Help For California Home Buyers

 

1st time home buyerThink you and your family don’t make enough to buy a home? Worried about your low credit score or lack of down payment? If these issues have prevented you from even beginning to look for a new home, let me assure you that help is on the way.

Most home buyers are not aware that many programs exist to help them  purchase a home. Often, the lenders selected by the buyers or their agents prefer to avoid the extra paperwork and so do  not inform their clients about these programs. Financial aid for home buyers in California comes from cities, counties and the state itself. 

The assistance comes in many forms.Some allow zero down payment. Some are outright grants of money. Some come as “silent seconds” which are only repaid when the home is sold. Some eliminate mortgage insurance. Some are directed towards buyers with low credit scores. Future home buyers in pricey California would do well to find a lender who is conversant with these programs and start the process.

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Here is a sampling of assistance available to first-time home buyers. Note that a “first-time” home buyer is one who has not owned a home in the last three years. 

  • California Housing Finance Authority [CalHFA] requires at least a 640 FICO score, well below average, and when combined with 3% CHDAP, 3% CalPLUS and $6500 Cal Extra allows for ZERO down payment. On a $300,000 property, for instance, $22,000 is available through these programs.
  • Extra Credit Teacher’s Program [ECTP] allows teachers, administrators, employees and staff of high priority schools [ranks 1-5] a deferred loan of up to $15,000 in high-cost areas and $7500 in low-cost areas. If the recipient lives in the house for three years, the loan is forgiven.
  • Southern California Home Finance Authority [SCHFA] requires at least a 640 FICO score and offers a grant, not a loan, of up to 4% of the purchase price to help with the down payment. This program applies to LA and Orange Counties only.
  • CHF Platinum, again requiring 640 FICO,  is a 3-5% down payment assistance grant with a slightly higher interest rate.
  • Mortgage Credit Certificate [MCC] is a 20% tax credit through CalHFA and amounts to average savings of $200/month through the life of the loan and helps borrowers qualify.
  • County of Orange Mortgage Assistance Program [MAP] provides up to $40,000 down payment assistance in 17 Orange County cities. The amount becomes a lien which must be paid back when the property is sold.

Most of these programs are for “low-income” individuals and families, but in Southern California that can mean up to $120,000 or higher family income. Each program is different and attempts to answer different borrower needs.

These are just SOME of the mortgage assistance programs available. Many cities in Southern California also offer some type of aid. It costs nothing to ask and may make the difference between buying and renting.

For further help either with home buying or selecting a lender, feel free to call me, Diane Butler, at 626-641-0346 or email me at drdbroker@gmail.com.

 

Fiscal Cliff Approval and Real Estate

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Real Estate Tax Provisos for 2013

 

Finally, “fiscal cliff” debate is over! For months now, it’s been impossible to turn on the TV or radio without getting an earful of breathless and mostly unwanted information.  Even though most of us now regard Congress as on a par with cockroaches, what happens there does have an impact on our lives. All the more reason for members of Congress to act like grownups, but that’s another topic…

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Real Estate Tax Deductions

Rushed through at the last minute, the “fiscal cliff” legislation contains a number of important provisions and none more important than those that relate to real estate.  Here are a few of the most salient.

  • Short sale taxation relief extended for another year until January 1, 2014
  • Deduction of mortgage insurance premium is retroactive to 2012 and extended to 2013 for incomes under $110,000
  • 10% tax credit [up to $500] for energy-saving home improvements retroactive to 2012 and through 2013.
  • Capital gains tax stays at 15% except for those earning over $400,000 [single filer] or $450,000 [joint] and then it’s 20%.
  • $250,000/$500,000 [single/married] exclusion on capital gain from sale of principal residence remains unchanged.
  • Estate taxes on first $5 million for individual and $10 million for family estates are ZERO.  Above those amounts, the rates are 35% and 40% respectively.

Effect of Real Estate Provisos of 2013

Given these provisos, it’s clear that real estate remains in a privileged position as far as federal taxes go. Not only do homeowners get a tax deduction  for the interest in their mortgage payments, which is unheard of in other developed countries, such as Australia and Canada, but we can deduct mortgage insurance premiums which are only applied if the equity in the home is less than 20%. By extending this tax deduction, Congress is implicitly encouraging home ownership among those who do not have the traditional 20% down payment. Is this a good thing? Considering the recent mortgage meltdown, maybe not.  It does help lenders and real estate professionals, though.

Homeowners also get to purchase equipment for their homes and then deduct some of the cost–just so long as it saves energy and fits the criteria.  Naturally, no one can argue that energy-saving is bad, but here the government supports homeowners and no one else.

Additionally, estate taxes on the first $5 or $10 million, depending, amount to nothing. This also supports homeowners since a large proportion of most estates of this size is made up of real estate holdings, both principal residence and investment properties. Again, the tax code is supporting home ownership and investment in property.

Last, but not least, the tax code encourages home ownership by not taxing any capital gain up to $250,000 or $500,000 respectively. This means that home owners can sell their homes frequently, pocket the gain or purchase a more expensive home, without worrying at all about taxes. This has been part of the tax code several decades, though the amounts have increased, and does encourage home ownership. In fact, it encourages or at least does not discourage serial home ownership.  Of course, this benefits those who change jobs and must change jobs, but it also benefits lenders and real estate professionals.

Extending the tax relief to those who short sale their homes is in a different category. So long as underwater homeowners face no tax penalties for short selling their homes,  they will usually prefer it to the foreclosure alternative. At the same time, short sales are a much faster way of  dealing with an inability or unwillingness to pay the mortgage in underwater homes.  Short sales help to clear the vast inventory of underwater property which has been clogging the system for the past few years making it difficult for the real estate industry to recover.

 

How To Assume A Non-Assumable Loan

Half the Country Has Bad Credit

It’s no secret that half the county’s credit has been trashed during the Great Recession. Due to short sales, foreclosures, bankruptcies, job loss and assorted maladies, a significant chunk of the population can no longer qualify for a mortgage loan. Add, too, the new, much more stringent, underwriting guidelines adopted by lenders in the wake of their irresponsible behavior during the “bubble” years and that creates a huge problem for many, many would-be home buyers and investors.

Assumable Loan

What to Do?

What to do? One thing buyers can do is search out seller-financed properties, though often such sellers, too, will check out the credit report and be unhappy with the result. Another, lesser-known, option is to assume an existing loan, saving thousands of dollars in closing costs to boot.  Now, this, too, has its own problems since most fixed-rate loans of the past 10 or so years have a “non-assumable” clause. This means that if the property title is transferred, the  new owner cannot take over the old mortgage. Most loans have a “due-on-sale clause”, meaning the lender can call in the entire amount of the loan in the event of a title transfer. Even the “assumable” loans usually require that the buyer qualify.

Assumable Mortgage

Some Ways To Assume a Non-Assumable Loan

Is there a work-around? Thankfully, in some cases, but certainly not all,  it may be possible to assume a non-assumable loan. Here are some of the scenarios where that may just work.

  1. Make Sure There Is A Due-On-Sale Clause. Even if the lender insists that the mortgage is not assumable, here’s a tip: read the mortgage and promissory note to make sure that it has a due-on-sale clause.  With all the confusion in the past few years, the lender may not even be able to produce the required documentation.  Without it, no due-on-sale clause is legally enforceable.  This is a check-with-a-real-estate attorney option.
  2. Death of a Joint Tenant. When the surviving joint tenant receives title after a death, federal law, the Garn-St. Germain Depository Institutions Act of 1982, prohibits the mortgage lender from enforcing a due-on-sale clause.
  3. A Related Owner-Occupant Inherits. When a related owner, such as a spouse, either occupies or continues to occupy the property, the lender cannot enforce a due-on-sale clause.
  4. A Junior Lien Is Placed On The Property. Here, too, the primary lender is enjoined from enforcing the due-on-sale clause.  In reality, the primary is in a better position if the homeowner has a second mortgage or an equity line since now two parties are  vitally interested in seeing that payments continue to flow in.
  5. An Owner-Beneficiary Trust Takes Title. These days, trusts and, especially inter vivos trusts, are used to avoid probate costs. Although the lender cannot enforce a due-on-sale clause under this scenario, the mortgage-holder does have a right to a copy of the trust.
  6. Transfer After Divorce. After a divorce the lender cannot enforce a due-on-sale clause if either children or a former spouse occupy or continue to occupy the property. They must occupy though.
  7. Ask About an Assumption Fee. Even if the situation is not one of the above, it always pays to ask the lender if an assumption is possible despite the presence of a due-on-sale clause. Especially if the loan is in default, the lender may be exceedingly happy to have the loan brought up to date often with no fee whatsoever. Lenders today have plenty of foreclosures and short sales already and so may be quite willing to make a mutually-beneficial deal.

Home Values & The Demographic Time Bomb

The bomb has already exploded and suburbia has been left childless. Suddenly, it’s not just rural areas and the Rust Belt that’s losing population.  Even, Beaver Cleaver’s neighborhood has no kids.  That’s what’s contained in the 2010 Census. Very few of the 3143  American counties report any growth in population and many [58.6%]  report steep declines. Children used to make up 25.7% of the population, even a scant 10 years ago. Now, children are 24% and still declining. In only 49 counties did the kid population increase, most in suburbs around mid-sized cities like Charlotte, NC.

Los Angeles  County, as reported in the L.A. Times, is losing children at a rapid rate due to the high cost of housing and the high unemployment rate. Too, hard times have led many new immigrants, many illegal, to return to their home countries, rather than tough it out here. That group had among the highest birthrates.

Time was when new schools were popping up all the time to accommodate the burgeoning baby boom. Now, even the youngest boomers are into advanced middle age.  And, they have not produced children like their parents. As a result, the archetypal American neighborhood, Suburbia, USA, is increasingly childless.  This  fact is having   massive impact in those communities.  As in L.A. Unified, schools are closing, pools and recreation areas are shutting down. All the activities we associate with child-rearing are diminishing or eliminated altogether–youth sports, music and dance classes, martial arts, swimming, skiing, birthday parties.

With the vanishing children goes the need for the 3-bedroom, 2-bath home with yard. Perhaps, too, the whole concept of suburbia is fading as newer communities insist on walkability, proximity to shops and public transportation.

Who Will Be Future Home Buyers?

During the real estate boom, as home values moved inexorably upward,  buyers spread out to purchase a second or even third home. Will this trend accelerate? It’s possible, yet, given the moribund state of housing right now, it doesn’t seem too likely. What does seem likely is that the buyers will increasingly be singles, childless couples, older singles and couples.

Where will they want to live? That, too, is not really known as yet.  Many young singles spend their twenties in urban areas like San Francisco and Manhattan or Brooklyn, Boston or Miami. They are marrying later and putting off child-rearing to their thirties.  Many of these want to stay in the urban core. With only one or, possibly, two children, that’s what they are doing.  The childless couples are doing the same thing. They like the amenities so close by–public transportation, great shopping, wonderful restaurants. Why move?

The Baby Boomers, many of whom were themselves raised in Suburbia, also raised their own children there. But, the kids are long gone for the oldest boomers and going for the younger ones as now even they are in advanced middle age.  No longer tied to school districts or commutes, many of the still-huge boomer generation are likely to  leave the suburbs where they brought up their children in search of new horizons.

Effect On Today’s Housing Market

None of this is terrifically good news for today’s market of foreclosures, short sales and underwater property. If the  kids are grown, why would a couple  hang on to the four bedroom home on which  they owe twice as much as it’s worth? They would be better off short selling the house and finding something smaller. On the other hand, if they were counting on sellling the home to move to a cheaper, slower-paced area, that option is closing fast as well.  Not only has their equity dropped like a stone, but who is going to buy that big house? Who’s going to be rushing to the suburbs to buy anything?

 

Housing Prices: The Infamous Double Dip Is Here!

We’ve been expecting it for a year and hoping we were wrong, but the double dip is here as home prices are plunging again. It seems that last year’s uptick was a result of the Congressional tax credits for home buyers. That pumped some life into the otherwise moribund housing sector, but the air all leaked out this year.

How bad is it? Nationwide, home prices are down 5.1% from last year to levels not seen since 2002. Home prices have now lost an average of 32.7% since the highs reached in 2006. Almost 30% of homes with a mortgage are now underwater and many of the rest are hanging on by their fingernails. Here’s a graph from CNN Money that shows the decline from 2006, the uptick last year and the plunge again this year.

It’s starting to look like Niagara Falls, and it appears poised to get worse. What is actually causing this depressing negativity in real estate? Why can’t the nation and our Golden State seem to pick ourselves up and start all over again?

Causes of the Continuing Decline In Housing

Many factors are contributing to this stubborn stalemate–high unemployment, lack of consumer confidence and spending, outsourcing of jobs–but the major reason is the same as at the beginning of the recession–the big banks.

Most of us now understand that the push for deregulation of the banking industry which culminated in the lifting of the 1930s-era Glass-Steigal Act functioned like a giant gold rush for the so-called financial services industry or, better yet, a red flag to a bull. The Wall St boys almost literally went crazy dreaming up creative ways to make money [for themselves] without much consideration for the consequences.

In those heady days, intoxicated with the freedom from almost all regulation, the banks shoveled out loans. Almost anyone could get a loan. Bad credit scores, no down payment, low or no income–none of it mattered. The bankers had a loan for everyone and raked in the money doing refi after refi as everyone cashed out their new-found equity as the housing  bubble grew.

When it burst, the first to explode were the sub-prime loans. That was back in 2007 and 2008. Those were the really terrible loans with horrendous interest rates given to completely unqualified buyers. That was the first wave of foreclosures and short sales.

Since then we have been dealing with the ARM loans, the adjustable rate loans that so many qualified buyers anxious to get into the hot housing market  were advised by their lenders to undertake “to get into the property.”  At the time lenders pitched these as  “starter loans”  because down the road, when they adjusted, buyers were told, with the rise in equity, you could easily refi when the rates went up.

Now we know better of course. Those ARM loans, so lucrative for lenders five years ago,  are now time bombs exploding all over the place. Here’s another graph showing how all these  3- and 5-year ARMs are now adjusting. Owners can’t refi now due to plunging real estate values. On the other hand, they can’t pay $1500 more a month either. Naturally, the banks aren’t budging–no help for you, partner.

Thanks to Sean Chapman for the graph.

This year, as we can plainly see from the graph, we can expect a huge number of resets for these adjustable mortgages. Since the properties are usually now either underwater or nearly underwater, even those who could pay will quickly determine that it is not in their financial interest to do so. The result will be an even deeper crisis for the housing market as home values plummet ever downwards.

After December, The Avalanche?

Louis XIV of France, styled the Sun King, famously opined, “Apres moi, le deluge.”  After me, the flood. He was right, of course, for his excesses so infuriated the people that his successor was guillotined and his monarchy overthrown in the French Revolution.

SoCal Plunge In Foreclosure Filings

Something similar seems to be brewing in Southern California and maybe even nationwide as lenders ratchet up their foreclosure filings after the “robo-signing” lull. Though foreclosures dropped dramatically in SoCal this fall, so, too, did all home sales. The reasons seem to be many: the end of the home buyer tax credit, stubbornly high unemployment and the generally still-moribund economy. In fact, sales are down a full 16% from November of 2009. This at the same time foreclosure filings fell 14% from the previous November after a 22% decline in October for a two-month total 36% decline. Nationwide, the filings fell 21%.

December is traditionally a slow month in real estate as consumers focus on retail buying, parties and holiday travel plans. Typically, though, also in December  smart investors are out there snapping up last-minute bargains of the now-extremely motivated sellers still on the market. Competition is almost always much less, to put it mildly, and sellers are determined to close out their books for year’s end.  This year seems to be different as even investors are holding back.

That may be because the huge drop in  foreclosure filings this fall has ominous repercussions for home prices in the new year. With the foreclosure freeze over, informed observers now expect to see the banks ratchet up their foreclosures with a vengeance, restarting filings begun in October and November and barreling ahead with new ones in January. Executives from RealtyTrac, a real estate data collection firm, speculate that the housing recovery could be set back three months, if not more, as the foreclosures pile up. In fact, we can expect ” an avalanche” of foreclosures shortly.

SoCal Home Prices

The most immediate effect of an avalanche of foreclosed properties on the market will be to further depress prices in Southern California which had started a slight upward movement. Los Angeles County home prices had dropped 1.2% over November 2009 to a median of $325,000. Riverside and San Bernardino Counties, the hardest hit by the bursting of the real estate bubble, lost 2.5% and 5.0% respectively to medians of $195,000 and $152,000. But, that is a huge improvement over the 30% and 40% drops of previous years. Other SoCal counties actually gained in value. Orange County eked out a .6% improvement for a $435,000 median home price. San Diego topped the charts with a 3.1% improvement over last year to a median of  $335,000 with Ventura County just behind at 2.7% uptick to a median of $375,000.

Future: More Underwater Homes

These hard-earned gains will soon be lost as the promised avalanche of foreclosures hits the market. Perhaps sales will pick up as buyers and investors are lured back into the game. But, bargain-hunting fun aside,  another price drop for already distressed homeowners will plunge yet more homeowners underwater.  That, in turn, spirals down into more foreclosures and more equity loss in future.

Like Louis XIV, banks see this as well as anyone, yet still refuse to modify loans in any serious way. Like Louis, they see, but, obviously, don’t give a damn as long as they get their bonuses. Short-term is the only term.

California Home Values–Where Are They?

Home Values Are Up

Here’s what’s happening in housing, according to the most recent reports from NAR [National Association of Realtors] and CAR [California Association of Realtors]. Nationally, the number of home sales declines, but in California home sales rose 14% in May 2010 over the previous month and were up a bit over 1% compared to last year. Of course, last year was a terrible year. This shows, though, that things are getting a bit better, though not by much.

California’s median home price also rose 23% compared to last year, May 2009. Last year the median price was $263,440 and this year the new median for May 2010  is $324,430,  almost 6% higher than the previous month of April 2010. This may seem to be a big jump in one month, so, naturally, we might ask the reason. And, the reason appears to be the federal government’s $8000 tax credit which is set to expire at the end of June 2010. It’s very likely sales volume and possibly the median home price will sink back once the buying frenzy has run its course.  New home buying has already snapped back to the doldrums after a busy couple of months.

Will California Home Prices Rise Soon?

Does this mean we’re coming out of it and should see rising prices from now on? It’s possible that prices will continue to inch up in  California, but more likely they will either decline or stay flat for quite some time. Here are several reasons. One is that a record number of foreclosures is slated to hit the market this summer and into the fall. This is the famous “shadow inventory” that banks have purportedly been holding off the market to prevent a steep slide in values.  That strategy works only so long then it gets old fast because neighborhoods and municipalities have  to deal with the consequences of many vacant properties. It’s better to sell them than leave them open to vandals, meth-heads and squatters.

Another reason we most likely will not see a brisk rise in home values in California anytime soon concerns our ongoing budget crisis which does  not instill confidence in the state. But, the  most important impediment is our stubbornly high unemployment rate. A government in crisis  cannot hire new people in the public sector to help the situation. Unemployed people cannot buy homes and, in fact,  may be on track to lose the homes they’ve been hanging onto. Long-term unemployed who may have been making it on unemployment benefits are now about to lose that lifeline as Congress has failed to renew extra benefits.

What Does This Mean To Home Sellers/Buyers?

The bottom line is–if you are underwater and hoping that the equity in your home will increase substantially in the next year or so, you will probably still be substantially underwater one year from today. If you have equity, but are waiting to sell until the prices “come back”, you will most likely be waiting for a number of years.

If you are a buyer, things are looking good. The new affordable median prices mean that a healthy 66% of first-time time buyers can afford the median-priced home. This is a good sign.

I, personally, have faith in the long-term health of the Golden State. Yet, it seems clear to me that all Californians have a lot of work to do before we return to the “good times” when we had good schools, fine universities, excellent local and state governments and rising home values–all with low taxes and little effort on our part.