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RECENT STUDY: New Mortgage Rules Could Shrink Lending by 20%

Pending mortgage regulations could lock today’s tight lending standards in place and result in nearly 20% fewer mortgages being issued in the coming years, restraining home sales and construction, according to a new study.

The report from the American Action Forum, a center-right think tank, provides an estimate of the potential impact of three important mortgage regulations set to take effect next year:

  • Higher bank capital standards under the Basel III agreement
  • The “qualified mortgage” rule regulating ability-to-repay standards, which is part of the Dodd-Frank financial-overhaul law
  • The “qualified residential mortgage” rule setting standards governing loans that are issued as securities, also part of Dodd-Frank.

Together, the new rules “will raise the cost of borrowing for millions of home buyers and tighten access to credit beyond pre-boom standards, a period of much more responsible lending than in the lead-up to the housing crisis,” says the AAF paper.

Download (PDF, 432KB)

Of course, regulators have yet to finalize the “qualified mortgage” and “qualified residential mortgage” rules. As a proxy for where those rules might land, the report roughly assumes that today’s tighter lending standards won’t return to those that prevailed before the housing boom as a result of the impending regulation.

“It would make permanent the current, tighter standards,” says Douglas Holtz-Eakin, the president of the AAF. While he says he won’t pretend that his estimate is “perfect,” he says it is a “sensible” forecast.

Mr. Holtz-Eakin and his co-authors attempt to quantify the potential impact of the regulations by comparing today’s mortgage lending standards with those that prevailed in 2001, which they use as a “baseline” for more normal lending standards.

Banks have tightened up their standards over the past three years—and kept them tight—largely to address the threat of mortgage “put-backs” from investors, from lawsuits, and from the higher costs associated with handling delinquent mortgages.

The paper concludes that if lending standards that are in place today don’t moderate to the 2001 baseline level, there would be roughly 14% to 20% fewer loans originated over the coming three years. That decline, they estimate, would reduce total home sales by 9% to 13%, depending on the ability of all-cash buyers to pick up any slack.

The decline in home sales, in turn, would reduce housing starts by 1.01 million through 2015 and GDP growth by 1.1 percentage points.

“The issue is, if we want to have tighter standards for mortgage origination—as a safety-and-soundness issue for banks, or as a matter of not having people get in trouble on their loans—you have to cut back on what you originate,” said Mr. Holtz-Eakin.

While no one is arguing for a return to the lax standards that prevailed during the housing bubble, Mr. Holtz-Eakin said he’s surprised that more policy makers haven’t focused on the potential impact on the housing market should regulation enshrine banks’ current defensive position when it comes to making mortgages.

Consumer advocates say they are cautiously optimistic that the Dodd-Frank rules can ensure stronger consumer protection without limiting new lending. “If Dodd-Frank is done right, we should see somewhat expanded lending from what we have right now,” said Julia Gordon, housing policy director at the Center for American Progress, a liberal think tank. “It’s important to raise these concerns, but it’s also important to be specific, and not just anti-regulation.”

SOURCE: Wall Street Journal

The New 3.8% Tax – Effective January 1, 2013

Beginning January 1, 2013, a new 3.8 percent tax on some investment income will take effect. Since this new tax will affect some real estate transactions, it is important for REALTORS to clearly understand the tax and how it could impact your clients. It’s a complicated tax, so you won’t be able to predict how it will affect every buyer or seller.

Read different examples and scenarios on how this new tax works

To get you up to speed about this new tax legislation, the NATIONAL ASSOCIATION OF REALTORS® has developed the following informational brochure.


On the following pages, you’ll read examples of different scenarios in which this new tax — passed by Congress in 2010 with the intent of generating an estimated $210 billion to help fund President Barack Obama’s health care and Medicare overhaul plans — could be relevant to your clients.

Understand that this tax WILL NOT be imposed on all real estate transactions, a common misconception. Rather, when the legislation becomes eff ective in 2013, it may impose a 3.8% tax on some (but not all) income from interest, dividends, rents (less expenses) and capital gains (less capital losses). The tax will fall only on individuals with an adjusted gross income (AGI) above $200,000 and couples filing a joint return with more than $250,000 AGI.

Nondelinquent Borrowers Soon to Be Eligible for Short Sales

Mortgage giants Fannie Mae and Freddie Mac have issued new rules, which will take effect Nov. 1, 2012 that will allow short sales for underwater borrowers who have never missed a mortgage payment.

Previously, Fannie and Freddie allowed only home owners who had missed payments to qualify for a short sale.

Eligible borrowers under the new rules will need to show a hardship to qualify for a short sale, however. Hardships may include unemployment or a death of a spouse.

Inman News points out one potential flaw to the new rule, however: The nondelinquent home owners who undergo a short sale will likely take just as big a hit to their credit score than if they had missed loan payments and gone into a foreclosure.

“Under current national credit reporting practices, those nondelinquent borrowers are likely to be treated the same for credit scoring purposes as severely delinquent owners who go to foreclosure after months of nonpayment, or who simply toss back the house keys and walk away in strategic defaults,” writes Ken Harney for Inman News.

Credit agencies use no special coding to indicate that a short sale was without delinquency. Therefore, home owners could see their credit scores drop 150 points or more after the short sale.

However, officials at the Federal Housing Finance Agency, which oversees Fannie and Freddie, told Inman News they are “in discussions with the credit industry” to explore ways to fix the credit score problem for those who haven’t missed a payment but undergo a short sale.

SOURCE: Realtor® Daily News

October 2012 U.S. Economic And Housing Market Outlook

Freddie Mac released today its U.S. Economic and Housing Market Outlook for October showing the expansion of the Federal Reserve’s Maturity Extension Program is sparking a further pick-up in housing activity. Therefore, Freddie Mac is revisiting its economic and housing market projections for the remainder of this year and for 2013.


Outlook Highlights

Housing contributed 0.3 percentage points to the first-half 2012 real GDP growth of 1.7 percent (annualized) and will likely add a similar boost during the second half of the year after being a net drag on GDP from 2006-2010.

Projecting 7 million borrowers refinancing in 2012 resulting in an aggregate of $15 billion in mortgage payment savings over the first 12 months after the refinance, a substantial infusion of funds to help strengthen savings and consumption spending by owners.

Expecting single-family origination volume to come in close to $2 trillion in 2012, about a 30-percent rise from 2011, and then drop by 15 to 20 percent in 2013 as refinance ‘burnout’ and somewhat higher mortgage rates during the latter half of next year lead to less refinance activity.

Anticipate a favorable interest-rate environment to remain through the end of this year and into next with the 30-year fixed-rate mortgage averaging around 3.50 percent.

Click to download the complete October 2012 U.S. Economic and Housing Market Outlook.

Freddie Mac compiles data on major economic and housing and mortgage market indicators and offers forecasts based on those indicators.

SOURCE: Freddie Mac

UNFOUNDED INTERNET RUMOR: 3.8% Sales Tax On Real Estate Coming With Health Care Reform

It is the unfounded rumor that never dies: You will have to pay a 3.8 percent federal health care tax on the sale of your house.

Ever since health care reform was enacted into law more than two years ago, rumors have been circulating on the Internet and in e-mails that the law contains a 3.8 percent tax on real estate.

NAR quickly released material to show that the tax doesn’t target real estate and will in fact affect very few home sales, because it’s a tax that will only affect high-income households that realize a substantial gain on an asset sale, including on a home sale, once other factors are taken into account. Maybe 2-3 percent of home sellers will be affected.

Nevertheless, the rumors persist and the latest version that’s circulating falsely say NAR is advocating for the tax’s repeal.

But while NAR doesn’t support the tax (it was added into the health care law at the last minute and never considered in hearings), it’s not advocating for its repeal at this time.

There Is No Obamacare Tax On Most Home Sales. Really.

For all but a handful of taxpayers, this is not true. It is wrong.

It is urban myth. It is the revenue equivalent of death panels or the Halliburton conspiracy to start the Iraq war.

This is one of those seemingly immortal Internet stories. You know the ones: They usually start with the assertion that, “They don’t want to know this but….”

In the words of one blogger, “Obamacare will impose a 3.8 percent tax on all home sales and real estate transactions.” Umm, no it won’t.

Yes, the health law will impose a 3.8 percent tax on investment profits and other non-wage income starting in 2013. But that tax applies only to couples with adjusted gross income of $250,000 (or individuals with AGI of $200,000).

About 95 percent of households make less than that, and will be exempt from the law no matter what. In addition, couples who sell a personal residence can exclude the first $500,000 in profit from tax ($250,000 for singles). That would be profit from a home sale, not proceeds. So a couple that bought a house for $100,000 and sold it for $599,000 would owe no tax, even under the health law.

If that couple had AGI in excess of $250,000 and made a profit of $500,010, it would owe the new tax. On ten bucks. That would be an extra 38 cents. The Tax Policy Center figures that in 2013 about 0.2 percent of households with cash income of $100,000-$200,000 would pay any additional tax under this provision. And they’d pay, on average, an extra $235. Keep in mind that is added tax on all sources of non-wage income, not just home sales.

Still, like Dracula, this rumor can’t be killed. Politfact tried to knock it down in 2010. A couple of months ago, my Tax Policy Center colleague Donald Marrondid the same in a Tax Notes article called “Health Reform’s Tax on Investment Income: Facts and Myths.”

People who send Internet chain letters probably don’t read Tax Notes. Still, imagine Donald’s surprise when just last week he met a guy in Kansas City who insisted that the tax not only exists, but the rate is 7 percent (some sort of weird bracket-creep, I guess). Now imagine my surprise when, after I wrote a TaxVox article the other day about the (real) tax provisions of the health law, I got an email from a frustrated housing industry tax specialist. “There is usually some confusion/disinformation associated with new tax rules,” he wrote, “but I’ve never seen an issue that has as much as this one.”

So the bottom line is this: If you are a married couple whose AGI exceeds $250,000, and if you make more than a $500,000 profit from the sale of your house, yes, you may owe this tax. But if you are anybody else, spend your time worrying about how you’re going to win the next $600 million lottery—or whether you are going to get bopped in the head by a stray asteroid on your way to work.

SOURCE: Bloomberg, National Association of Realtors®

YTD Sales Report – All Areas In Sun Valley MLS

Attached is a year to date sales report that shows all sales activity in the greater Sun Valley area for single family residential homes, condos and townhomes, vacant land, plus farms and ranches.

As always, more information is available by request.

Wealthy Home Buyers Return To Risky ARMs

Adjustable-rate mortgages can offer big savings over fixed-rate loans — at least for a period.

Luxury-home buyers are returning to adjustable-rate mortgages, despite pitfalls that pushed many homeowners into foreclosure during the housing bust.

The pitch?

A lower interest rate — at least for a period — than a fixed-rate mortgage means savings could be huge.

ARMs have a fixed rate for a certain number of years before they become variable, rising or dropping depending on prevailing interest rates. A five-year fixed rate is typical, though the time period can vary and be as long as seven or 10 years. As the loan’s rate changes, so does the monthly payment, possibly increasing or shrinking by thousands of dollars.

ARMs account for 30% to 40% of private jumbo loans at Bank of America(US:BAC) and roughly half of the private jumbos distributed by NASB Financial(US:NASB) , the holding company of North American Savings Bank. Private mortgages aren’t backed by the government.

Lenders say high-net-worth buyers face relatively little risk because they can tap liquid assets to pay off a loan should a sudden spike in rates occur.

“They’re typically looking to the future and saying, ‘Here’s how I’m going to strategize based on my assets,’ “ says Tony Caruso, mortgage loan officer for PNC Wealth Management, where more clients have been choosing ARMs over the past two years.

ARMs accounted for just 4.2% of all mortgage applications in July, according to the Mortgage Bankers Association. But they had a 34.9% market share of the number of private home loans originated that month, according to data compiled for The Wall Street Journal by LPS Applied Analytics, a division of mortgage-data firm Lender Processing Services.

Rates on a jumbo 5/1 ARM — where the rate remains the same for the first five years and then adjusts annually — average 2.82%, compared with 4.06% on a 30-year fixed-rate jumbo, according to mortgage-info website HSH.com. Over the first five years, borrowers with the 5/1 ARM would save nearly $90,900 in interest on a $1.5 million mortgage compared with a fixed-rate jumbo.

From a bank’s perspective

Lenders also prefer ARMs, though for different reasons. When the Federal Reserve raises rates, banks have to increase the rates they pay out on deposit accounts, but they receive bigger interest payments from ARM borrowers whose rates rise. “From a bank’s perspective, it’s a much safer asset to hold if it’s an ARM,” says Mike Fratantoni, vice president of research at the Mortgage Bankers Association.

For that reason, not every lender will offer a home buyer both mortgage options.

Here are possible risks associated with ARMs.
  • Rate spikes: After the fixed-rate period ends, rates could adjust higher. On a 5/1 ARM today, rates could increase by up to five percentage points during the sixth year — surging as high as 7.82%. The rate can move by two percentage points each year after that as long as it doesn’t surpass this cap.
  • Nowhere to turn: ARM borrowers could refinance into a fixed-rate mortgage when rates rise, but rates on the fixed-rate loans could be just as pricey as ARMs at that point.
  • Home equity could derail a refinance: Borrowers who decide to refinance out of an ARM will need enough home equity to do that, and so should consider making a down payment of at least 30% when they buy the home, says Kevin Miller, chief executive of Aspire Financial Inc., a mortgage lender that mostly provides fixed-rate mortgages. Otherwise, if home values drop, they may have to pay down some of the loan amount to refinance, or be forced to stay with their current mortgage.

SOURCE: Market Watch

CFPB Mortgage Rule Said to Give Lenders More Protection

U.S. lenders may get strong protections from lawsuits over most government-backed mortgages under rules being weighed by the Consumer Financial Protection Bureau, according to two people briefed on the policy.

The so-called qualified mortgage regulations would give banks including JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) safeguards against legal action arising from the underwriting process, according to the people who spoke on condition of anonymity because the discussions aren’t public. Protections would cover loans issued at prime interest rates to borrowers whose total debt-to-income ratio doesn’t exceed 43 percent.

The consumer bureau, which is crafting the rules as part of a broader overhaul of housing-finance oversight, revealed its plans in a meeting with other federal regulators yesterday, according to the people. About 80 percent of loans backed by Fannie Mae (FNMA), Freddie Mac or government insurers such as the Federal Housing Administration, would qualify for a legal safe harbor under the bureau’s plan, according to data from the Federal Housing Finance Agency.

“The CFPB is currently in the process of determining the parameters of these loans, with the goal of protecting consumers from risky mortgages that they cannot afford in a way that does not interfere with access to affordable credit,” Jen Howard, the agency’s spokeswoman, said in an e-mailed statement.

Bureau officials have said they will issue a final rule by the statutory deadline of Jan. 21. The process is still fluid, and the proposal may change, according to one of the people with knowledge of the meeting.

Verifying Income

In reaction to lax underwriting that fueled the housing bubble, the new regulations would require lenders to confirm a borrower’s ability to repay by steps such as verifying income. Within that context, lenders would gain some insulation from lawsuits if they meet certain criteria.

Loans to borrowers whose debt exceeded 43 percent of income or had non-prime interest rates would fall under a legal standard giving borrowers or bond investors greater latitude to sue if a lender didn’t adequately gauge ability to repay. This standard would presume that lenders properly underwrote the loan while allowing court challenges of that presumption.

To get any legal protection, a lender would have to meet underwriting standards such as verifying a borrower’s income and assets. Qualifying loans also couldn’t have features such as interest-only payments or include fees and points totaling more than 3 percent of the loan amount.

Lost Revenue

Once the rule goes into effect, lenders are expected to originate most of their loans according to the new standards in order to gain legal protection from the kind of lawsuits and “putbacks” that have cost banks billions in the wake of the housing market collapse. The additional legal protections will help banks compensate for lost revenue from higher fees or exotic loans such as interest-only mortgages.

Joe Ventrone, vice president for regulatory affairs at the National Association of Realtors, said any partial safe harbor would need to go “much further” to avoid harm to the mortgage market.

“We need a QM that reaches a broad base of borrowers and that has strong protections for lenders,” he said in an e-mail. “Without that, we will see even further tightening of credit.”

Industry Concession

Alys Cohen, an attorney with the National Consumer Law Center, said consumer groups favor a so-called rebuttable presumption for all mortgages and that the safe harbor was a concession to the industry. Much will depend on how the rebuttable presumption is structured, she said.

“You will face the problem of any rebuttable presumption being a de facto safe harbor because it is so onerous,” Cohen said in an interview. “The devil really is in the details.”

In the years before the 2008 credit crisis, banks increasingly made loans with high fees and adjustable terms that required borrowers to refinance after a few years. Defaults soared after falling home prices cut borrowers’ equity and prevented refinancing.

The qualified mortgage rule will underpin a series of regulations by the consumer bureau, which was created by the Dodd-Frank law of 2010 in response to complaints that banks had abused borrowers before the housing bubble burst. Other rules planned by the agency will touch on mortgage service, loan officer compensation, and points and fees.

SOURCE: Bloomberg / Business Week

Appraisals Continue to Hamper Sales

The real estate market is recovering but still faces hurdles. Real estate appraisals are one of the issues holding back home sales, according to survey findings by the National Association of REALTORS® (NAR).

Most appraisers are competent and provide good valuations that are compliant with the Uniform Standards of Professional Appraisal Practice. However, appraisals generally lag market conditions and some changes to the appraisal process have been causing problems in recent years, including the use of out-of-area valuators who lack local expertise, full access to local data, inappropriate comparisons, and excessive lender demands. In addition, before the beginning of last year, some lenders’ loan processors edited valuations, cutting them by a certain percentage.

Although 65 percent of REALTORS® surveyed in September report no contract problems relating to home appraisals over the past three months, 11 percent said a contract was cancelled because an appraised value came in below the price negotiated between the buyer and seller, 9 percent reported a contract was delayed, and 15 percent said a contract was renegotiated to a lower sales price as a result of a low valuation. These findings are notable given that homes in many areas are selling for less than replacement construction costs.

Lawrence Yun, NAR chief economist, said there has been a steady level of appraisal issues for quite some time. “Though the real estate recovery is taking place, the combined issues of stringent mortgage lending requirements and appraisal frictions are hampering otherwise qualified buyers from purchasing a home in a timely fashion, and in some cases are preventing them from buying at all,” he said.

Major problems reported by REALTORS® include:

  • Appraisers using foreclosures, short sales, and run-down properties as comparable homes, and not making adjustments for market conditions or the condition of the property.
  • Appraised values that do not reflect market conditions such as rising prices, multiple bids, and low inventory.
  • Inconsistent and fluctuating valuations.
  • Out-of-town appraisers who are not familiar with the area or local market conditions.
  • Slow turnaround time by both appraisers and banks.

A large concern is that some appraisers working for an appraisal management company (AMC) are operating under strict and limited parameters due to bank lending criteria, which appear to be related to banking regulations or risk aversion on the part of the lender. Furthermore, unreasonable “put back” risks imposed by Fannie Mae and Freddie Mac could also cause banks to set unrealistic requirements for appraisers.

There is a clear difference between the value of distressed property and non-distressed homes, and some appraisers do not currently distinguish between these types of properties when making comparisons for valuation purposes. NAR data shows that the typical foreclosure is sold for an average discount of 20 percent relative to traditional homes in good condition, while the typical short sale is discounted by 15 percent.

NAR President Moe Veissi said some appraisal practices lack common sense. “Our long-standing policy is that all appraisals should be done by licensed or certified professionals with local expertise, which also is what Fannie Mae and Freddie Mac recommend, but clearly this isn’t practiced universally,” he said.

NAR has long advocated for an independent appraisal process and enhanced education requirements that allow appraisers to produce the most accurate reports possible. However, appraisers have faced undue pressure — whether from a lender or an AMC — to complete appraisals using distressed sales as comps, to complete an appraisal in an unacceptably short time frame, and to complete a scope of work that is not justified by the fee being offered.

In addition, some appraisers are required to provide as many as eight to 10 comparable sales, which almost guarantee the use of distressed properties as comps in many cases. Previously, three comparable homes were the norm for most appraisals. In many cases, there simply aren’t enough apples-to-apples comps to comply with the excessive demands by lenders, so discounted distressed homes are sometimes used in valuating traditional homes in good condition without appropriate adjustments.

“In short, there has been an inconsistent appraisal process leading to disruptive delays for home buyers and sellers,” Veissi said. “All home valuations should be made without undue pressure from any source. Even so, buyers, sellers and agents are free to ask appraisers to consider additional data and to correct errors, or discuss unique aspects of the home, the neighborhood or properties used as comps.”

The appraisal industry has made strides in adapting to market conditions, expanding education, and making appropriate adjustments for distressed homes that are used as comps. It appears many of the remaining problems are tied to appraisals made through AMCs.

Fortunately, the level of distressed sales is trending down — they accounted for about one-third of all sales in 2011, but have averaged roughly a quarter of sales in recent months. By 2013 NAR expects the distressed market share to decline to about 10 to 15 percent. As distressed inventory is cleared from the market over the next two years, it should help to correct ongoing problems.

“In the meantime, buyers, sellers and real estate agents need to be aware that there are problems with some real estate appraisals, but also be aware of their rights to communicate with appraisers and lenders about errors or concerns with individual valuations,” Veissi said. “In some cases, a second appraisal may be justified.”

Source: NAR

Idaho Among States With Biggest Home Price Increases

A measure of U.S. home prices jumped 4.6 percent in August compared with a year ago, the largest year-over-year increase in more than six years.

CoreLogic, a private real estate data provider, also said Oct. 2 that prices rose 0.3 percent in August from July, the sixth straight monthly gain.

Steady price increases, combined with greater home sales and rising builder confidence, suggest the housing recovery may be sustainable.

Other measures of home prices have also increased. The Standard & Poor’s/Case Shiller index rose in July compared with a year ago, the second straight yearly increase after two years of declines. And an index compiled by a federal housing regulator has also reported annual increases.

Housing prices are rising in most areas, according to CoreLogic. Only 20 large cities out of 100 tracked showed declines in the 12 months ending in August. That compared with 26 in July.

“The housing market’s gains are increasingly geographically diverse with only six states continuing to show declining prices,” said Mark Fleming, chief economist for CoreLogic.

States with the biggest price increases in the past 12 months were Arizona, Idaho, Nevada, Utah and Hawaii. Prices soared 18.2 percent in Arizona, partly because the supply of homes for sale is low and foreclosure sales have slowed. Prices have risen 10.4 percent in Idaho.

The states with the biggest declines were Rhode Island, Illinois, New Jersey, Alabama and Connecticut.

The housing market has begun to rebound this year more than five years after the bubble burst.

Sales of previously occupied homes jumped in August to the highest level since May 2010. The rate at which builders started single-family homes rose last month to the fastest in more than two years. Builders have also increased their spending on single-family home construction for five straight months. And the lowest mortgage rates on record have made home buying more attractive.

Even with the gains, the housing market has a long way back. Many would-be buyers can’t qualify for stricter lending standards or save enough money for larger down payments that most banks now require. Home sales, housing starts and prices all remain below healthy levels.

CoreLogic said its measure of prices is 26.7 percent below a nationwide peak in April 2006.

Still, the broader economy will likely benefit from rising home values. When prices rise, people typically feel wealthier and spend more. And more Americans are likely to put their houses up for sale, which could further energize the market.