WHAT’S HAPPENING TO THE MORTGAGE MARKETS? (Sept. 18, 2008)

Housing and Economic Act of 2008 - Mixed Blessings!

1. It eliminates DAP (downpayment assistance programs) that allowed buyers to borrow 100% of the purchase price. While this makes sense from a risk-based analysis point of view (these types of loans defaulted at a much higher rate than loans where the buyer actually puts in a downpayment out of their own money) it does not stimulate the housing industry, restricting first-home buyers, who are the ones supportuing the whole housing "food chain". No one disputes that homeowners have more to lose if they have a downpayment, so maybe they will "try harder" to make ends meet when the going gets tough. But a responsible, stable income buyer will be a better credit risk than an irresponsible buyer with a downpayment.
   
   Comment: I believe that this provision will affect the demand from first-home buyers substantially. In this economic climate it is very difficult for a person with moderate to low income to save any substantial amount for a downpayment. A more equitable and fair way of determining default risk and access to use these types of programs would be by looking at the buyer's ability to pay (income & employment history) and financial responsibility track record (i.e. credit scores).
2. It amends Section 121 of the Internal Revenue Code (which is the exclusion that allows homeowners to sell their qualifying primary residence and exclude up to $250,000 ($500,000 for a couple) of capital gain from capital gains tax. Many savvy investors were combining this exclusion with the 1031 exchange provisions to build up equity via several 1031 exchange transactions, and then convert this investment property to a primary residence to take advantage of the capital gain break. With this amendment, Section 121 no longer permits homeowners to take advantage of the full tax-free exclusion on the sale of a home that was their primary residence if there was a non-qualified use of the property (i.e. investment) prior to being held as primary residence.
   
   Comment: I believe this amendment is just closing a loophole that only savvy investors with high net worth were using, so I am OK with it. However, it will restrict the demand for investment property transacted with investors looking to maximize their tax-free equity, and the sale of homes via 1031 exchanges.
3. It provides up to $7,500 in tax credits for first home buyers (or individuals who have not owned a home in the last 3 years). While this is being publicized as a "great thing" for our industry, this amount is only an interest-free loan for a 15-year period.
   
   My opinion: People with irresponsible credit behavior will be lured into home ownership by the shine of this tax credit (we are already seeing many volume builders advertising this credit) , will spend the $7,500 on consumer goods when they receive it, and increase their indebtness to the point of default. I believe it is our duty as REALTORS to point out to our clients that they will have to pay this amount back, and strongly suggest that they use the $7,500 instead to pay off high interest credit lines, or principal off their mortgage to shorten the life of the loan, build equity and have some forced savings.

NATURAL DISASTERS

1. Clean debris and leaves from your roof, gutters, yard and street drainages. Nail and seal loose shingles and caulk all windows, doors and siding to prevent flooding and water penetration. Remember that your homeowners insurance policy does not cover flood damages (did you remember to buy flood insurance?)
2. Trim all bushes and trees that are close to your house to prevent damage from abrasion. Look carefully at all your trees, cut dry-loose limbs. If a tree doesn’t look healthy it is best to cut it down (remember you may need a permit from the city/county to cut a tree of a certain size)
3. Bring inside all objects that could move with strong winds: Planters, bicycles, chairs, tables, BBQ, trampolines, etc. Park your car in the garage.
4. Prepare for the possibility of a heavy tropical storm or a mandatory evacuation. Prepare all your important documents and store them in a waterproof container, including your insurance policies for your home. Take some cash out of the bank in case ATMs are out of service. Buy enough non-perishable food and water to last 3 or 4 days. Have enough flashlights, batteries gas stoves and a radio to be able to survive without electricity.
5. Have an emergency plan in case of a mandatory evacuation. Where are you going? Which way are you taking? Try to avoid leaving at the last minute, together with 90% of the city.