left holding a large number of properties. As the credit crunch got worse, inventory of unsold homes grew and prices started to decrease.
Builders and flippers were scrambling to dump these properties. Some, advertised crazy incentives to get rid of these homes.
Here is one strategy they've used:
Builder or investor would locate someone with good credit who could use some cash.
They would offer them as much as much as $50,000 in cash (in some cases more) plus no mortgage payments for twelve months. They would get to live in a new home or in a rehabed home in exchange for them allowing the builder/investor to use their credit.
The seller/builder/investor would set aside six monthly payments into an escrow account. The new lender would receive payments on the mortgage for the first six months. Once the payments would cease to come, the lender would start foreclosure proceedings. In some states, it takes up to nine months to evict the homeowner. The first six payments allowed to get passed the fraud detection policies put in place by lenders for protection.
The end result"
Builder/investor sold the home.
Buyer's credit got ruined but they received a lump sum of cash plus lived in the home for over a year.
The lender ended up with a foreclosed home.
Many people blame mortgage lenders for the current housing meltdown...portion of it is deserved...but there are other players who have coasted under the radar for the last couple of years. The FBI has stepped up their efforts to combat such fraudulent practices.
Tuesday, August 19, 2008
Ed McMahons's Money Troubles And How To Avoid Them
Johnny Carson's long-time sidekick, Ed McMahon, is losing his home to Countrywide Home Loans for defaulting on his mortgage payments.
The Wall Street Journal reports that Donald Trump is in the process of working out a deal with Countrywide that would enable McMahon to stay in his home. Trump would take over the first mortgage (at a deep discount I'm sure) and make a decent profit (after McMahon's departure from this world) while helping out McMahon.
How could this happen to someone like Ed McMahon?
Moody's Economy.com estimates that 1.65 million homes will be lost to foreclosure this year.
Foreclosure and money troubles can happen to anyone.
One of the main reasons is due to money mismanagement.
Most Americans make more than enough money to live a comfortable life, have an emergency liquid account and set aside enough money for retirement.
But, because of our lack of planning and financial knowledge we seem to misuse the money we make. 9 out of 10 people, if asked, will tell you that they think they will be making more money in the near future and when that happens they will start to worry about retirement. Then, they will get their finances in order.
Fact: Rarely does that ever happen. Whether you have money or you are drowning in debt, you should talk to a financial planner. He or she will be able to draw out a plan for you to get your financial situation in order a lot faster than you think.
Ed McMahon probably approached the loan process the same way most people do. Most people think that a mortgage loan is a way to finance real estate. Furthermore, they think a mortgage loan is a 'necessary evil' that must be terminated as soon as possible. After all, that's what we were taught growing up, right? So, we put every extra dollar towards the principal balance.
When times are tough, people need money. And, the money that was applied toward the mortgage is now trapped inside of our homes in the form of equity.
And, when you need it most, that's when it's the hardest to get it out. But, when we don't need it, we seem to be getting all kinds of offers for credit.
Is what we know about mortgages wrong and if Yes, how do we fix it?
In a way, yes. It doesn't always make sense to pay off your mortgage. Each situation is unique, as are people, and their financial objectives. So, to say that everyone should try to pay off their home is wrong and can lead some people to financial distress.
For example, due to the current economic downturn, or recession if that's what you want to call it, many people have lost their jobs. Most of those people have a hard time finding a job with equal pay in a short period of time. This creates a strain on the family cash-flow and more money is needed.
But, since there is money locked up in equity. However, banks and lenders are not willing to give you a loan if you have no job. To them, you fail to demonstrate the ability to repay the loan.
Why is this scenario relevant?
Over the last 2 years I've come across many people, rich and not so rich, who have found themselves in this situation. They thought they were doing well financially. They have a 401K and they were pouring money into their mortgage.
Someone with a no liquid assets and $200,000 in home equity has a net worth of $200,000.
That equity is trapped and no loan is available. If mortgage payments are not made, the mortgage lender will foreclose on your property and you will lose your hard earned money and equity.
Here are some celebrities in foreclosure trouble:
The Wall Street Journal reports that Donald Trump is in the process of working out a deal with Countrywide that would enable McMahon to stay in his home. Trump would take over the first mortgage (at a deep discount I'm sure) and make a decent profit (after McMahon's departure from this world) while helping out McMahon.
How could this happen to someone like Ed McMahon?
Moody's Economy.com estimates that 1.65 million homes will be lost to foreclosure this year.
Foreclosure and money troubles can happen to anyone.
One of the main reasons is due to money mismanagement.
Most Americans make more than enough money to live a comfortable life, have an emergency liquid account and set aside enough money for retirement.
But, because of our lack of planning and financial knowledge we seem to misuse the money we make. 9 out of 10 people, if asked, will tell you that they think they will be making more money in the near future and when that happens they will start to worry about retirement. Then, they will get their finances in order.
Fact: Rarely does that ever happen. Whether you have money or you are drowning in debt, you should talk to a financial planner. He or she will be able to draw out a plan for you to get your financial situation in order a lot faster than you think.
Ed McMahon probably approached the loan process the same way most people do. Most people think that a mortgage loan is a way to finance real estate. Furthermore, they think a mortgage loan is a 'necessary evil' that must be terminated as soon as possible. After all, that's what we were taught growing up, right? So, we put every extra dollar towards the principal balance.
When times are tough, people need money. And, the money that was applied toward the mortgage is now trapped inside of our homes in the form of equity.
And, when you need it most, that's when it's the hardest to get it out. But, when we don't need it, we seem to be getting all kinds of offers for credit.
Is what we know about mortgages wrong and if Yes, how do we fix it?
In a way, yes. It doesn't always make sense to pay off your mortgage. Each situation is unique, as are people, and their financial objectives. So, to say that everyone should try to pay off their home is wrong and can lead some people to financial distress.
For example, due to the current economic downturn, or recession if that's what you want to call it, many people have lost their jobs. Most of those people have a hard time finding a job with equal pay in a short period of time. This creates a strain on the family cash-flow and more money is needed.
But, since there is money locked up in equity. However, banks and lenders are not willing to give you a loan if you have no job. To them, you fail to demonstrate the ability to repay the loan.
Why is this scenario relevant?
Over the last 2 years I've come across many people, rich and not so rich, who have found themselves in this situation. They thought they were doing well financially. They have a 401K and they were pouring money into their mortgage.
Someone with a no liquid assets and $200,000 in home equity has a net worth of $200,000.
That equity is trapped and no loan is available. If mortgage payments are not made, the mortgage lender will foreclose on your property and you will lose your hard earned money and equity.
Here are some celebrities in foreclosure trouble:
- Ed McMahon - entertainer
- Jose Conseco - former MLB player
- Aretha Franklin - singer
- Evander Holyfield - former boxing champion
- Latrell Sprewell - former NBA player
- Michael Jackson - singer
- Pacman Jones - Dallas Cowboys
- Ernestine Anderson - 4 time Grammy Nominee
- Marion Jones - Olympic Gold Medalist*******
One would think that celebrities that make as much money as the ones mentioned above would have a team of great financial advisors surrounding them. Maybe they do, maybe they don't.
But when you spend more money than what you make you're clearly headed for trouble.
Here's how to protect yourself:
1) Assess your financial situation. Sit down and track where your money is going.
2) Calculate your housing expenses. Add up your mortgage payments, monthly tax, insurance, and association dues. Divide this number by your gross monthly income. If this number is greater than .29 then you may want to consult a mortgage planner.
Example: Mortgage payment $1,500
Annual Taxes $3,600 (divide by 12 to get monthly amount)
Homeowner's Insurance $1,200 (divide by 12 to get monthly amount)
Association Dues $200 per month
Total monthly housing expenses $2,100
If the gross monthly income is $6,000 then $2,100 / $6,000 = .35 or 35% of your gross monthly income is going to cover your housing expenses. You should definitevely consult an experienced mortgage or financial planner to see if your financial situation needs immediate attention.
3) Increase your savings rate. You should save 15% of your annual income each year. If you are not, you should consult a financial or mortgage planner.
4) Add up all your bills and set aside 6 months worth of payments. In case of emergency, you won't have to resort to credit cards or other financially ill-advised methods of keeping up.
If you want a help with this feel free to contact me at Leo.M@Consultant.com
Wednesday, August 13, 2008
The New Housing Bill Helps Homeowners Who Are in Trouble
The new Housing Bill goes into effect on October 1.
It authorizes $300 billion to help homeowners and prevent them from going into foreclosure.
The bill also authorizes Treasury to provide Fannie Mae and Freddie Mac with an unlimited
line of credit and to buy stock in the companies to prevent them from failing.
Homeowners who are stuck in an unaffordable mortgage or have an adjustable rate mortgage (ARM) and their payment is set to go up after the fixed period is begins to adjust will be eligible for a low-cost mortgage insured by the Federal Government.
Loans up to $625,000 will be available in high income areas.
It authorizes $300 billion to help homeowners and prevent them from going into foreclosure.
The bill also authorizes Treasury to provide Fannie Mae and Freddie Mac with an unlimited
line of credit and to buy stock in the companies to prevent them from failing.
Homeowners who are stuck in an unaffordable mortgage or have an adjustable rate mortgage (ARM) and their payment is set to go up after the fixed period is begins to adjust will be eligible for a low-cost mortgage insured by the Federal Government.
Loans up to $625,000 will be available in high income areas.
Friday, August 8, 2008
Connecticut Sues Countrywide for Deceptive Lending Practices
First it was Wells Fargo Home Mortgage which was sued by the city of Baltimore for deceptive lending practices. Now, Connecticut Attorney General Richard Blumenthal has sued Bank of America Corp.'s Countrywide Financial Corp. for allegedly deceptive lending practices.
Mr. Blumenthal told Wall Street Journal saying "Countrywide conned customers into loans that were clearly unaffordable and unsustainable, turning the American Dream of homeownership into a nightmare."
If found in favor of Connecticut, Countrywide is to pay as much as $100,000 per violation of state banking laws and as much as $5,000 per violation of state consumer-protection laws.
Mr. Blumenthal told Wall Street Journal saying "Countrywide conned customers into loans that were clearly unaffordable and unsustainable, turning the American Dream of homeownership into a nightmare."
If found in favor of Connecticut, Countrywide is to pay as much as $100,000 per violation of state banking laws and as much as $5,000 per violation of state consumer-protection laws.
Thursday, August 7, 2008
Follow the Money: Why Now is the Best Time to Invest in Real Estate
Here's a pleasant surprise...unemployment and home sales were both up in July.
We know about unemployment, but what spurred home sales to go up?
Experts concluded that deep discounts on real estate invetory spurred homebuyers and investors to pick up these home for dirt cheap.
Even though, it's tougher for some to obtain mortgage loans, banks and lenders are in business to lend money. However, they're looking for borrowers that have the ability to repay the loan they take out. Excellent credit is not mandatory. In fact, you can get a loan with 'Zero Down Payment' even if you've had credit issues in the past. There are government programs that allow homebuyers who have had a Chapter 7 Bankruptcy just 24 months ago to qualify for these loan programs.
Money Magazine published an article in the winter of 2008 about a group of Hedge Fund managers who collectively put together $1 Billion to invest in single family homes.
Their strategy is to make offers on foreclosed homes, or homes that are about to go in foreclosure. They offer 50% of the value. Upon purchasing these homes, they will perform some cosmetic repairs and try to sell at a discount. The homes they don't sell, they will rent out.
Average people have been doing this for years...and some have become rich using these strategies.
According to industry experts, there has never been a better time to invest in real estate, simply because prices are extremely low and they will not remain this low for too much longer.
We know about unemployment, but what spurred home sales to go up?
Experts concluded that deep discounts on real estate invetory spurred homebuyers and investors to pick up these home for dirt cheap.
Even though, it's tougher for some to obtain mortgage loans, banks and lenders are in business to lend money. However, they're looking for borrowers that have the ability to repay the loan they take out. Excellent credit is not mandatory. In fact, you can get a loan with 'Zero Down Payment' even if you've had credit issues in the past. There are government programs that allow homebuyers who have had a Chapter 7 Bankruptcy just 24 months ago to qualify for these loan programs.
Money Magazine published an article in the winter of 2008 about a group of Hedge Fund managers who collectively put together $1 Billion to invest in single family homes.
Their strategy is to make offers on foreclosed homes, or homes that are about to go in foreclosure. They offer 50% of the value. Upon purchasing these homes, they will perform some cosmetic repairs and try to sell at a discount. The homes they don't sell, they will rent out.
Average people have been doing this for years...and some have become rich using these strategies.
According to industry experts, there has never been a better time to invest in real estate, simply because prices are extremely low and they will not remain this low for too much longer.
2 New Tax Incentives from Uncle Sam
Uncle Sam is giving home buyers and homeowners 2 new tax incentives.
The Housing Act was signed on July 30, 2008. Here are the two incentives you should know about:
1. Temporary New Homebuyer Tax Credit
Qualified buyers will receive the lesser of 10% of sale price or $7,500 tax credit ($3,750 if married and filing jointly). This tax credit is refundable which means you can use it to offset your entire regular federal income tax liability plus receive the difference from Uncle Sam should the credit exceed your tax bill.
The credit applies only toward a purchase of a primary residence and is good from April 1, 2008 until July 1, 2009.
This is not a grant but, an interest free loan from the Government.
Home buyers have up to 15 years to repay the tax credit. So, if you take advantage of the maximum credit of $7,500 than you will have to pay back $500 per year ($7,500/15 years =$500). Unless you die first, or you sell the home, in which case you would have to pay at tax time of the year the sale occurred.
2. Temporary New Property Tax Deduction for Non-itemizers
If you're unmarried you get to add $500 toward your deductions for local and state property taxes. If married, the deduction increases to $1,000. However, you can't deduct more than you actually pay in state and local taxes.
The Housing Act was signed on July 30, 2008. Here are the two incentives you should know about:
1. Temporary New Homebuyer Tax Credit
Qualified buyers will receive the lesser of 10% of sale price or $7,500 tax credit ($3,750 if married and filing jointly). This tax credit is refundable which means you can use it to offset your entire regular federal income tax liability plus receive the difference from Uncle Sam should the credit exceed your tax bill.
The credit applies only toward a purchase of a primary residence and is good from April 1, 2008 until July 1, 2009.
This is not a grant but, an interest free loan from the Government.
Home buyers have up to 15 years to repay the tax credit. So, if you take advantage of the maximum credit of $7,500 than you will have to pay back $500 per year ($7,500/15 years =$500). Unless you die first, or you sell the home, in which case you would have to pay at tax time of the year the sale occurred.
2. Temporary New Property Tax Deduction for Non-itemizers
If you're unmarried you get to add $500 toward your deductions for local and state property taxes. If married, the deduction increases to $1,000. However, you can't deduct more than you actually pay in state and local taxes.
Wednesday, August 6, 2008
New Tax Rule Targets Affluent Homeowners
The new housing bill signed by President Bush last week may affect some affluent homeowners who own multiple homes.
Under the old and new law, homeowners who sell their primary residence can realize up to a $250,000 net gain if single or $500,000 if married without having to pay capital gains.
The old law allowed homeowners who own multiple properties to sell their exisiting home and then move into their second or third home they've owned for a while, convert it into their primary residence, and sell it once again and pay little or no capital gains.
Here's an example Smart Money Magazine published on their website:
Example: Say you bought a very nice vacation home on 1/1/05. On 1/1/11, you convert it into your principal residence, live in it for two years, and sell it on 1/1/13 for a sweet $500,000 profit. Your total ownership period is eight years, but the two years of post-2008 use as a vacation home (2009 and 2010) count against you. Specifically, the two years result in a nonexcludable gain of $125,000 (2/8 x $500,000 = $125,000). So you'll have to report the $125,000 as capital gain on your 2013 Schedule D and pay the resulting federal income tax hit. If you're a married joint filer eligible for the $500,000 exclusion, you won't have to pay any federal tax on the remaining $375,000 of gain ($500,000 - $125,000) because it's completely sheltered by your exclusion. If you did the same deal today, however, you wouldn't owe a dime to the IRS.
The new tax law takes effect next year. Some tax professionals seem to think that this new tax rule contains loopholes.
Under the old and new law, homeowners who sell their primary residence can realize up to a $250,000 net gain if single or $500,000 if married without having to pay capital gains.
The old law allowed homeowners who own multiple properties to sell their exisiting home and then move into their second or third home they've owned for a while, convert it into their primary residence, and sell it once again and pay little or no capital gains.
Here's an example Smart Money Magazine published on their website:
Example: Say you bought a very nice vacation home on 1/1/05. On 1/1/11, you convert it into your principal residence, live in it for two years, and sell it on 1/1/13 for a sweet $500,000 profit. Your total ownership period is eight years, but the two years of post-2008 use as a vacation home (2009 and 2010) count against you. Specifically, the two years result in a nonexcludable gain of $125,000 (2/8 x $500,000 = $125,000). So you'll have to report the $125,000 as capital gain on your 2013 Schedule D and pay the resulting federal income tax hit. If you're a married joint filer eligible for the $500,000 exclusion, you won't have to pay any federal tax on the remaining $375,000 of gain ($500,000 - $125,000) because it's completely sheltered by your exclusion. If you did the same deal today, however, you wouldn't owe a dime to the IRS.
The new tax law takes effect next year. Some tax professionals seem to think that this new tax rule contains loopholes.
Fed Stands Still, but Inflation Remains a Concern
The Federal Reserve Bank kept the Fed Funds Rate at 2% for the third straight meeting. Earlier in the week, the Personal Consumption Expenditure data indicated that inflation climbed 0.8% overall in June, which is the highest inflation jump in 27 years. In addition, the report indicated that inflation now sits at 2.3%–above the Fed's desired range of 1-2%.
Even though the Fed left interest rates unchanged, inflation obviously remains a concern and the recent rise may lead to an interest rate hike by the Fed in the near future.
What Does This Mean To You?
Many experts believe the housing market is nearing the bottom and may even be set to bounce back up. For now, home prices remain low, and interest rates are still very attractive.
If you've been weighing your options and waiting to see how things shake out, this is the ideal time to act–since interest rates will probably rise if inflation remains an issue or if the economy starts to show signs of improvement.
Even though the Fed left interest rates unchanged, inflation obviously remains a concern and the recent rise may lead to an interest rate hike by the Fed in the near future.
What Does This Mean To You?
Many experts believe the housing market is nearing the bottom and may even be set to bounce back up. For now, home prices remain low, and interest rates are still very attractive.
If you've been weighing your options and waiting to see how things shake out, this is the ideal time to act–since interest rates will probably rise if inflation remains an issue or if the economy starts to show signs of improvement.
Tuesday, August 5, 2008
I'm buying a home...Should I ask for a Reduction in Price or Seller Credit
You're ready to buy a home. It's a buyers market and there are more deals than ever.
You've put on your negotiating hat and are ready to start wheelin' -n-dealin'.
You've met with your mortgage broker and you've concluded how much you can afford and हाउ much you're going to invest in a home.
Your realtor has narrowed down your search to a few homes that you like.
It's now time to make an offer। But, you're not sure if you should ask the seller to reduce the price or do a seller credit.
Let's see the difference between the two strategies.
Let's assume that you're going to make an offer on a home listed at $400,000 and you have $40,000 or 10% to put down.
Because of market conditions, you think you can get the seller to come down in price by $20,000.
Let's see how much of a difference $20,000 would make on your payment.
Traditional Sale
$400,000 sale price with a 10% down payment at 6.25% on a 30 year fixed (rate is arbitrary and can change daily) would yield a monthly payment of $2.216.
Price Reduction of $20,000
If you get the seller to take $20,000 less then your monthly payment would be $2.105.
A $20,000 reduction in the sale price reduces the payment by only $116.
Seller Credit of $20,000
Instead of asking for a $20,000 reduction in price, it may make more sense to offer full price and ask for a $20,000 seller credit to pay closing costs.
Here's why it makes sense...
You would use the $20,000 to buy down the rate from 6.25% to 4.5%.
The payment would be $1,824 or $392 less than the traditional approach or $281 less than asking for a $20,000 price reduction.
If you apply the $281 savings toward principal, you would pay off your loan in 23 years....a savings in payments of $176,820 over the life of the loan. This approach ends up saving you an average of $7,652 per year.
This approach can be used all loan amounts and with different down payments (even as low as 5%)
You've put on your negotiating hat and are ready to start wheelin' -n-dealin'.
You've met with your mortgage broker and you've concluded how much you can afford and हाउ much you're going to invest in a home.
Your realtor has narrowed down your search to a few homes that you like.
It's now time to make an offer। But, you're not sure if you should ask the seller to reduce the price or do a seller credit.
Let's see the difference between the two strategies.
Let's assume that you're going to make an offer on a home listed at $400,000 and you have $40,000 or 10% to put down.
Because of market conditions, you think you can get the seller to come down in price by $20,000.
Let's see how much of a difference $20,000 would make on your payment.
Traditional Sale
$400,000 sale price with a 10% down payment at 6.25% on a 30 year fixed (rate is arbitrary and can change daily) would yield a monthly payment of $2.216.
Price Reduction of $20,000
If you get the seller to take $20,000 less then your monthly payment would be $2.105.
A $20,000 reduction in the sale price reduces the payment by only $116.
Seller Credit of $20,000
Instead of asking for a $20,000 reduction in price, it may make more sense to offer full price and ask for a $20,000 seller credit to pay closing costs.
Here's why it makes sense...
You would use the $20,000 to buy down the rate from 6.25% to 4.5%.
The payment would be $1,824 or $392 less than the traditional approach or $281 less than asking for a $20,000 price reduction.
If you apply the $281 savings toward principal, you would pay off your loan in 23 years....a savings in payments of $176,820 over the life of the loan. This approach ends up saving you an average of $7,652 per year.
This approach can be used all loan amounts and with different down payments (even as low as 5%)
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