Do You Have to Repay Your Homebuyer Credit?


Original Post Date: October 28, 2010

By: Bill Bischoff

Back in 2008, when the housing market was in even deeper trouble than it is in now, Congress passed the Housing and Economic Recovery Act to help move a glut of homes off the market. One of the key provisions was a tax credit for first-time homebuyers. That provision would be extended (twice) – and getting in early would have been a mistake. 

If you claimed a federal income tax credit for a 2008 home purchase, you’ll probably have to pay it back over 15 years, starting with your 2010 Form 1040 (due next April). In contrast, if you claimed a credit for a 2009 or 2010 purchase, you probably won’t have to pay it back. (Blame Congress’s patchwork legislating.) 

Before getting into whether the credit repayment rules will affect you, let’s briefly revisit how the homebuyer credit itself works. 

Homebuyer Credit Basics

First Version: The original credit was up to $7,500 for individuals who bought a U.S. principal residence between April 9, 2008 and Dec. 31, 2008 and had not owned one for the three-year period ending on the purchase date. 

Second Version: Congress increased the credit to up to $8,000 for individuals who bought a U.S. principal residence between Jan. 1, 2009 and April 30, 2010 and had not owned one for the three-year period ending on the purchase date. However, the closing deadline was extended to June 30 for homes that were under contract as of April 30. The deadline was further extended to Sept. 30 for homes that were under contract as of April 30 and were contracted to close by June 30 but did not. 

Third Version: This credit offers up to $6,500 to so-called longtime homeowners, which means those who had owned a U.S. principal residence for at least five consecutive years during the eight-year period ending on the purchase date for a new U.S. principal residence. For this third version, the purchase date had to be between Nov. 7, 2009 and April 30, 2010. However, the closing deadline was extended to the same dates as for the second version. 

Repayment Rules for First Version

Buyers who claimed the original version of the credit (for 2008 purchases) are generally required to repay the credit in equal installments over 15 years, starting with their 2010 tax return. 

Example: Say you claimed a $7,500 credit for a $200,000 purchase in 2008. You’ll generally have to add $500 (one fifteenth of $7,500) to the tax bill shown on your 2010 Form 1040. Assuming you continue to own the home, you’ll do the same thing for the following 14 years (2011 and beyond). However if you sell in 2010, you’ll have to repay the lesser of: (1) the $7,500 credit or (2) your gain on sale (if any). 

To see if you have a gain for credit repayment purposes, you must reduce your cost basis in the home by the credit. In this example, if you sold the home in 2010 for $195,000, you’re considered to have a $2,500 gain for credit repayment purposes. That’s because the $195,000 sale price exceeds your home’s $192,500 cost basis ($200,000 actual cost reduced by the $7,500 credit). So you’ll have to repay $2,500 (lesser of the $7,500 credit or the $2,500 gain on sale) with your 2010 return. 

However, if you have a loss on sale (after reducing the home’s basis by the credit), you don’t have to repay the credit. 

Exceptions: If you or your spouse is in the military and had to sell because of an order to relocate for extended duty, you don’t have to repay the credit. If you transfer the home to your ex as part of a divorce settlement, the credit repayment obligation becomes his or her problem. Finally, folks who die don’t have to repay the credit (nor do their heirs).   

Repayment Rules for Second and Third Versions

If you claimed a credit for a 2009 or 2010 purchase, the 15-year repayment rule doesn’t apply (it only applies to 2008 purchases). But if you sell the home in 2010 or stop using it as your principal residence this year, you’ll generally have to repay the lesser of: (1) the full amount of the credit or (2) your gain on sale (if any). If you have a loss, you don’t have to repay the credit. The earlier example explains how to determine if you have a gain or loss. 

Exceptions: For post-2008 purchases, the credit repayment obligation disappears after you’ve owned and used the home as your principal residence for over three years. In addition, the credit repayment exceptions listed for the first version of the credit also apply to the second and third versions. 

The Last Word

The credit repayment rules are confusing, but you won’t have any difficulty following them at tax-return time. Just fill out Parts III and IV of the 2010 version of IRS Form 5405 (First-Time Homebuyer Credit and Repayment of the Credit), and add the credit repayment amount to your tax bill on the indicated line of Form 1040. You can get an advance look at Form 5405 at the IRS web site: While I hope you’re blissfully unaffected by the credit repayment rule, you now know the score if you are.

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Southern California home sales remain weak


Original Post Date: October 20, 2010

By: Alejandro Lazo

Sales of homes in Southern California slumped for a third consecutive month in September but prices ticked up, underscoring a weak but stable real estate market headed into the traditionally slow fall and winter months.

Sales of newly built and previously owned houses, town homes and condominiums fell 2.4% from August and 16% from the same month last year, according to real estate research firm MDA DataQuick of San Diego. A total of 18,091 homes were sold last month in the region.

Prices rose slightly as sales continued to move from more affordable areas to pricier neighborhoods. The Southland’s median home price was $295,500, up 2.6% from the previous month and up 7.5% from September 2009, DataQuick said Tuesday.

Real estate professionals and economists said the sales pace probably would remain sluggish for the rest of the year as buyers take longer to commit to purchases and sellers wait out the slow period.

“We are in the doldrums. Nothing much is happening,” said Richard Green, director of the USC Lusk Center for Real Estate. “We are now kind of bumping along, not doing particularly well, but not doing any worse either, and that is probably where we are going to be for a while.”

Glenn Kelman, chief executive of online brokerage Redfin, said the uncertainty in the marketplace after the expiration of tax credits had created a standoff between buyers and sellers.

“There are a huge number of buyers touring houses, but they have no sense of urgency whatsoever,” Kelman said. “They are all convinced that property values will drop. They are probably right, and they all want a discount.”

And sellers, “instead of lowering their prices,” he said, “are boarding up their windows for the winter, and they are going to wait for the spring.”

September’s sales pace was the slowest for that month since 2007, having fallen for three straight months beginning in July, when the market’s boost from federal and state tax credits evaporated, DataQuick reported.

Economists believe those tax incentives pulled sales that would have occurred in the latter part of this year into the first half, and now the housing market is feeling the fallout. Nevertheless, sales in September usually are lower than those in August, and recent sales decreases in no way compare to the freefall of late 2007 and early 2008.

Sales are up 81% from the last bottom, reached in January 2008, when only 9,983 homes sold in the six-county region.

The data released Tuesday reflect deals that closed in September, meaning that home buyers probably were signing contracts on the properties in July and August. Some real estate agents said things have improved since.

Syd Leibovitch, president of Rodeo Realty Inc. in Beverly Hills, said he was optimistic about the rest of the year.

“Things have picked up. They are much better than they were in July, which was really a slow sales month,” he said. “In June and July, they were talking about a double-dip recession and consumer confidence had dropped…. In August it got a little better and September it got a little better.”

The numbers didn’t reflect the recent halt in foreclosures announced by several large lenders, which for the most part didn’t include California. At least one major lender, Bank of America Corp., said Monday that it would resume foreclosures in 23 states, although not in California.

Foreclosures as a percentage of the Southland’s resale market have dwindled steadily since hitting a peak of 56.7% of the market in February 2009. Last month, they made up 33.4% of the market.

Also Tuesday, the Commerce Department said construction of U.S. single-family homes and apartment buildings in September rose 0.3% from the prior month and 4.1% from September 2009.

“The construction industry perked up a bit in September,” said Michael D. Larson, a housing and interest rate analyst for Weiss Research Inc. “Overall starts hit a six-month high, and the single-family market in particular showed relative strength.”

“Still,” he added, “there’s [not] any evidence of a robust recovery here.”

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Foreclosures Sales, REO Inventories Increase Along West Coast: Report


Original Post Date: October 18, 2010

By: Carrie Bay

ForeclosureRadar has released its September market report, and the company’s data shows that both foreclosure sales and inventories of bank-owned properties are on the rise throughout the West Coast states of Arizona, California, Nevada, Oregon, and Washington.

Five major mortgage servicers have announced that are suspending certain foreclosure activities in various states. These companies included Ally (GMAC), JPMorgan Chase, Bank of America, Litton Loan Servicing, and PNC Financial.

ForeclosureRadar says that its latest report is primarily focused on September foreclosure activity, and pointed out that the company’s analysts have yet to see any impact to foreclosure sales from the announced suspensions within its coverage area.

“We regularly see lenders make minor mistakes in foreclosure filings” said Sean O’Toole, CEO and founder of ForeclosureRadar. “But the reality is that far more homeowners are behind on their mortgage payments than are even in foreclosure.”

O’Toole continued, “The clear problem in the housing market today is not foreclosures, but negative equity; and as long as the focus remains on the symptom rather than the disease we will see little progress towards real solutions and this crisis will drag on for years to come.”

In Arizona, REO inventories have been steadily rising for the last year. According to ForeclosureRadar, the state’s bank-owned supply has jumped again – up 4.3 percent from August to September, and 67.9 percent year-over-year. The company says this can partially be explained by an increase in foreclosure sales that went back to the bank and a slowing of REO sales since the expiration of the federal tax credit. Notice of Trustee Sale filings dropped in Arizona for the second month in a row.

ForeclosureRadar reports that in California, the number of foreclosures sold to third parties, typically investors, declined 15.6 percent in September, most likely because the time it takes foreclosure investors to flip the property has lengthened from 95 to 137 days over the past year. The Golden State’s total REO inventory increased by 5.3 percent last month as REO resales slowed.

Nevada’s foreclosure sales jumped dramatically in September, increasing by 39.2 percent from August. The number of foreclosure sales purchased by third parties was essentially flat, while the majority went back to the bank, leading to an 8.0 percent increase in the state’s inventory of REO properties. Nevada foreclosures filings were mixed with Notices of Default down 8.8 percent and Notices of Trustee Sale up 6.5 percent in September.

Foreclosure sales continue to climb in Oregon, up 18.5 percent from August and 88.9 percent from the prior year to a record 967 sales. The vast majority of these sales, 94.3 percent, failed to receive a bid from a third party and went back to the bank as REO inventory, according to ForeclosureRadar.

A record 2,007 properties were foreclosed on in September in Washington, up 19.0 percent from August, and 55.2 percent from the prior year. Just 7.3 percent of foreclosures sales were purchased by third parties, with the remaining swelling REO supplies by 10.9 percent.

ForeclosureRadar tracks every foreclosure in the five West Coast states included in its coverage area and provides daily auction updates.

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Home Construction Grows


 Original Post Date: October 19, 2010

By: Justin Lahart and Jeffrey Sparshott

U.S. home construction rose last month, suggesting that the lull in the housing market that followed the expiration of home-buyer tax breaks in the spring has ended.

September construction starts on single-family homes rose 4.4% from August, an annual rate of 468,000, the Commerce Department said Tuesday. Overall housing starts, which include groundbreakings on apartment and other multifamily buildings, increased 0.3% to a seasonally adjusted annual rate of 610,000.

Even though the level of monthly housing starts is up from an average of 530,000 in the first quarter of 2009, by the standards of the past 50 years it is still low, noted New York Federal Reserve Bank President William Dudley in remarks to reporters Tuesday.

“One reason why so little housing is being built is that many existing homes stand vacant,” he said. “We estimate that there are roughly three million vacant housing units more than usual. And more vacancies are added daily as the foreclosure process moves homes from families to mortgage lenders.”

Bank of America Corp., after imposing a moratorium on foreclosures earlier this month on documentation concerns, reopened more than 100,000 foreclosure actions Monday.

The combination of weak demand and the large supply of vacant homes for sale will leave housing starts subdued for several years, said Paul Dales, economist at Capital Economics. “We doubt that housing starts will reach one million before 2015,” he said.

Regionally, housing starts in September increased 4.8% in the South and 2.9% in the Northeast. They fell 8.2% in the Midwest, and 3.6% in the West.

Building permits for single-homes, seen as an indicator of future construction, edged up to 405,000 in September from 403,000 in August. But weighed down by a drop in permits for multifamily homes, overall permits fell by 5.6% to 571,000.

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Is income property the right buy now?


 Original Post Date: October 19, 2010

By: Marilyn Kalfus

Q.:  “Is now a good time to buy income property?

A.:  “We get this question a lot about not only income property but about single family residences as well form prospective new homeowners. Everyone has an opinion, for every ‘yes’ there is at least one or more ‘no’ responses to this question.  Without providing a definitive yes or no I will provide some information so you can determine if the market is right for you to dive into, or continue in, the investment real estate market. For this discussion I am assuming ‘investment property’ to be one to four units that you will not occupy.

“The residential income market is soft, softer I feel than the single family market, and the main reason is the difficulty in financing non-owner occupied purchases and units. Combine the two and look to finance a non-owner occupied three or four unit building and the lending gets as restrictive as it gets. Interestingly the investor mortgage market is not that much tighter today than it was pre-meltdown for conventional loans (Fannie Mae/Freddie Mac), unlike the single family market. Many of the guidelines we are using are close to what they were pre-2008.  The most significant change is how rental income is considered in qualifying.

“Because the lending from Fannie and Freddie has always been somewhat restrictive for investor mortgages the relative erosion in market conditions due to foreclosure is considerably less than the single family/condo markets due to foreclosures.  Most of the property declines in the 2-4 unit properties are as a result of overall market conditions, or because landlords have lost properties due to other factors besides being upside down. Since most investment properties have been purchased with 25% or more down and turn a break even or better cash-flow owners are in a better position to ride through the down markets.

“The primary factor limiting financing for investment properties is the use of rents for qualifying. Prior guidelines allowed 75% of the rents on the subject property to be used for qualification purposes. If the fourplex you were considering purchasing had rents of $4,000 per month then $3,000 per month would be added to the application for qualifying. The loosest guidelines for qualifying rental income today are based upon your experience. If you can show a two year history of property management then a few lenders will allow 75% of the rents for qualifying. Without the history you must qualify for the property with no rent credit, and many lenders follow this guideline even if you are an experienced investor. 

“What this means is that if you are a homeowner and are looking to invest in some rental property for the first time you must qualify for the mortgage to purchase the property with both the full PITI (principle, interest, taxes, insurance) for both your current residence and the new property.  If your current housing payment is $2,750 per month including taxes and insurance and you are looking at a $650,000 duplex with 25% down you will have a PITI of approximately $3,400 for qualifying; your income must therefore support total monthly payments of $6,150 per month plus any other debt such as car payments and credit cards. 

“A second factor is cash for downpayment. Depending on the loan amount the minimum requirement is either 25% or 35% down; prior limits would allow 20% down for non-owner occupied purchases through Fannie Mae and Freddie Mac. Given the high value of Southern California real estate, the amount of money needed for a three or four unit building can be as much as some single family homes.

“The investment market is soft primarily due to the increased income and cash needed to qualify for and obtain financing.  Reduced opportunities for financing soften a market; in the case of residential units this is having a far greater impact on values than foreclosures.

“Is now a good time to buy investment property?  If you can qualify and are looking for a long term investment and feel that the market provides you with a good opportunity then perhaps it is; if you feel the market will decline substantially in the next several months then perhaps not. Keep in mind, making investment property even more affordable in this market are the incredibly low interest rates—under 5% for three and four unit buildings with 25% down is pretty incredible.”

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Banks Restart Foreclosures


Original Post Date: October 19, 2010

By: Jessica Silver-Greenberg, Robbie Whelan, and Dan Fitzpatrick

Two major lenders at the center of the foreclosure crisis took steps Monday to put the mess behind them by restarting home seizures that were frozen by documentation concerns.

Bank of America Corp. reopened more than 100,000 foreclosure actions, declaring that it had found no significant problems in its procedures for seizing homes. GMAC Mortgage, a lender and loan servicer, said that it also is pushing ahead with an unspecified number of foreclosures that came under intense pressure.

Bank of America prepared to restart 102,000 pending foreclosure actions where court approval is required, applying new signatures to documents in 23 states. Rick Brooks discusses. Also, Elizabeth Bernstein discusses the various ways men, women, strangers and family members apologize.

Monday’s moves are part of a growing counterattack by lenders scrambling to stem a financial and political threat over allegations that certain employees signed hundreds of documents a day without carefully reviewing their contents when foreclosing on homes.

Bank of America, the nation’s largest bank in assets, which imposed on Oct. 8 a nationwide moratorium on the sale of foreclosed homes, said it has begun preparing new affidavits for pending foreclosures in 23 states where a judge’s approval is required. The paperwork will be submitted to courts by next Monday, and foreclosure sales will resume in those states starting in November, according to the bank.

“This is an important first step in debunking speculation that the mortgage market is severely flawed,” said Bank of America spokesman James Mahoney. More details will be disclosed when the company reports quarterly results Tuesday.

Citigroup Inc. Chief Financial Officer John Gerspach said the bank has found no reason to halt foreclosures, calling its internal procedures “sound.” “We have not identified any system issues,” he said Monday.

Restarting the nation’s foreclosure machine puts the lenders on a collision course with state attorneys general, who announced last week a nationwide investigation of foreclosure practices. Some state officials have been pushing for a wider halt to foreclosure sales, but Bank of America’s moves show determination by at least some lenders to get back to business while the investigation proceeds.

A Bank of America spokesman said the bank has found “no cases” thus far of foreclosures that should not have “gone through.” Last week, James Dimon, J.P. Morgan Chase & Co. chairman and chief executive, said that no one has been “evicted out of a home who shouldn’t have been.”

Some attorneys general said they have little confidence that problems with foreclosures have been fixed. “We’ve been in discussions with some of the major servicers, and as part of that they’ve assured us that they are fixing this problem, but we’re not just going to take their word for it,” said Patrick Madigan, a spokesman for Iowa Attorney General Tom Miller.

It will be hard for lenders to declare the foreclosure crisis over and get back to business as usual. Bondholders are escalating efforts to recover losses on soured mortgage-bond deals containing loans with flawed paperwork. Meanwhile, federal banking regulators are assigning additional employees to an ongoing review of large mortgage-servicing operations, according to people familiar with the situation. Officials want to make sure that documentation procedures are being followed and companies are meeting all legal foreclosure requirements.

Bank stocks surged Monday as investors reassessed last week’s outlook for the cost of the foreclosure mess. Citigroup shares jumped 23 cents, or 5.8%, to $4.18 a share in New York Stock Exchange composite trading at 4 p.m., on better-than-expected earnings. Bank of America rose 36 cents, or 3%, to $12.34, while J.P. Morgan was up $1.05, or 2.8%, to $38.20.

Bank of America is the only major U.S. bank that announced a halt to all foreclosure sales while it reviewed documents for errors. Bank officials say they’re readying new affidavits for 102,000 pending foreclosure actions.

A company spokesman said the largest investors in mortgages serviced by Bank of America have signed off on the new timetable. The bank will continue delaying foreclosure sales in the 27 states where court approval isn’t required until a review is completed “on a state by state basis.” The bank expects delays on fewer than 30,000 foreclosure sales nationwide.

“Now it may be legal, but I am not sure it’s ethical,” said Robert Quigley, a 68-year-old retired commercial fisherman, who received a legal notice last week that Bank of America is proceeding with foreclosure on his home in Lake City, Fla. A bank spokesman said the bank never said it would stop all foreclosure proceedings, just final sales.

GMAC, a unit of Ally Financial Inc., declined to comment on the number of foreclosures it has reviewed so far, but said they included loans with affidavits signed by employee Jeffrey Stephan. His testimony in a deposition that he signed 10,000 foreclosure affidavits a month without reviewing the underlying documentation led GMAC to halt evictions in 23 states last month while it scrutinized its procedures.

Several lawyers representing borrowers facing foreclosure by GMAC said affidavits signed by Mr. Stephan were replaced by similar filings with the signature of a different employee.

Michael Holmes, an antiques dealer in Belfast, Maine, thought he would get a chance to save his home because the affidavit used by GMAC to substantiate his loan amount was signed by Mr. Stephan. Instead, GMAC replaced Mr. Stephan’s document in the courthouse file for the foreclosure proceeding with an affidavit signed by employee Davida Harriott. Her name also appears on substitute paperwork in pending foreclosure cases in Florida, according to court documents and lawyers representing the borrowers.

Gina Proia, a spokeswoman for Ally, said on Monday: “As each case is reviewed and remediated, it moves on.” None of the revised foreclosure documents being filed by the company will bear the signature of Mr. Stephan, though he still works for GMAC, she said. Mr. Stephan and Ms. Harriott couldn’t be reached for comment.

Ohio Attorney General Richard Cordray, who last week filed a lawsuit against GMAC alleging hundreds of counts of fraud related to foreclosure documents, said he is suspicious of efforts to replace paperwork. “Substituting new evidence in [cases] where there’s been fraud won’t help prevent the court from sanctioning them for the fraud that has already been committed,” he said. “It doesn’t unring the bell.”

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Set a realistic price from the start when you list your home online


Original Post Date: October 17, 2010

By: Mary Umberger

If you’re considering listing your house and you’re serious about selling, you’re better off being realistic right from the get-go.

This is according to a New Zealand housing analyst whose study of online buyer habits echoes one done this year in the United States.

Alistair Helm, chief executive of, concluded that a property receives four times as many views in the first week online as it does a week later. His company looked at 1,100 New Zealand properties during a six-week period in July and August.

Helm told the New Zealand Herald that the “most important people in the market” are serious buyers who are searching online every day, and they’re fully aware when a home that might meet their needs becomes available.

A few months ago, the online brokerage looked at traffic for listings in multiple markets.

The homes studied had gone on the market early this year and had been for sale at least 60 days, and the listings had been updated — had a price change or some other significant condition change — at least once. came to the same conclusion: Brand-new listings get four times as many online viewings in that initial week as they do immediately afterward.

If you’re fishing for an unrealistic price, you may be blowing it, the company said.

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Realtors to pursue vetoed mortgage bill


Original Post Date: October 15, 2010

By: Jeff Collins

The California Association of Realtors plans to renew its fight next year for a mortgage bill vetoed last week by the governor, association officials said.

Gov. Arnold Schwarzenegger killed SB 1178 last week, saying he believed the measure “would encourage borrowers to strategically default on loans they have the capacity to repay.”

The measure sought to protect homeowners from having to repay the full amount of their loan if the home is sold in a foreclosure sale for less than they owe.

Under current law, a borrower’s liability is limited to the sale amount in a foreclosure involving the loan used to buy the home. But borrowers lose that protection when they refinance into another loan, say, to take advantage of a lower interest rate and reduce their payments.

The state Realtors association sponsored the proposal, saying that people who refinance their loans should have the same protections they had under their purchase mortgages. The group maintains that the protections are needed even though lenders rarely exercise their right to sue for a loan “deficiency.”

But Schwarzenegger said in his veto message that changing the law now would revoke terms of already agreed-upon contracts.

“This bill fundamentally alters the nature and impairs the value of previously negotiated contracts, leading to negative consequences for the value of those loans held in a lender’s portfolio and a deleterious impact on the secondary market. Fundamentally altering the nature of a contract after its consummation is a bad precedent and will provide uncertainty for future lending transactions.”

Alex Creel, the Realtor association’s chief lobbyist, said the association likely will seek to have a similar measure reintroduced in the Legislature next January or February, when a new governor will be in office.

“With all due respect, we think the governor’s wrong,” Creel said. “He bought the line from the banks, which we feel is fallacious.”

Schwarzenegger did sign a competing proposal, SB 931, which extends “anti-deficiency” protections to a borrower’s first loan after a “short sale,” or a lender-approved sale for less than is owed on the home. But the protections don’t apply to second-mortgage or subsequent loans on the home, nor do they apply to loans after a foreclosure.

The Realtors association said that while it supported SB 931, “it does not go far enough.”

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Seven Million U.S. Mortgages Past Due or in Foreclosure: LPS


Original Post Date: October 15, 2010

By: Carrie Bay

There are 7,018,000 mortgages in the United States that are 30 or more days delinquent or in the process of foreclosure, according to new data from Lender Processing Services (LPS).

The Florida-based analytics and technology firm offered the media a preview Friday of its September month-end mortgage performance figures, derived from the company’s loan-level database of nearly 40 million mortgage loans.

Of the more than 7 million home loans in the country currently going unpaid, 2,055,000 have already commenced foreclosure proceedings. LPS reports that

4,963,000 are in the pre-foreclosure default stages, with nearly half of these falling into the 90-plus-days delinquent bucket.

LPS’ measurement of the U.S. loan delinquency rate (loans 30 or more days past due, but not in foreclosure) rose to 9.27 percent as of the end of September. That’s a 0.6 percent increase over the previous month, but down 7.8 percent compared to last September.

The nation’s pre-sale foreclosure inventory rate stands at 3.84 percent, according to LPS’ market data – up 1.1 percent from the August reading and 3.6 percent above a year earlier.

LPS says the states with the highest percentage of non-current loans (defined as the total number of foreclosures and delinquencies as a percent of all active loans in that state) include: Florida, Nevada, Mississippi, Georgia, and Louisiana.

The lowest percentage of non-current loans can be found in: Montana, Wyoming, Arkansas, South Dakota, and North Dakota.

LPS will provide a more in-depth review of this data in its September Mortgage Monitor report, is scheduled for release on October 29.

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Fannie-Freddie add-on fees put damper on refis


 Original Post Date: October 10, 2010

By: Kenneth R. Harney

With mortgage rates at unprecedented lows, why are more people not taking advantage of them to refinance or buy houses?

The answers are complex and include sagging consumer confidence in the economy and high unemployment rates. But some mortgage lenders point to what they see as overreactions within their own industry that are discouraging and disqualifying potential borrowers — sharply increased credit score requirements, higher down payments and add-on fees imposed by mortgage giants Fannie Mae and Freddie Mac, which control about two-thirds of the loan volume.

The most controversial Fannie-Freddie fees, which were introduced as the housing bubble began deflating, are known in the industry as “loan-level pricing adjustments.” Many mortgage executives say they are excessive, given the stricter underwriting standards now in place that reduce the long-term risk of new loans being originated today.

Bruce Calabrese, president of Equitable Mortgage Corp., a mortgage banking firm in Columbus, Ohio, considers them “simple cash grabs by Fannie and Freddie because they can, not because of any increased risk.”

Fred Kreger, branch manager for American Family Funding in Stevenson Ranch, Calif., says the fees — which can add thousands of dollars in upfront costs for borrowers or raise their interest rates — seem to be out of line with the actual risk in the marketplace, as shown by the fact that “portfolio lenders like small- to medium-size credit unions or banks do not charge them,” even though they are lending to the same customers as Fannie and Freddie.

Lewis Corcoran, a loan officer with Star Mortgage in West Bridgewater, Mass., says the add-ons are killing refinancing deals for customers who want to lock in 30-year rates in the mid-4% range. “You’ve got people out there … who’d like to refinance,” he said in an interview. “But when they look at the points they’ve got to pay because their credit score is a little below” a cutoff line set by Fannie and Freddie, “they decide it’s not worth it.”

Both Fannie and Freddie, which have operated under federal conservatorship since September 2008, maintain sliding scales of fees, starting with a standard 0.25% “adverse market delivery charge.” For a $300,000 loan, that’s $750 just to get in the door. On top of that come fees calibrated to a sliding scale of down payments, credit scores and housing types.

Say, for example, you want to buy or refinance a condominium. Under Fannie’s latest add-on matrix, a condo buyer who has less than a 25% down payment must pay a 0.75% add-on fee for starters. On a $300,000 condo loan, this comes to $2,250, to either be paid in cash or financed through a higher mortgage interest rate.

The same matrix imposes additional fees based on applicants’ credit scores. For instance, anyone with a FICO credit score of 679 or lower who is buying a house with 20% to 25% down — substantial money for most budgets — is assessed a 2.5% “loan-level price adjustment” fee.

Asked for comment on what justifies the continuing imposition of costly add-ons that date back to lower-quality underwriting conditions, officials of the two companies either did not comment or said the fees are needed to cover potential future losses. Freddie Mac spokesman Brad German said, “We feel we are pricing risk appropriately.” Fannie Mae had no comment.

Private mortgage insurance companies, which provide coverage against loss to Fannie and Freddie on loans with down payments of less than 20%, are especially critical of the continuing add-on fees. They say the extra charges on top of their own insurance premiums routinely discourage borrowers from taking out conventional loans and push them instead to the Federal Housing Administration, whose market share has exploded from under 3% to more than 30% in recent years.

Even with the FHA’s move to raise its monthly insurance premiums to borrowers effective Monday, private insurers say that in many cases Fannie’s and Freddie’s add-on fees still make them noncompetitive. Without the extra charges, they argue, consumers seeking low-down-payment conventional loans could be getting lower rates and fees, but there’s no sign they will.

Bottom line for borrowers: Absent a sudden change in policy, don’t look for the Fannie-Freddie fees to be cut or eliminated. Both corporations have bigger fish to fry. Beginning in early 2011, Congress is planning a major debate on their existence, their structures and how they relate to consumers who simply want to get the best-priced mortgage they can.

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