Reporting from Washington -- Mortgage rates and house prices are down -- which sounds great for buyers and refinancers. But mortgage industry underwriting and appraisal changes taking effect this month are putting new hurdles in the way of borrowers and loan officers.
Take Fannie Mae's and Freddie Mac's add-on fees for loans purchased after April 1. In some cases, applicants are being hit with extra fees of 3% to 5% because of the type of property they want to buy or refinance, their credit scores or the size of their down payment.
Some major lenders who sell loans to Fannie and Freddie are going further -- tightening underwriting rules beyond what either corporation requires. For example, as of April 6, Wells Fargo, one of the country's largest mortgage originators, imposed a new minimum FICO credit score of 720 -- up from the previous 620 -- on all conventional loans purchased through its wholesale system that have less than a 20% down payment. It also began requiring a total debt-to-income ratio maximum of 41% -- down from the previous 45%.
Fannie Mae now has a mandatory fee of three-quarters of a percentage point on all condominium loans, no matter how high the applicant's credit score. For a once-popular interest-only condo loan with a 20% down payment and a borrower credit score of 690, Fannie imposes the following ratcheted sequence of add-ons: one-quarter of a percentage point as an "adverse market" fee; 1.5% for the below-optimal credit score; three-quarters of a percentage point for the interest-only payment feature; and the same because the property is a condo. The total comes to 3.25% extra, which can be paid upfront or rolled into the loan.
On top of these extra fees, borrowers are now starting to get hit with two sets of cost-raising appraisal rule changes. Fannie and Freddie have begun requiring all appraisers to complete an extra "market condition" report that includes detailed statistical analyses of local sales and pricing trends -- above and beyond the regular appraisal data. Many appraisers are charging an extra $45 to $50 for the time required to complete the form. Home buyers and refinancers can expect to pay the higher fees.
On top of that, beginning May 1, Fannie and Freddie are refusing to fund loans with appraisals that do not follow a set of new rules known as the Home Valuation Code of Conduct. Among the procedural changes: Mortgage brokers no longer can order appraisals directly, but instead must allow lenders or investors to use third-party "appraisal management companies" to assign the job to appraisers in their networks.
How does that affect the consumer? Consider the notification one Connecticut brokerage firm recently received from a major lending partner: Starting April 15, all good faith estimates provided to applicants must indicate a flat $455 charge for appraisals arranged through the appraisal management company. The broker previously charged $325. Consumers will now have to pay the appraisal fee upfront -- before any inspection or valuation is completed -- using a credit card, debit card or electronic fund transfer.
What happens if the appraisal comes in low and the applicants can't qualify for the refi or purchase program they sought? Tough luck: They'll have just two choices: Pay another $455 for a second appraisal -- with no assurance that it will solve the problem -- or cancel the application.
Jeff Lipes, president of Family Choice Mortgage Corp., which serves the Hartford, Conn., area, said the net effect of the underwriting, credit score and pricing changes was to "squeeze some people who are creditworthy by any reasonable standard out of the market."
For instance, as a result of the restrictions on condos, Lipes says "whenever we hear the word 'condo' [from an applicant], we shiver" because the deck is stacked against them. Even for prime borrowers with 800 FICO scores and 50% down payments, Lipes said, "I can't tell them that we're certain we can get you a mortgage."
A welter of recent rule changes from Fannie Mae has made some condo units in projects with commercial tenants or high percentages of investor units almost impossible to refinance.
In Naples, Fla., John Calabria, president of Bancmortgage Corp., said, "It has become such a nightmare to lend money" because of the layers of add-on fees, higher mandatory down payments and FICO scores. One high-income client sought to put down 25% ($200,000) to buy an $800,000 condo as a second home but couldn't because the minimum down payment on such a unit is now 30%.
"That's ridiculous," Calabria said. "Some of this just doesn't make sense."
Tuesday, June 16, 2009
Is Obama's foreclosure rescue plan working?
Richmond could afford his $1,600 monthly mortgage payment when he was making $63,000 as an accountant for Bank of America. But after his position was outsourced to India in 2006, the only work he could find was as a customer service representative at Wachovia for less than $12 an hour.
Desperate, he called SunTrust Bank in January to see if he could get a loan modification. He was turned down because he hadn't yet missed a payment. So the father of five didn't make his January payment and called back in February to start the modification process. A month later, an agent told him that all modifications were being scrapped in favor of the new Obama foreclosure prevention plan.
In April, he sent in his tax and income documents, as well as a hardship letter. Richmond calls every two weeks, only to be told that the application is still being processed. In early June, an agent said a supervisor would call him back within 48 hours. He's still waiting.
Richmond thinks the Obama plan would be a blessing for him and his family.
"I can get back on my feet again and make my payments and afford my house," said Richmond, 43. "But the banks are not making it easy to get the process done. I've been waiting all these months."
A SunTrust spokesman said bank representatives "work diligently" to discuss modifications with clients in a timely manner.
Desperate, he called SunTrust Bank in January to see if he could get a loan modification. He was turned down because he hadn't yet missed a payment. So the father of five didn't make his January payment and called back in February to start the modification process. A month later, an agent told him that all modifications were being scrapped in favor of the new Obama foreclosure prevention plan.
In April, he sent in his tax and income documents, as well as a hardship letter. Richmond calls every two weeks, only to be told that the application is still being processed. In early June, an agent said a supervisor would call him back within 48 hours. He's still waiting.
Richmond thinks the Obama plan would be a blessing for him and his family.
"I can get back on my feet again and make my payments and afford my house," said Richmond, 43. "But the banks are not making it easy to get the process done. I've been waiting all these months."
A SunTrust spokesman said bank representatives "work diligently" to discuss modifications with clients in a timely manner.
Saturday, May 9, 2009
Man facing foreclosure campaigns for patience
Link
www.komonews.com/news/local/44627492.html?video=YHI&t=a
TACOMA, Wash. -- Banks have lifted their temporary moratorium on foreclosures, which means more properties are being auctioned off every Friday on the courthouse steps of every county in the state.
Amid the busy transactions is a man who's leading a protest for patience.
Craig Wuest is trying to find out if his home will indeed be auctioned off the courthouse steps. It's on the list.
"Don't have any information yet, none yet. What's that telling me?" he said.
Wuest, who was injured 18 months ago, can no longer work. His wife works, but her monthly income doesn't cover the mortgage.
"If they lower it, I can afford it. But at this point in time, I can't afford it," he said.
Wuest is four months behind, owes more than his house is worth and has an interest only loan at 10.5 percent.
With mortgage rates at 5 percent, Wuest wants a new deal with his lender but says the lender won't deal.
"I even sent them new financials, so they can see what the financials looked like. It doesn't seem to work with them. I don't know what does, because they don't want to talk to you," he said.
Right now, banks want cash and want borrowers like Wuest off their books. So Wuest got ACORN, a national housing group, to hold a protest for patience.
"This foreclosure rate is just horrendous. I've got five houses in my neighborhood today that are in foreclosure," said Wuest.
The latest monthly figures show the highest rate of foreclosures tends to be in counties with lower household incomes. The worst figures are in Cowlitz County where one out of every 300 homes was in foreclosure during the month of March. Cowlitz County is followed by Pierce, Thurston, Snohomish and Clallam counties.
But someone's pain is someone else's gain.
"The banks are giving more discounts down here so we are purchasing several more properties every week," said Cindy Hornbuckle of Vestus Foreclosure Group.
Auction regulars say the banks are in the mood to sell quick on the courthouse steps. Wuest wishes they'd just make a long-term deal with him.
www.komonews.com/news/local/44627492.html?video=YHI&t=a
TACOMA, Wash. -- Banks have lifted their temporary moratorium on foreclosures, which means more properties are being auctioned off every Friday on the courthouse steps of every county in the state.
Amid the busy transactions is a man who's leading a protest for patience.
Craig Wuest is trying to find out if his home will indeed be auctioned off the courthouse steps. It's on the list.
"Don't have any information yet, none yet. What's that telling me?" he said.
Wuest, who was injured 18 months ago, can no longer work. His wife works, but her monthly income doesn't cover the mortgage.
"If they lower it, I can afford it. But at this point in time, I can't afford it," he said.
Wuest is four months behind, owes more than his house is worth and has an interest only loan at 10.5 percent.
With mortgage rates at 5 percent, Wuest wants a new deal with his lender but says the lender won't deal.
"I even sent them new financials, so they can see what the financials looked like. It doesn't seem to work with them. I don't know what does, because they don't want to talk to you," he said.
Right now, banks want cash and want borrowers like Wuest off their books. So Wuest got ACORN, a national housing group, to hold a protest for patience.
"This foreclosure rate is just horrendous. I've got five houses in my neighborhood today that are in foreclosure," said Wuest.
The latest monthly figures show the highest rate of foreclosures tends to be in counties with lower household incomes. The worst figures are in Cowlitz County where one out of every 300 homes was in foreclosure during the month of March. Cowlitz County is followed by Pierce, Thurston, Snohomish and Clallam counties.
But someone's pain is someone else's gain.
"The banks are giving more discounts down here so we are purchasing several more properties every week," said Cindy Hornbuckle of Vestus Foreclosure Group.
Auction regulars say the banks are in the mood to sell quick on the courthouse steps. Wuest wishes they'd just make a long-term deal with him.
Tuesday, April 28, 2009
Important changes to foreclosure law headed to governor’s desk
Important changes to foreclosure law headed to governor’s desk
April 9, 2009
OLYMPIA – A bill that aims to increase consumer protection in the area of housing, as well as protection of tenants and homeowners, has passed the Legislature and is now on its way to Gov. Gregoire for her signature.
The legislation (ESB 5810) would give owners and tenants more notice with foreclosures on deeds of trust; it would require lenders to contact homeowners prior to issuing a notice of default; and it would also give tenants more time to move after a foreclosure sale.
“One component critical to helping the economy is to stabilize the housing market. Washington state is still struggling as housing prices and home sales have declined along with an 83 percent rise in foreclosures,” said Rep. Tina Orwall (D-Normandy Park) who sponsored the companion bill in the House. “But we can help the housing market by addressing the issue of foreclosure and making sure that families with the ability to receive assistance to keep their homes do, in fact, get the help they need.”
Deeds of trust are security interests in real property. The Deeds of Trust Act establishes procedures for non-judicial foreclosure in which the homeowner grants a deed creating a lien on the real property for an obligation due to the lender.
Most foreclosures in Washington state are known as non-judicial foreclosures because they don't involve the courts. When homeowners fall behind in their mortgage payments, they receive a notice of default informing them that the foreclosure process has begun.
The bill puts in place a meet and confer requirement, which essentially involves the mortgagee contacting the borrower, assessing his or her financial situation and exploring alternatives to foreclosure, all before issuing a notice of default. This requirement does not apply when the beneficiary is a homeowners or condominium association.
Renters benefit as well under this bill. Additional sections of the bill provide them with notice regarding the foreclosure process, which is not currently required because they do not own the property where they live. Not only do they now get notice, but they also get a 60-day notice of eviction, instead of the 20 days required by current law. This allows them to have greater success in finding a new place to live, and also prevents an eviction notice on their record, which could hinder their finding future rental housing.
“A lot of work was put into this legislation to include important consumer protections so that families actually have the time and resources they need to remain in their homes when possible, and renters –who are often victims in these situations-- have more time to find housing if their homes are foreclosed,” added Orwall.
ESB 5810 also provides that a homeowner can bring an action after the foreclosure sale if there were irregularities in the process, such as fraud or misrepresentation. That section of the bill also:
adds to the list of nonwaived claims a violation of Title 19 RCW (regulations of businesses, including the Consumer Protection Act);
clarifies that the relief is for money damages; and
clarifies that the nonwaived claims must be brought within two years of the foreclosure sale or within the applicable statute of limitation for the claim, whichever is earlier.
April 9, 2009
OLYMPIA – A bill that aims to increase consumer protection in the area of housing, as well as protection of tenants and homeowners, has passed the Legislature and is now on its way to Gov. Gregoire for her signature.
The legislation (ESB 5810) would give owners and tenants more notice with foreclosures on deeds of trust; it would require lenders to contact homeowners prior to issuing a notice of default; and it would also give tenants more time to move after a foreclosure sale.
“One component critical to helping the economy is to stabilize the housing market. Washington state is still struggling as housing prices and home sales have declined along with an 83 percent rise in foreclosures,” said Rep. Tina Orwall (D-Normandy Park) who sponsored the companion bill in the House. “But we can help the housing market by addressing the issue of foreclosure and making sure that families with the ability to receive assistance to keep their homes do, in fact, get the help they need.”
Deeds of trust are security interests in real property. The Deeds of Trust Act establishes procedures for non-judicial foreclosure in which the homeowner grants a deed creating a lien on the real property for an obligation due to the lender.
Most foreclosures in Washington state are known as non-judicial foreclosures because they don't involve the courts. When homeowners fall behind in their mortgage payments, they receive a notice of default informing them that the foreclosure process has begun.
The bill puts in place a meet and confer requirement, which essentially involves the mortgagee contacting the borrower, assessing his or her financial situation and exploring alternatives to foreclosure, all before issuing a notice of default. This requirement does not apply when the beneficiary is a homeowners or condominium association.
Renters benefit as well under this bill. Additional sections of the bill provide them with notice regarding the foreclosure process, which is not currently required because they do not own the property where they live. Not only do they now get notice, but they also get a 60-day notice of eviction, instead of the 20 days required by current law. This allows them to have greater success in finding a new place to live, and also prevents an eviction notice on their record, which could hinder their finding future rental housing.
“A lot of work was put into this legislation to include important consumer protections so that families actually have the time and resources they need to remain in their homes when possible, and renters –who are often victims in these situations-- have more time to find housing if their homes are foreclosed,” added Orwall.
ESB 5810 also provides that a homeowner can bring an action after the foreclosure sale if there were irregularities in the process, such as fraud or misrepresentation. That section of the bill also:
adds to the list of nonwaived claims a violation of Title 19 RCW (regulations of businesses, including the Consumer Protection Act);
clarifies that the relief is for money damages; and
clarifies that the nonwaived claims must be brought within two years of the foreclosure sale or within the applicable statute of limitation for the claim, whichever is earlier.
Obama expands foreclosure fix
Obama expands foreclosure fix
Two steps: Second liens now covered by modification program; servicers must offer eligible borrowers principal reduction under Hope for Homeowners.
NEW YORK (CNNMoney.com) -- The Obama administration said Tuesday it is expanding its foreclosure prevention program to cover second mortgages and to direct more troubled borrowers to the Hope for Homeowners program.
Announced with great fanfare in mid-February, the president's $75 billion program has gotten off to a slow start. Loan servicers only recently started taking applications and many delinquent borrowers have complained about being left in the cold because their home values have dropped or they've lost their jobs.
The administration is seeking to address some of the concerns by tweaking the original modification plan, which calls for adjusting eligible borrowers' loans so monthly payments are no more than 31% of pre-tax income.
Servicers covering 75% of the nation's mortgages are now participating in the program, which also allows some homeowners with little or no equity to refinance their mortgages, a senior administration official said Tuesday. Together, the plans are expected to help up to 9 million avoid foreclosure.
Second mortgage roadblock
During the housing frenzy, many borrowers obtained second mortgages to allow them to put little or nothing down when buying a home. Up to half of at-risk borrowers have second liens, according to the administration.
These loans have complicated the modification process. For one thing, they add to troubled homeowners' debt levels. Also, mortgage investors have balked at reducing payments on first mortgages when the second loan was left intact.
Under the administration's new program, the interest rate on second mortgages will be reduced to 1% on loans where payments cover interest and principal and to 2% for interest-only loans. The government will subsidize the rate reduction, with the money going to the mortgage investor.
Servicers will be paid $500 for each modification and an additional $250 annually for three years if the borrower stays current. Borrowers can receive up to $250 per year for five years to pay down their first mortgage.
Investors can also receive a payment in exchange for extinguishing the second lien. They would receive 3 cents on the dollar for loans more than 180 days delinquent and between 4 cents and 12 cents for less delinquent loans, depending on the borrowers' debt levels.
Servicers who join the new program must modify second loans when a borrower's first mortgage is adjusted. It will likely take a month to implement, but it should not slow down the modifications of primary mortgages, the administration said.
"By bringing both the first lien and second lien program together, we can reduce monthly payments for borrowers and make it much more likely that they can stay in their homes," a senior administration official said.
Hope for Homeowners option
Also Tuesday, the administration said it is now requiring servicers to offer troubled borrowers access to Hope for Homeowners as a modification option if they qualify.
Expanding Hope for Homeowners would address one of the major holes in the original Obama foreclosure prevention plan. It helps homeowners whose homes are now worth far less than their mortgages.
Servicers had balked at participating in the Hope program because it required they reduce the mortgage principal balance to 90% of a home's current value.
Hope for Homeowners, which began in October, is being revamped in Congress. Servicers would have to reduce the principal to 93% of the home's value. The change would also reduce the program's high fees, which turned off many troubled borrowers.
As an incentive to participate, servicers will be paid $2,500 for each refinancing, while lenders who originate the new loans will receive up to $1,000 a year for three years, as long as the loan remains current.
Separately, however, another pillar of the president's plan appears to be headed for defeat this week. The Senate is not expected to pass legislation allowing bankruptcy judges to modify mortgages. The administration had sought this change to pressure servicers to modify loans before borrowers declare bankruptcy.
Two steps: Second liens now covered by modification program; servicers must offer eligible borrowers principal reduction under Hope for Homeowners.
NEW YORK (CNNMoney.com) -- The Obama administration said Tuesday it is expanding its foreclosure prevention program to cover second mortgages and to direct more troubled borrowers to the Hope for Homeowners program.
Announced with great fanfare in mid-February, the president's $75 billion program has gotten off to a slow start. Loan servicers only recently started taking applications and many delinquent borrowers have complained about being left in the cold because their home values have dropped or they've lost their jobs.
The administration is seeking to address some of the concerns by tweaking the original modification plan, which calls for adjusting eligible borrowers' loans so monthly payments are no more than 31% of pre-tax income.
Servicers covering 75% of the nation's mortgages are now participating in the program, which also allows some homeowners with little or no equity to refinance their mortgages, a senior administration official said Tuesday. Together, the plans are expected to help up to 9 million avoid foreclosure.
Second mortgage roadblock
During the housing frenzy, many borrowers obtained second mortgages to allow them to put little or nothing down when buying a home. Up to half of at-risk borrowers have second liens, according to the administration.
These loans have complicated the modification process. For one thing, they add to troubled homeowners' debt levels. Also, mortgage investors have balked at reducing payments on first mortgages when the second loan was left intact.
Under the administration's new program, the interest rate on second mortgages will be reduced to 1% on loans where payments cover interest and principal and to 2% for interest-only loans. The government will subsidize the rate reduction, with the money going to the mortgage investor.
Servicers will be paid $500 for each modification and an additional $250 annually for three years if the borrower stays current. Borrowers can receive up to $250 per year for five years to pay down their first mortgage.
Investors can also receive a payment in exchange for extinguishing the second lien. They would receive 3 cents on the dollar for loans more than 180 days delinquent and between 4 cents and 12 cents for less delinquent loans, depending on the borrowers' debt levels.
Servicers who join the new program must modify second loans when a borrower's first mortgage is adjusted. It will likely take a month to implement, but it should not slow down the modifications of primary mortgages, the administration said.
"By bringing both the first lien and second lien program together, we can reduce monthly payments for borrowers and make it much more likely that they can stay in their homes," a senior administration official said.
Hope for Homeowners option
Also Tuesday, the administration said it is now requiring servicers to offer troubled borrowers access to Hope for Homeowners as a modification option if they qualify.
Expanding Hope for Homeowners would address one of the major holes in the original Obama foreclosure prevention plan. It helps homeowners whose homes are now worth far less than their mortgages.
Servicers had balked at participating in the Hope program because it required they reduce the mortgage principal balance to 90% of a home's current value.
Hope for Homeowners, which began in October, is being revamped in Congress. Servicers would have to reduce the principal to 93% of the home's value. The change would also reduce the program's high fees, which turned off many troubled borrowers.
As an incentive to participate, servicers will be paid $2,500 for each refinancing, while lenders who originate the new loans will receive up to $1,000 a year for three years, as long as the loan remains current.
Separately, however, another pillar of the president's plan appears to be headed for defeat this week. The Senate is not expected to pass legislation allowing bankruptcy judges to modify mortgages. The administration had sought this change to pressure servicers to modify loans before borrowers declare bankruptcy.
Thursday, April 2, 2009
Six reasons to tap retirement funds now to buy rental property
Using IRAs to buy real estate
Six reasons to tap retirement funds now to buy rental property
By Chris Pummer
Last update: 9:02 p.m. EDT April 1, 2009Comments: 115SAN FRANCISCO (MarketWatch) -- One of today's soundest investments is never touted in financial-services ads. The reason: Wall Street wouldn't make any money off it.
Since 1974, Americans have had the ability to use IRA assets to buy investment property. Yet the means to do that -- called a self-directed IRA -- remains one of the least known and unheralded investment vehicles in the vast financial marketplace.
Video: Finding a bottom for home prices
David Berson, chief economist of PMI Group, talks to MarketWatch's Stacey Delo about how the housing market will rebound before jobs do, and why he expects home prices to bottom for most of the U.S. in early 2010. (April 1)With foreclosed homes selling at dimes on the dollar, residential real estate is a bargain for investors holding cash. And if they can put 30% down, IRA investors will find specialty lenders eager to help them leverage their retirement savings with mortgages on rental properties.
The U.S. housing market may not yet have hit bottom, but the winds appear to be shifting. Existing-home sales are on the mend in hardest-hit markets and foreclosure-avoidance programs are expected to stem the rising inventory of bank repossessions, meaning the window to buy at rock-bottom prices could close before the year is out.
Bear in mind homes purchased with IRA funds can't be used for personal purposes. Doing so risks the IRS declaring the assets withdrawn and demanding immediate payment of income taxes and penalties on the entire account value.
Still, as an investment readily understood by anyone who's been through the home buying and selling process, purchasing a steeply discounted property that can produce annual income of 10% and more is a low-risk strategy for uncertain times -- especially for retirees whose fixed-income investments are paying paltry yields right now. Read more on setting up a managing a self-directed IRA.
Here are six reasons why buying real estate with an IRA is a potentially lucrative and wise move today:
1. A solid alternative to stocks
When economies teeter, investors often run to hard assets such as gold -- humankind's historic "store of value." Yet gold's value is measured not only in ounces but also in the intangible fear that surrounds its price spikes.
When it comes to hard assets, there's perhaps no greater shared sense of value from Mongolia to Montana than for land and a dwelling. And in U.S. history, there's never been such a fire sale on our housing stock.
The Great Depression exacted a heavy toll on home values, but there was nowhere near the inventory flooding the housing market as in the past year. The reason: A collapse in home prices, not stocks, triggered this meltdown.
Of course, some would say foreclosed-home buyers capitalize on others' misfortune. But the sooner we clear the massive, nationwide inventory of unsold homes -- which many economists argue is a key to recovery -- the better off we'll all be.
2. An investment well-suited for long-term investors
Even in the best of times, the stock market looks out six months to a year. Right now, even seasoned pros can't feel the bottom of the muck we're in.
Many retirement savers are uncomfortable with their nest egg tied up largely in stocks. That's just the direction where the system of IRAs and 401(k)s -- which also advances Wall Street's interests -- shepherds them.
Real-estate cycles generally run in decade-or-so swings and this one may not yet have neared its bottom. Housing values could drop another 10% to 20%, but the stock market also could drop further and take a decade to well surpass its previous highs.
Especially for those in or near retirement, buying a property that produces rental income that's likely to increase with inflation is as sound a long-term investment as any TV commentator or investing guru might offer.
3. Purchasing a significantly undervalued asset
For investors willing to hang on to a property for five years or more, residential real estate today presents a tremendous opportunity to do just what investors ideally do -- buy low and sell high.
In some of the hardest-hit regional markets nationwide, homes are selling for as little as 20% of their value in 2006. In the San Francisco Bay Area, for instance, a 3,400-square-foot, five-bedroom, three-bath house built in 2000 recently listed for $257,000 -- after last selling for $795,000 just three years ago.
More importantly, at a cost of just $75 per-square-foot, that's about a third of the new construction cost for a well-outfitted, single-family home in that region. An IRA buyer in that case would get a relatively new house that would require little maintenance -- and a 7,000-square-foot lot essentially thrown in for free
While that may be an extreme example, countless thousands of existing homes nationwide are selling for 50% of today's construction and land costs. Putting aside previous overinflated values, that statistic illustrates how inexpensive home prices have become -- and how much upside they offer in terms of appreciation when the real-estate market finally recovers.
4. A steady income generator
At a time when companies are slashing stock dividends at record rates, retirees can't be assured of that income source. And with government bonds paying a pittance in terms of yield, that fixed-income stream is running mighty shallow.
Income from a rental property bought with a self-directed IRA flows back into the retirement account. The IRA holds title to the property and the income it produces can be directed into all manner of investments typically held within an IRA, be it stocks, bonds, mutual funds or money market accounts.
On a percentage basis, that income can be two to three times higher than today's fixed-income offerings even after paying expenses such as property taxes and insurance. Meanwhile, the accountholder can eventually reap the potential appreciation of the underlying asset -- the property -- that the IRA owns.
For retirement savers needing to fund a child's college costs, a rental property held in an IRA also can be a valuable source of funds. While money taken out of a traditional IRA is subject to income taxes, it doesn't face early-withdrawal penalties if used for higher-education costs. And while financial advisers caution against using retirement funds to pay for college costs, the IRA owner still has upside potential on the property to count on and the income in years ahead.
5. A safer means to play the stock market
For those who don't want to abandon potential stock-market returns, a rental home owned in an IRA still affords them the ability to invest in stocks.
Rental income funneled into stocks or stock mutual funds today will be buying shares at sharply reduced prices. Directing the proceeds of each monthly rent check into stocks or mutual-fund shares accomplishes the same "dollar-cost averaging" strategy that occurs when employees steer a fixed amount of every paycheck into their 401(k).
Over a 10- to 20-year period, the return that the rental income produces if plowed into stocks is rich icing on the cake, coming on top of the return provided by the rental income itself.
6. The ability to flip real estate with no tax bite
Proceeds from selling an IRA-owned home roll back into the IRA without facing capital-gains taxes. To the contrary, an investor who buys and resells a property within a year with nonretirement funds faces a capital-gains levy.
Many foreclosed homes today are "distressed," vandalized by angry departing owners who may have deferred maintenance due to tough times. They often ransack anything and everything not nailed down and many things that are, from lighting fixtures and kitchen appliances to furnaces and central-air conditioners, toilets and bathroom vanities.
Such properties -- which can be found at most all price points -- are among the cheapest on the market on a per-square-foot basis because the Federal Housing Administration (FHA) and most private mortgage lenders won't loan on homes deemed "uninhabitable." That drastically reduces the potential buyer pool to just cash purchasers -- and reduces the property values as a result.
Even homes needing only cosmetic fixes sell at a discount today because there are countless others available in move-in condition. If an IRA home buyer has enough in the account post-purchase to refit a home's interior -- whether it's laying carpet and laminate flooring or upgrading a kitchen or bathroom -- going the minor-rehab route can be a rewarding approach.
Buyers might choose to fix up the cheapest, distressed property in a solid neighborhood so it qualifies for a mortgage and then resell it. They also could improve upon it over several years with the rental income. Either way, it's a potentially enriching value-add strategy.
The ultimate choice
The bottom line with buying rental properties with an IRA is that the investor retains a level of control over a tangible asset that he or she could never remotely attain in owning shares of a company or a mutual fund.
The question that bears asking: What will yield a better return in the next five to 10 years -- shares of Microsoft, General Electric or Citigroup, or a modest rental home in a decent school district -- selling for 30 cents on the dollar -- whose value may soon be juiced by record-low mortgage rates and unprecedented tax breaks?
Six reasons to tap retirement funds now to buy rental property
By Chris Pummer
Last update: 9:02 p.m. EDT April 1, 2009Comments: 115SAN FRANCISCO (MarketWatch) -- One of today's soundest investments is never touted in financial-services ads. The reason: Wall Street wouldn't make any money off it.
Since 1974, Americans have had the ability to use IRA assets to buy investment property. Yet the means to do that -- called a self-directed IRA -- remains one of the least known and unheralded investment vehicles in the vast financial marketplace.
Video: Finding a bottom for home prices
David Berson, chief economist of PMI Group, talks to MarketWatch's Stacey Delo about how the housing market will rebound before jobs do, and why he expects home prices to bottom for most of the U.S. in early 2010. (April 1)With foreclosed homes selling at dimes on the dollar, residential real estate is a bargain for investors holding cash. And if they can put 30% down, IRA investors will find specialty lenders eager to help them leverage their retirement savings with mortgages on rental properties.
The U.S. housing market may not yet have hit bottom, but the winds appear to be shifting. Existing-home sales are on the mend in hardest-hit markets and foreclosure-avoidance programs are expected to stem the rising inventory of bank repossessions, meaning the window to buy at rock-bottom prices could close before the year is out.
Bear in mind homes purchased with IRA funds can't be used for personal purposes. Doing so risks the IRS declaring the assets withdrawn and demanding immediate payment of income taxes and penalties on the entire account value.
Still, as an investment readily understood by anyone who's been through the home buying and selling process, purchasing a steeply discounted property that can produce annual income of 10% and more is a low-risk strategy for uncertain times -- especially for retirees whose fixed-income investments are paying paltry yields right now. Read more on setting up a managing a self-directed IRA.
Here are six reasons why buying real estate with an IRA is a potentially lucrative and wise move today:
1. A solid alternative to stocks
When economies teeter, investors often run to hard assets such as gold -- humankind's historic "store of value." Yet gold's value is measured not only in ounces but also in the intangible fear that surrounds its price spikes.
When it comes to hard assets, there's perhaps no greater shared sense of value from Mongolia to Montana than for land and a dwelling. And in U.S. history, there's never been such a fire sale on our housing stock.
The Great Depression exacted a heavy toll on home values, but there was nowhere near the inventory flooding the housing market as in the past year. The reason: A collapse in home prices, not stocks, triggered this meltdown.
Of course, some would say foreclosed-home buyers capitalize on others' misfortune. But the sooner we clear the massive, nationwide inventory of unsold homes -- which many economists argue is a key to recovery -- the better off we'll all be.
2. An investment well-suited for long-term investors
Even in the best of times, the stock market looks out six months to a year. Right now, even seasoned pros can't feel the bottom of the muck we're in.
Many retirement savers are uncomfortable with their nest egg tied up largely in stocks. That's just the direction where the system of IRAs and 401(k)s -- which also advances Wall Street's interests -- shepherds them.
Real-estate cycles generally run in decade-or-so swings and this one may not yet have neared its bottom. Housing values could drop another 10% to 20%, but the stock market also could drop further and take a decade to well surpass its previous highs.
Especially for those in or near retirement, buying a property that produces rental income that's likely to increase with inflation is as sound a long-term investment as any TV commentator or investing guru might offer.
3. Purchasing a significantly undervalued asset
For investors willing to hang on to a property for five years or more, residential real estate today presents a tremendous opportunity to do just what investors ideally do -- buy low and sell high.
In some of the hardest-hit regional markets nationwide, homes are selling for as little as 20% of their value in 2006. In the San Francisco Bay Area, for instance, a 3,400-square-foot, five-bedroom, three-bath house built in 2000 recently listed for $257,000 -- after last selling for $795,000 just three years ago.
More importantly, at a cost of just $75 per-square-foot, that's about a third of the new construction cost for a well-outfitted, single-family home in that region. An IRA buyer in that case would get a relatively new house that would require little maintenance -- and a 7,000-square-foot lot essentially thrown in for free
While that may be an extreme example, countless thousands of existing homes nationwide are selling for 50% of today's construction and land costs. Putting aside previous overinflated values, that statistic illustrates how inexpensive home prices have become -- and how much upside they offer in terms of appreciation when the real-estate market finally recovers.
4. A steady income generator
At a time when companies are slashing stock dividends at record rates, retirees can't be assured of that income source. And with government bonds paying a pittance in terms of yield, that fixed-income stream is running mighty shallow.
Income from a rental property bought with a self-directed IRA flows back into the retirement account. The IRA holds title to the property and the income it produces can be directed into all manner of investments typically held within an IRA, be it stocks, bonds, mutual funds or money market accounts.
On a percentage basis, that income can be two to three times higher than today's fixed-income offerings even after paying expenses such as property taxes and insurance. Meanwhile, the accountholder can eventually reap the potential appreciation of the underlying asset -- the property -- that the IRA owns.
For retirement savers needing to fund a child's college costs, a rental property held in an IRA also can be a valuable source of funds. While money taken out of a traditional IRA is subject to income taxes, it doesn't face early-withdrawal penalties if used for higher-education costs. And while financial advisers caution against using retirement funds to pay for college costs, the IRA owner still has upside potential on the property to count on and the income in years ahead.
5. A safer means to play the stock market
For those who don't want to abandon potential stock-market returns, a rental home owned in an IRA still affords them the ability to invest in stocks.
Rental income funneled into stocks or stock mutual funds today will be buying shares at sharply reduced prices. Directing the proceeds of each monthly rent check into stocks or mutual-fund shares accomplishes the same "dollar-cost averaging" strategy that occurs when employees steer a fixed amount of every paycheck into their 401(k).
Over a 10- to 20-year period, the return that the rental income produces if plowed into stocks is rich icing on the cake, coming on top of the return provided by the rental income itself.
6. The ability to flip real estate with no tax bite
Proceeds from selling an IRA-owned home roll back into the IRA without facing capital-gains taxes. To the contrary, an investor who buys and resells a property within a year with nonretirement funds faces a capital-gains levy.
Many foreclosed homes today are "distressed," vandalized by angry departing owners who may have deferred maintenance due to tough times. They often ransack anything and everything not nailed down and many things that are, from lighting fixtures and kitchen appliances to furnaces and central-air conditioners, toilets and bathroom vanities.
Such properties -- which can be found at most all price points -- are among the cheapest on the market on a per-square-foot basis because the Federal Housing Administration (FHA) and most private mortgage lenders won't loan on homes deemed "uninhabitable." That drastically reduces the potential buyer pool to just cash purchasers -- and reduces the property values as a result.
Even homes needing only cosmetic fixes sell at a discount today because there are countless others available in move-in condition. If an IRA home buyer has enough in the account post-purchase to refit a home's interior -- whether it's laying carpet and laminate flooring or upgrading a kitchen or bathroom -- going the minor-rehab route can be a rewarding approach.
Buyers might choose to fix up the cheapest, distressed property in a solid neighborhood so it qualifies for a mortgage and then resell it. They also could improve upon it over several years with the rental income. Either way, it's a potentially enriching value-add strategy.
The ultimate choice
The bottom line with buying rental properties with an IRA is that the investor retains a level of control over a tangible asset that he or she could never remotely attain in owning shares of a company or a mutual fund.
The question that bears asking: What will yield a better return in the next five to 10 years -- shares of Microsoft, General Electric or Citigroup, or a modest rental home in a decent school district -- selling for 30 cents on the dollar -- whose value may soon be juiced by record-low mortgage rates and unprecedented tax breaks?
Wednesday, March 25, 2009
Existing home sales spike 5%
NEW YORK (CNNMoney.com) -- Sales of existing homes unexpectedly rose in February, recovering from a sharp drop in the previous month, according to an industry report released Monday.
The National Association of Realtors said that existing home sales rose last month to a seasonally adjusted annual rate of 4.72 million million units, up 5.1% from a rate of 4.49 million in January. February sales were down nearly 5% from year ago levels.
Economists surveyed by Briefing.com were expecting existing home sales to decline to 4.45 million.
The report said first-time buyers made up half of all purchases in February, and that sales of distressed properties accounted for about 45% of all transactions.
Sales were unexpectedly strong in the West, with activity increasing more than 30% over last year.
"February wasn't too shabby for the existing-home market," said Mike Larson, real estate analyst at Weiss Research. "The catch? The increase in sales activity is coming at the expense of pricing."
The national median existing-home price was $165,400 in February, down 15.5% from last year, when the median price was $195,800.
Prices were depressed by the large number of foreclosed properties on the market, said NAR chief economist Lawrence Yun in a statement.
"Our analysis shows that distressed homes typically are selling for 20% less than the normal market price, and this naturally is drawing down the overall median price."
Meanwhile, the total number of existing homes on the market at the end of February rose 5.2% to 3.80 million units. At the current sales pace, it would take an estimated 9.7 months to sell down that inventory of properties.
The report also said the total number of homes for sale has steadily declined over the past six months from a record level last July.
Ian Shepherdson, chief U.S. economist at High Frequency Economics, said there's a "good chance" the collapse in home sales that has been going on since September is "now over." "Though a sustained recovery is still a long way off," he added.
The National Association of Realtors said that existing home sales rose last month to a seasonally adjusted annual rate of 4.72 million million units, up 5.1% from a rate of 4.49 million in January. February sales were down nearly 5% from year ago levels.
Economists surveyed by Briefing.com were expecting existing home sales to decline to 4.45 million.
The report said first-time buyers made up half of all purchases in February, and that sales of distressed properties accounted for about 45% of all transactions.
Sales were unexpectedly strong in the West, with activity increasing more than 30% over last year.
"February wasn't too shabby for the existing-home market," said Mike Larson, real estate analyst at Weiss Research. "The catch? The increase in sales activity is coming at the expense of pricing."
The national median existing-home price was $165,400 in February, down 15.5% from last year, when the median price was $195,800.
Prices were depressed by the large number of foreclosed properties on the market, said NAR chief economist Lawrence Yun in a statement.
"Our analysis shows that distressed homes typically are selling for 20% less than the normal market price, and this naturally is drawing down the overall median price."
Meanwhile, the total number of existing homes on the market at the end of February rose 5.2% to 3.80 million units. At the current sales pace, it would take an estimated 9.7 months to sell down that inventory of properties.
The report also said the total number of homes for sale has steadily declined over the past six months from a record level last July.
Ian Shepherdson, chief U.S. economist at High Frequency Economics, said there's a "good chance" the collapse in home sales that has been going on since September is "now over." "Though a sustained recovery is still a long way off," he added.
Subscribe to:
Posts (Atom)
