Housing Still Awaits Its Happy Ending


Original Post Date: November 30, 2010

By: David Reilly

The economy and consumers are looking a bit perkier these days. Housing, not so much.

Last week, the government revised upward its estimate of third-quarter gross domestic product growth, weekly jobless claims fell to their lowest level in two years and personal incomes posted a strong gain in October. Consumer-confidence data due Tuesday are expected to rise, while Friday’s November employment report could show the addition of another 150,000 or so jobs.

Housing is a different story. October new-home sales sank 8.1% to a seasonally adjusted annual pace of only 283,000, just off record lows, while existing-home sales slid 2.2% in October to a 4.43 million annual rate. On Tuesday, S&P/Case-Shiller home-price index data through September is expected to show a 0.5% month-on-month fall, while pending home sales figures Thursday are also expected to remain weak.

Granted, housing has shaken off the worst of the hangover that followed April’s expiration of the federal government’s home-buyer tax credit. Housing inventory, for example, fell from 12 months of supply for single-family homes and condos this summer, to about 10.5 months in October, according to the National Association of Realtors.

But the market is merely bouncing along a bottom, and demand is tepid, even with mortgage rates below 4.5%. Even excluding the summer surge, the number of months of housing inventory for sale is still at its highest level since November 2008. Plus, the figures don’t include 2.1 million units of “shadow” inventory not yet on the market, according to Corelogic, largely foreclosures in process.

The danger is that today’s renewed housing slowdown leads to a further leg down for home prices. Janney Capital Markets, at the bearish end of the spectrum, expects prices could fall another 10% to 15% by year-end 2012. That would clearly pose risks to the economy and banks. While most bigger banks would probably weather additional price falls of as much as 5%, a double-digit decline could force many to again build loan-loss reserves, denting profit.

Further price falls will eventually get sales moving again. For now though, it is likely declines will breed even more uncertainty, keeping home buyers on the sidelines and the housing market on its back.

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A housing recovery in 2011? Experts are divided

Link: http://www.latimes.com/business/realestate/la-fi-umberger-20101128,0,7275773.story

Original Post Date: November 28, 2010

By: Mary Umberger

Optimists, pessimists and Ferraris — a compendium of real estate musings:

• Wait till next year. Or 2012. You probably shouldn’t set your heart on any significant housing recovery in 2011, Yale University economics professor Robert Shiller said.

That’s not his prediction; it’s the consensus of 109 economists, analysts and real estate experts surveyed by his financial technology firm, MacroMarkets. His panel in October was roughly evenly split between “recovery optimists,” who expect market improvement next year, and “recovery pessimists,” who don’t see a rebound coming until 2012 or later.

The optimists (Shiller isn’t one of them) predicted that home prices would increase 14% overall by 2014. If you’re looking for housing encouragement, you probably ought to stop reading, because the pessimists expect price growth of, at most, a puny 3% in that same period.

Their blended viewpoint, however, does see prices nationwide increasing 8% by 2014, or a little more than 2% annually. Not exactly the basis for handsprings, though better than some alternative scenarios.

Shiller is well known in economic circles for having called the Internet stock crash and the housing bubble long before they happened in addition to being a namesake of the widely reported Standard & Poor’s/Case-Shiller home price index. He told Kiplinger’s Personal Finance magazine recently that future mortgages ought to have “workout” wording written into them that would allow greater flexibility in modifying the loan terms to avoid foreclosure for borrowers experiencing financial hardship.

• Home buyer, start your engine. Around 2006, when the market was starting to sag, there was no shortage of homes for sale whose owners were offering to throw in a car to sweeten the deal. I remember the full automotive range, from Mini Coopers to Hummers. The cars didn’t seem to be particularly effective incentives, agents said, and they fell off the marketing map.

But Ferrari lovers, don’t give up hope: Maybe you’d just like to pretend that you own one. The owner of a Colleyville, Texas, mansion, who hopes to lease the place out the week of the 2011 Super Bowl in nearby Arlington in February, will let the renter tool around in his Ferrari F430 (or his Lamborghini Gallardo or Maserati Quattroporte) for an additional fee. The house is $45,000 for the week — or you could buy it for $2.8 million, according to the Fort Worth Star-Telegram.

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Foreclosure Restarts Limp Out of the Gate


 Original Post Date: November 27, 2010

By: Dan Fitzpatrick and Ruth Simon

Bank of America Corp. and J.P. Morgan Chase & Co. have hit snags in efforts to restart nearly 230,000 foreclosures across the U.S., meaning some cases are likely to remain in limbo until early next year.

Several complications are slowing the process, ranging from the hiring of new law firms to handle foreclosure paperwork to making sure that correct procedures are being followed as new or revised files are submitted in the 23 states where court approval is required for foreclosures.

The delays aren’t a sign that documentation problems are worse than previously acknowledged by the nation’s two largest banks by assets, according to the companies. And Bank of America, based in Charlotte, N.C., and J.P. Morgan, of New York, haven’t backed down from their insistence that no one was wrongly foreclosed on as a result of errors in affidavits or other loan documents.

Still, Bank of America said it has refiled documentation on just a “handful” of foreclosures that must be approved by a judge. The bank previously said it would resubmit 102,000 affidavits on pending foreclosures starting Oct. 25, with foreclosure sales resuming in November.

James Mahoney, Bank of America’s head of public policy, said “the process is now picking up,” adding that “we expect there will be thousands of affidavits in the courts by the end of December.” He wouldn’t provide an estimate of how long it could take to go through all 102,000 cases being reviewed by employees.

The delay partly reflects a decision by Bank of America officials to make several visits to new law firms working on foreclosure cases for the bank to check that proper procedures are followed as new files are submitted to courts.

“We’ll be opening the valve soon,” another Bank of America executive said. “We’re going to move slowly to ensure high quality.”

J.P. Morgan said in November that it expected to start refiling foreclosure affidavits “within a couple of weeks.” The bank temporarily suspended foreclosures in October.

However, “we still haven’t quite started,” a J.P. Morgan spokesman said. “We’re making sure everything is right.” Bank officials have said it will take three or four months to submit revised documentation on roughly 127,000 loans affected by the temporary halt.

Ally Financial Inc.’s GMAC Mortgage unit has reviewed about half of its 25,000 foreclosures idled by the freeze it announced in September and resubmitted a majority of those cases.

“We still expect the vast majority of the remaining to be completed in the next few months,” said a company spokeswoman.

The delays could lead to higher costs for banks and investors.

This week, mortgage companies Fannie Mae and Freddie Mac began telling real-estate agents nationwide to resume sales of foreclosed properties, though it is unclear how quickly sales will resume given the reviews by loan servicers. Fannie earlier had instructed agents to offer month-to-month leases to would-be buyers of those properties.

Restarting the foreclosure machine poses a thicket of challenges, which are complicated by state and federal investigations of the mortgage-servicing industry and congressional scrutiny that included two hearings last week.

Loan servicers must make sure “either the affidavit is valid or refile an appropriate affidavit,” said Andrew Sandler, co-chairman of BuckleySandler LLP, a law firm representing mortgage servicers. “That requires a clear understanding of state and local law and a clear understanding of the facts of the individual case.”

Mr. Sandler said mortgage companies also have intensified their “due diligence on the foreclosure counsel,” or the outside lawyers commonly used to process evictions on behalf of loan servicers. Some firms specializing in that business have been criticized for signing files without reviewing them in an effort to speed through foreclosures.

Because of the recent controversy, it is even more important that lawyers who handle foreclosures have “credibility with the courts and regulators,” Mr. Sandler said.

—Nick Timiraos contributed to this article.

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Second-Mortgage Standoffs Stand in Way of Short Sales


Original Post Date: November 27, 2010

By: Nick Timiraos

Sergio Trujillo thought he could avoid foreclosure when an investor made an all-cash offer last month to buy his one-bedroom condominium in La Jolla, Calif., for less than the amount he owes on his mortgage.

But a standoff between Mr. Trujillo’s lenders over a few thousand dollars threatens to derail the deal, known as a short sale.

Like many heavily indebted borrowers, Mr. Trujillo has two mortgages: a first mortgage in the amount of $260,000, which is held by Freddie Mac; and a $50,000 second mortgage, handled by Specialized Loan Servicing LLC. Freddie Mac will allow no more than $3,000 in sale proceeds to go toward the second mortgage. But SLS says it will scotch any deal if it doesn’t get at least $7,000.

“This is an all-parties-lose scenario,” said Brian Flock, Mr. Trujillo’s real-estate agent. “There is no housing recovery when this happens.”

Over the past year, real-estate agents, lenders and federal policy makers have pointed to short sales as one way to revive moribund housing markets while helping troubled borrowers avoid foreclosure. But for homeowners that took out second mortgages during the boom, getting a short sale approved is proving to be a nightmare.

Most first mortgages, like Mr. Trujillo’s, are guaranteed by government-controlled mortgage giants Fannie Mae and Freddie Mac or held by other investors in mortgage securities. Second mortgages and other junior liens are typically owned by banks and credit unions.

Banks are reluctant to write down second mortgages because many are still current, even if the borrowers owe more than the value of their homes. They may also be able to pursue borrowers’ assets after foreclosure.

“If I’m the second-lien holder, I may say, ‘You know what, I want to see if I can hold out for a better deal,’ ” said Greg Hebner, president of MOS Group Inc., an Irvine, Calif., company that contacts troubled borrowers on behalf of lenders and servicers.

The result is a “chicken game” between investors that leads to unnecessary foreclosures, said Jon Goodman, a real-estate lawyer and investor in Boulder, Colo.

As of June 30, 11 million homeowners owe more than their homes are worth and an additional 2.5 million have just 5% equity, according to real-estate research firm CoreLogic. To sell, those homeowners must cover the shortfall or, more commonly, ask the bank to take a loss via a short sale. The short-sale process remains full of land mines. Loan servicers were never designed to handle large volumes of customized workouts and it can take months to bring loan servicers, investors and mortgage insurers to agree on a price. Softening home prices create greater potential for disputes over values. And lenders are wary of fraud.

Second mortgages, however, have become one of the biggest roadblocks. More than a third of about 1.33 million properties in some stage of the foreclosure process have at least one junior lien, according to publicly available data tracked by CoreLogic.

Many seconds and home-equity lines are worth little in a foreclosure because home prices have fallen so sharply. That gives the second-lien holder “nothing-left-to-lose leverage,” said Mr. Goodman. Banks say they are approving deals where they can, but borrowers must agree to some form of debt repayment.

About three-quarters of the $1 trillion in seconds outstanding as of June 30 were held by commercial banks, and of those, more than $430 billion belong to the nation’s four largest banks—Bank of America Corp., Wells Fargo & Co., J.P. Morgan Chase & Co, and Citigroup Inc. Forcing write-downs on large numbers of those loans could significantly erode their capital.

Real-estate agents say some banks are getting better at cutting deals. Wells Fargo & Co. now dispatches employees in some markets to appraise homes even before a short-sale offer has been received to help speed potential sales. Bank of America doubled its staff dedicated to handling short sales to around 2,700 over the past year and began using an online platform to allow for paperless applications and approvals. The bank says it has approved 70,000 short sales through September, double the year-earlier total.

In Mr. Trujillo’s case, SLS requested far more than the lien was worth on the secondary market, said Mark Johnson, who oversees short sales for Freddie Mac. “That’s always been our challenge—participation from second-lien holders,” he said. “It’s ultimately their decision about whether they want to help us save borrowers in foreclosure.” Freddie says it hopes to negotiate a deal for Mr. Trujillo. SLS declined to comment.

Jeff Gray waited months to complete the purchase of a home in Litchfield Park, Ariz., as part of a short sale, only to see it fall apart days before closing. Chase, which serviced the first mortgage for Freddie Mac, approved the sale but wouldn’t forgive the second mortgage, which it owned. Chase says it has completed 83,000 short sales since 2009.

Mr. Gray eventually bought another home in the same neighborhood; meanwhile, the short sale was listed for sale by Freddie Mac earlier this month for $30,000 less than what Mr. Gray had offered.

“It’s sad,” he said. “The grapefruit tree in front is dead, the grass has turned brown, and the shutters are starting to fall.”

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National Assn. of Realtors wants FICO credit scoring model revised

Link: http://www.latimes.com/business/realestate/la-fi-harney-20101121-7,0,6076482.story

Original Post Date: November 21, 2010

By: Kenneth R. Harney

Reporting from Washington —

Here’s a homeowner credit torture scenario that might have happened to you, and now has a major real estate lobby on Capitol Hill demanding immediate reforms.

Say you’ve had a solid payment record on just about all your accounts — three credit cards, your first mortgage, home equity line and other important monthly bills. The last time you checked, your credit scores were comfortably in the 750s.

Suddenly you get a notice from the bank that because of “market conditions,” your equity line limit has been cut from $60,000 to $35,000, slightly above the $30,000 balance you’ve got outstanding. Then one of your credit card issuers hits you with more bad news: Your $20,000 limit has been reduced to $10,000. Your balance on the card, meanwhile, is about $9,000.

What happens to your credit scores in the wake of the bank cuts? You might assume that nothing happens; you haven’t been late, you haven’t missed a monthly payment. You’re a good customer.

Wrong. Depending upon your overall financial situation, your credit scores could plunge into the upper 600s. This in turn could put you out of reach for a refinancing at a favorable interest rate or hamper your ability to buy a new home and sell your current one.

The reason for the score drop: With the reductions in your line limits, you’re now much closer to being maxed out. You are using a higher percentage of your available credit — $30,000 of the $35,000 revised limit (86%) on your home equity line, and $9,000 of the $10,000 limit (90%) on your card. Credit scoring models typically penalize high utilization rates because they are statistically correlated with future delinquency problems.

No one ever warned you about this — certainly not the banks that cut your credit. Now the largest lobby group on Capitol Hill, the 1.1-million-member National Assn. of Realtors, is demanding that Fair Isaac Corp., the creator of the FICO score that dominates the mortgage market, take immediate steps to lessen the negative effects on consumers when banks abruptly cancel or slash credit lines of nondelinquent customers.

In a major policy move, the realty association is calling upon Fair Isaac to “amend its formulas to avoid harming consumers whose utilization rates increase because their available lines of credit” are reduced despite on-time payment histories. The group wants FICO to either ignore the utilization rate altogether for such consumers or to compute the score as if the credit max had not been reduced.

Ron Phipps, president of the association, said, “We’re seeing this across the country and it is hurting people who are responsible users of credit.” Tom Salomone, broker-owner of Real Estate II in Coral Springs, Fla., said, “There’s absolutely no question these credit card and home equity line reductions are killing deals, and arbitrarily raising interest rates on people.”

In an interview, Salomone said he had seen many situations where home buyers lost 20 to 30 points on FICO scores “but had done nothing wrong — the banks just lowered their lines.” He added that the inability of FICO’s software to distinguish innocent victims from people whose behavior actually merits credit line reductions demonstrates that “FICO’s model is archaic.”

Asked for a response, Joanne Gaskin, Fair Isaac’s director of mortgage scoring solutions, said the FICO model attached such importance to consumers’ available credit and utilization rates — they account for 30% of the score — because they are highly accurate predictors of future credit problems.

Research conducted by Fair Isaac last year found that consumers who use 70% of their available credit “have a future bad rate 20 to 50 times greater than consumers with lower utilizations.” Ignoring this key indicator, the study said, would decrease the score’s “predictive power.”

The National Assn. of Realtors has also asked Fair Isaac to help out with the nationwide foreclosure crisis by revising its model to recognize lender codings on credit file accounts indicating that homeowners had received loan modifications approved under federally backed programs. Rather than treating borrowers’ reduced post-modification payments as ongoing evidence that the mortgage was “not paid as originally agreed,” which depresses scores sharply, the association said FICO scores should reflect the reality that the lender agreed to lower payments and borrowers are making payments “as agreed.”

The realty group also said it planned to push for legislation in the upcoming congressional session to provide free credit scores — one each from Equifax, Experian and TransUnion, the national credit bureaus — every time a consumer orders annual free credit reports. (You can obtain your free reports once a year — without scores — at http://www.annualcreditreport.com.)

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Hidden Costs of Short Sale ‘Bargains’


Original Post Date: November 19, 2010

By: June Fletcher

Q: I am interested in buying a short sale, but wonder if there are any unusual or unexpected costs associated with such a sale, compared to buying a regular house.


A: It’s possible to get a great deal on a short sale–where a home sells for less than is owed on the mortgage–but whenever a seller is in a financial bind, you should be prepared to pay extra costs.

Expect to pay for many of the expenses that a seller would normally pay in the transaction—because the lender, who is taking a loss, may refuse to approve the deal if you don’t.

Just what those costs will be varies. For instance, some lenders will agree to assist with a buyer’s closing costs; others won’t. Some will pay broker’s fees—others won’t. (If you agree to pay your buyer broker a certain fee for finding the house and handling the deal, and the lender doesn’t pay it, it will come out of your pocket.)

Among the other expenses you may have to shoulder: unpaid homeowners association dues, appraisals, inspections, mechanics and other liens, a second deed of trust, transfer and other fees and even the seller’s back taxes.

If the price you and the seller agree to is lower than what the bank will accept, you will be asked to make up the difference—though it’s worth trying to negotiate this point.

On top of that, if there are any repairs to be made—and since sellers under financial stress often let maintenance slide—you will have to make them. Short-sale homes are almost always sold “as is,” although some lenders will agree to pay for termite damage, or to correct safety or building code violations.

Though lenders may take months to decide whether to approve your offer, when they finally respond, beware of a clause that asks for “liquidated damages.” That could put you on the hook to pay a daily penalty if you cannot close in a certain period of time after the bank’s approval.

Of course, just because you will be asked to assume more of the expenses that traditionally are paid by the seller doesn’t mean that you should try to cut corners on items that protect you, even if it means more money out of your pocket.

Specifically, don’t buy a short-sale home without springing for title insurance, which will cover you should there be any clouds on the title–always a possibility in any sale, but even more so in a distressed situation when there may be liens or other claims on the property.

And spring for a home warranty, since after laying out all this cash, you shouldn’t have to lay out more money to repair a leaky washer or growling dishwasher once you move in.

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Shadow Inventory of Homes Rising

Link: http://blogs.wsj.com/developments/2010/11/22/shadow-inventory-of-homes-rising/

Original Post Date: November 22, 2010

By: Nick Timiraos

The “shadow inventory” of unlisted bank-owned homes and potential foreclosures increased to 2.1 million units in August, up 10% from one year earlier, according to new estimates from CoreLogic, a real-estate research firm.

That’s around eight months of supply, compared to a five-months’ supply one year ago.

By contrast, the inventory of all unsold homes listed for sale totaled 4.2 million units in August, unchanged from one year ago. Together, that means the visible and shadow supply of homes stood at around 6.3 million in August, or around 23 months of supply at the current sales pace.

Mark Fleming, chief economist at CoreLogic, says that weak housing demand “is significantly increasing the risk of further price declines in the housing market.” Delays in the foreclosure process, including those brought on by banks’ inability to file the proper legal paperwork, threaten to exacerbate that trend.

CoreLogic estimates that the shadow inventory is highest in the Miami metro area, at 33.5 months, followed by Long Island’s Nassau and Suffolk counties and the Chicago and Atlanta metro areas, with around 30 months. Florida, New York and Illinois require banks to process foreclosures through courts.

Some analysts have said the CoreLogic estimates look rather low. Laurie Goodman, senior managing director at Amherst Securities Group, has warned that as many as seven million homes could end up in banks hands unless more aggressive modification regimes are put in place.

Analysts at Barclays Capital, meanwhile, estimate that bank owned inventory stood at around 600,000 at the end of September (the figures don’t specify what share of that inventory is unlisted versus listed).

Barclays estimates that another 3.76 million homes are either in the foreclosure process or are at least 90 days delinquent but not yet in foreclosure. That’s up from 3.66 million one year ago, though it’s down from a peak of 4.22 million at the end of February. Some of those homes could still sell before going through foreclosure, including through a short sale, where banks approve a sale for less than the amount owed, while other loans could be modified, avoiding (or delaying) foreclosure.

Nearly 356,000 homes have sold through short sales during the first nine months of 2010, according to Barclays analysts, double the amount two years ago. By contrast, banks have sold around 700,000 foreclosures during that period, down 25% from last year and up 10% from two years ago.

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More Homeowners Opt for Fixed-Rate Mortgage Products

Link http://www.dsnews.com/articles/more-homeowners-opt-for-fixed-rate-mortgage-products-2010-11-15

 Original Post Date: November 15, 2010

By: Carrie Bay

Fixed-rate mortgages have become the dominant choice among borrowers looking to refinance their home loans, with more and more applicants gravitating toward shorter loan terms.

Freddie Mac released the results of its quarterly study on loan transition trends Monday. The GSE’s analysts found that in the third quarter of 2010, refinancing borrowers overwhelmingly chose fixed-rate loans, regardless of whether their original loan was an adjustable-rate mortgage (ARM) or a fixed-rate.

Overall, fixed-rate loans accounted for more than 95 percent of refinances last quarter, according to the GSE’s market data.

Frank Nothaft, Freddie Mac’s VP and chief economist, noted that fixed mortgage rates dropped steadily throughout the third quarter, with 30-year fixed rates falling to levels not seen since the early 1950s.

“We ended the second quarter excited that borrowers could lock in a rate of 4.75 percent for 30 years, and we ended the third quarter with rates at just a touch over 4.25

percent,” Nothaft said. “It’s no wonder borrowers are attracted to fixed-rate loans.”

While 30-year fixed-rate mortgages are still the most preferred product chosen for the new, refinance loan, Freddie Mac says borrowers who previously held shorter-term fixed-rate mortgages showed a stronger preference for staying with a 15-year or 20-year fixed-rate loan than they have in recent quarters.

“The share of borrowers shortening their amortization terms remains high,” Nothaft said. “There is always a discount for shorter terms but the payments are often about 50 percent higher than a 30-year amortizing payment and thus are unaffordable to many homeowners. What we’re seeing now is that the level of the 15-year payment is becoming more affordable to more borrowers.”

A separate study released by Freddie Mac last month found that 33 percent of homeowners who refinanced their first-lien home mortgage during the third quarter lowered their principal balance by paying-in additional money at the closing table – a practice referred to as a cash-in refinance.

Last quarter’s was the second highest “cash-in” share since Freddie Mac began keeping records on refinancing patterns in 1985. By comparison, 23 percent of homeowners refinancing during the second quarter of this year paid additional cash-in to lower the principal of the new loan.

“When rates fall to new lows we typically see more ‘rate and term’ refinancers, who are looking only to reduce their interest payments,” Nothaft commented. “But now we’re also seeing a very large share of borrowers reduce their mortgage debt when they refinance. Consumer debt across the board is down since the start of the recession.”

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Refinancing now could be better than waiting for mortgage rates to drop further

Link: http://www.latimes.com/business/realestate/la-fi-harney-20101114,0,6276584.story

 Original Post Date: November 14, 2010

By: Kenneth R. Harney

Reporting from Washington —

When the Federal Reserve recently rolled out its plan to pump $600 billion into the credit markets, many homeowners and buyers might have figured that because mortgage interest rates are now likely to fall again, why not postpone the loan application they were contemplating?

Fed Chairman Ben S. Bernanke offered implicit support for that scenario when, in a Washington Post op-ed column Nov. 4, he wrote that as a byproduct of the $600-billion infusion “lower mortgage rates will make housing more affordable and allow more homeowners to refinance.”

But wait a minute: Haven’t 30-year fixed mortgage rates been hovering around 4.25%, the lowest level on record since April 1951? Aren’t 15-year mortgages just above 3.6%? How much lower could rates possibly go?

More to the point on refinancings, since we’re already well into a refi boomlet, with lenders reporting 70% to 85% of new mortgage volume going to refinancings, how much more of a market share can the Fed expect?

Housing economists generally don’t anticipate seeing significant direct effects on mortgage rates from the Fed’s move. David Crowe, chief economist of the National Assn. of Home Builders, says the likely effect will be to restrain rate increases that otherwise would occur over the coming year as the economy warms up.

Amy Crews Cutts, deputy chief economist for mortgage giant Freddie Mac, says the $600 billion might only “tweak” rates downward from current levels. “Four and an eighth is far more likely than 4%” on 30-year fixed rate loans, she said in an interview, because the Fed is not buying mortgage-backed securities but rather Treasury bonds.

Which raises the question: Does it make more sense to wait around for a rate bottom that might not materialize, or to lock in rates now at what are multigenerational lows?

Cutts has a personal answer. She recently refinanced her home loan through a mortgage broker to 4.5% fixed for 30 years, and is saving $100 a month on payments. What is she doing with the extra $100? Plowing it back into her new mortgage, reducing principal to shorten the term of the note and paying it off sooner. David Crowe has refinanced two loans in recent months.

Peter Ogilvie, president of First Residential Mortgage Corp. in Santa Cruz, Calif., says that “refinancing makes sense for just about anybody with a rate over 5.25%” and often produces monthly savings even for people with notes in the upper 4% range — provided, of course, that they can qualify under the industry’s toughened credit and loan-to-value underwriting standards.

Some homeowners may also be good candidates for so-called no-cost refinancing, where the title, escrow and lender closing charges are either added to the mortgage principal balance or paid for over time with a slightly higher note rate. The idea here, Ogilvie says, is to reduce your monthly housing payments — improving cash flow without laying out dollars at settlement.

Jeff Lipes, senior vice president of Family Choice Mortgage in Hartford, Conn., and president of the Connecticut Mortgage Bankers Assn., has what he calls a 24-month rule of thumb for deciding whether refinancing makes sense: If you can pay for the closing and other expenses of the rate reduction in about two years, consider a refi.

Take this example: Say you have a 5.75% fixed rate loan at $200,000, paying $1,167 a month in principal and interest. If you refi to a fixed-rate $200,000 loan at 4.75% you’ll be paying $1,043 a month, a $124 monthly saving, or $1,488 a year. Since prepaid charges, tax escrows and closing costs will come to about $3,000, Lipes calculates, you should recoup virtually all your costs in the first 24 months.

Steve Stamets, a loan officer for Union Mortgage Group in Rockville, Md., says homeowners who’d like to be debt-free faster ought to consider a refi out of their current 30-year term loan into a 15-year term. Fifteen-year mortgages carry lower rates than 30-year loans, but their faster amortization schedules require higher monthly payments.

Here’s an example, using the no-cost option: Say you took out a $300,000 fixed-rate loan during the rate dip in 2003 at 5%. Current balance is around $264,000, with monthly principal and interest of $1,613. Rolling the closing, insurance, tax and other loan costs of about $5,000 into a new $269,000 15-year mortgage at 3.75% produces a payment of $1,958. If you can afford it, that extra $345 a month will save you many thousands of dollars in interest compared with the 30-year alternative, Stamets says, and make you mortgage-free in 15 years.

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Is It Time to Roll Back the Mortgage-Interest Deduction?

Link: http://blogs.wsj.com/developments/2010/11/12/is-it-time-to-roll-back-the-mortgage-interest-deduction/

Original Post Date: November 12, 2010

By: Nick Timiraos

The deficit commission is taking aim at one of the sacred cows of the tax code: the mortgage-interest deduction.

Previous efforts to overhaul the prized deduction have fallen flat, and this one faces an uphill battle, too. But economists are more optimistic because “there is an increasing understanding that single-family housing has been over-subsidized, and that’s to the detriment of the broader economy,” says Mark Zandi, chief economist at Moody’s Analytics.

Under one proposal, filers could deduct interest paid on mortgage debt of up to $500,000, down from the current ceiling of $1 million. The deduction wouldn’t apply anymore for interest paid on home-equity borrowings (currently allowed for debt up to $100,000) or on mortgages for vacation homes.

The mortgage-interest deduction is the largest single subsidy for housing and one of the largest deductions in the U.S. tax code. It’s projected to reduce tax revenue by $131 billion in 2012, according to White House estimates.

Many economists have long argued that the deduction doesn’t actually have a significant impact on homeownership and that it instead encourages wealthier borrowers to take on more debt. That’s because the deduction is only available to people who itemize deductions on their tax returns, and low-income borrowers often fare better by taking the standard deduction.

Around 70% of the benefits from mortgage-interest and property-tax deductions go to the top 20% of taxpayers in terms of income, according to the Urban-Brookings Tax Policy Center.

Certain aspects of the deduction move in the opposite direction from “long-run sustainable homeownership,” says Thomas Lawler, a housing economist in Leesburg, Va., because borrowers that take equity out of their homes can receive a bigger deduction.

Around seven in ten homeowners with a mortgage claim the credit, and nearly 1.2 million borrowers would see their taxes rise if the upper limit of the deduction was lowered to $400,000, according to 2007 estimates from the Congressional Budget Office.

The real-estate industry is ready to fend off the latest assault with a strong defense: they say that removing government support for housing will put pressure on prices at a time when the housing market can ill afford it. The industry is preparing to defend against efforts to roll back not only tax preferences but also mortgage subsidies that will be up for debate next year when the White House considers how to revamp Fannie Mae and Freddie Mac.

Losing the mortgage-interest deduction entirely “will surely put us in a broader economic recession,” said Lawrence Yun, chief economist at the National Association of Realtors, at the trade group’s convention last week.

Capping the mortgage-interest deduction limit at $500,000 could also have an outsized effect on coastal and other high-cost housing markets, while vacation home communities could be vulnerable if the deduction is stripped for second homes, said Robert Dietz, tax economist for the National Association of Home Builders.

Mr. Zandi says any proposal could be phased in over time to avoid disrupting depressed housing markets. He says the real-estate industry should embrace the proposal because it stands to lose the most if the deficit isn’t addressed and interest rates rise. “This is in their interest, and they should lead the way,” he says.

Readers, what do you think—is it time to roll back the mortgage-interest deduction?

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