Archives

September 2008

Insights from a Mortgage Professional

Posted at 4:10 AM, Sep. 30, 2008

Here is an insight provided from Jamie Simpson from Guaranteed Rate to help consumers and real estate professionals gain some clairity to the scare of recent headlines.  Feel free to give him a call with any questions.

I want to provide insight to the credit crisis of last week because I know there is a lot of confusion based upon scary headlines of the past several days.  My hope is to clarify some terms and explain what actually happened, what it means for the economy, the real estate market and your mortgage for the next 6-9 months.

What Happened: The Treasury Purchased Assets, Not a Bail Out, Taxpayer Might Profit

Under normal circumstances, the government would let AIG and Fannie Mae and Freddie Mac fail.  Lehman Brothers was allowed to fail (its CEO Fuld sold his shares for only 20 cents each and lost $145,000,000 since January), and Bear Sterns was bought by JP Morgan with a collar loan from the Treasury.  But these were not normal circumstances. The government bought assets totaling $700B in delinquent mortgages because no other institution was willing to buy these highly leveraged bad debts, nor did any other institution have a balance sheet large enough to absorb them.  Institutional banks stopped lending to each other and hoarded cash because they feared they would not get paid back. Only the Treasury was trusted to pay them back.  The troubled assets were simply too large, too complex, and too leveraged, sometimes 40:1.  They need to be de-leveraged and appraised to allow for an orderly trade of these assets.  Once clearing prices are set, institutions will trade them.  Capital of approximately $350M will need to be raised.  The Treasury valued the assets at $700B, which is at a discounted par value of $1 trillion.  It represents 10% of the system's mortgage exposure, and 100% of the delinquent mortgage exposure.  The Treasury borrowed money to buy these assets, and might make or lose money when these assets are sold.  The difference is what we taxpayers are responsible for.

What It Means for Inflation, Credit, and Housing; Good News, Bad News

Whenever the government borrows massive amounts of money, it crowds out other players such as small businesses who need cash to run their business.  So the problems on Wall Street will trickle down to Main Street.  The good news is that because the assets need to be de-leveraged, this will be deflationary.  You can expect low inflation in the next 6-9 months, as well as low mortgage rates.  The bad news is that the consumer is under stress, he feels that tighter credit has eroded his wealth, and unemployment is now rising.  He will cut back on discretionary consumption.  The key driver of inflation is unit labor costs, and in this down business cycle labor costs will be deflated because of the contraction in employment.  The risks are thus higher for a contraction in the economy.

The key is the stabilization of prices in the housing market, which has been occurring nationally.  Housing inventory has slowly been absorbed over the past 14 months, and it does take fewer months to sell today.  The National Association of Realtors believes housing will begin to turn around in earnest in 1Q2009.  Prices are firming, we are nearing a bottom, and auction inventory is reducing.  The Treasury's sale of troubled assets will speed the dissolution of housing inventory. Nonetheless, government policy may be necessary to limit the downside, possibly through more liquidity of reserves into the system, and fiscal stimulus.  It does not appear that the Fed needs to lower its Fed Funds rate of 2% because its real rate is actually negative because inflation is higher than 2%, so businesses and banks are borrowing for free.  It seems to be stimulative enough for now.  If the Fed adds liquidity into the system and the liquidity is not going to goods and services (like the stimulus earlier in the spring), but instead goes to purchase assets, this is not inflationary.

Bottom-line, it is rare to see low mortgage rates and low housing prices.  Usually the two are inverse to each other -- high prices, low rates and vice-versa.  It is a great time to buy, and the market will come back sooner than expected.  Get ready because the opportunities are plentiful now.  If you have good credit and income, you can get almost any loan.  If your credit needs repair, please call me because lenders are charging up to 1% higher rates for FICOs less than 660.

The costly restrictions by Fannie Mae and Freddie Mac on investment properties need to be removed to sell more property.  Today, it can cost an investor up to 4% in points to buy a condo or a 4 flat when in February it was only 1.5%.  Also, as of January 1 2009 no investor with more than 4 mortgages can get an investor loan from Fannie and Freddie.  As long as the investor has 20% down and 640 FICO scores, this makes no sense in this market.

Where We Go From Here: GDP Here and Abroad, Taxes, Undisciplined Government Spending

The current financial crisis, Boeing strike, HP layoffs, and the remnants from Hurricane Ike will be felt and we will likely have a volatile period immediately following these announcements, but the underlying trend for most companies is strong today.  Except for the financial sector (Fannie Mae and Freddie Mac were replaced by two other companies) and some discretionary consumer-based companies, the cash flow and earnings of businesses is generally strong for the 3rd Quarter. The GDP was 3.3% in the 2nd Quarter ending June 30.  Yet the risks are still higher for a contraction in the economy going forward.

The US is farther along in the downward global business cycle than is Japan and Europe.  As their economies stall, look to the ECB to consider lowering its rates from 5% to be closer to our own 2%.  The interest rate differential is not favorable now but look for the ECB to change that. The US is also likely to exit from this downward business cycle faster than Japan and Europe.  But our exports will be hurt, and that has been a bright spot for the US.

More tax revenue than ever was brought into the Treasury's coffers in 2007 and 2008, yet the federal budget deficit is out of control, currently about $500B.  That means the government is borrowing almost $1 out of every $5 it spends.  The government has to get its spending under control because plenty of tax revenue is generated by the taxpayer, and the taxpayer is tapped out.  The national debt is also approaching $10 trillion, which means that rising interest payments are being made overseas to pay the coupon on the Treasuries held by foreigners.  Tax increases by Herbert Hoover in 1932 from 28% to 63% on the top earners to end the Depression actually prolonged it. We're not in a Depression, which had a 40% foreclosure rate, but clearly any tax policy going forward also needs massive cuts in spending to reduce the budget deficit.

Jamie Simpson
VP of Mortgage Lending
Guaranteed Rate, Inc
P. (773) 290-0525
C. (773) 251-7187
F. (773) 435-0623
jamie@guaranteedrate.com
 

Predatory Lending Database Program Fact Sheet

Posted at 3:05 AM, Sep. 29, 2008

Illinois has enacted a comprehensive predatory lending measure, Public Act 95-691 (SB 1167) that is now in effect as of July 1, 2008.  This law revises the predatory lending pilot program that was originally in the HB 4050. 

The purpose of this program is to reduce predatory lending practices by assiting certain borrowers in understanding the terms and conditions of the loan that is being applied for.

Borrowers will be required to undergo counseling if the borrower and the mortgage they are applying for meet certain criteria.    This information will be placed into a database accessible only by housing counselors, closing agents and licensed mortgage brokers and loan originators. 

Requirements are:

A.  The broker or loan originator is not exempt from the Residential Mortgage License Act

       AND

B.  The borrowers (all of them if more than one) are first-time homebuyers seeking a mortgage on a 1 to 4 unit dwelling that will be owner-occupied in Cook County or the borrowers are refinancing a primary residence.

       AND

C.  The loan includes one or more of the following characteristics:

* The loan permits interest only payments;

* The loan may result in negative amortization;

* The total points and fees payable by the borrower at or before closing will exceed 5%;

* The loan includes a pre-payment penalty; or

* The loan is an Adjustable Rate Mortgage (ARM) which allows adjustments of the interest rate in the first three years.

The program will be administered such that ALL mortgages recorded in Cook County will need to have a Certificate of Compliance or Certificate of Exemption attached to the mortgage.  Counseling must be done by a HUD-certified agency. 

If the borrower qualifies, prior to closing they will be notified and given a list of participating counseling agencies.  Only after this review will the loan be given a "clear to close" status.  Should the closing agent upon review notice any changes to the originial loan terms, the buyer would be required to re-counsel and the loan would be suspended until further notice. 

Energy Saving Tip #4

Posted at 10:51 AM, Sep. 26, 2008

Windy Windows & Drafty Doors- Replacing old drafty windows and doors with new airtight or thermo-pane windows can help reduce your home's heat loss by half and increase your energy efficiency by 70%.  If new windows aren't in the budget, weather stripping and plastic insulation kits are quick, easy & economical solutions that can save up to 10% annually.

www.homeimprovementmag.com

Protecting Your Assets

Posted at 5:36 AM, Sep. 24, 2008

It is a sign of the times.  Recently, my in-laws had their home broken into for the first time.  What is shocking about that it is that it was in the middle of the afternoon, the neighbor was outside working on his house, and my in-laws are retired.  Whomever robbed them took a great risk at guessing when they would leave the house and for how long.  As you can imagine, they were very distraught about it.  They had lived in their home for over 35 years and had NEVER experienced something like this.  To make matters worse, the theives stole very specific items that in reality, weren't worth a whole lot, but were priceless in my in-laws eyes.  Items that were handed down generation to generation. 

Here is a question you should ask yourself.  Could you list everything in your closet from memory?  If not, take this opportunity to make it a priority to catalog items of value.  Do you know how much it would take to replace your family's clothing?  How about furniture?  Electronics and computers?  Your entire kitchen-ware?  Start by listing items with current value and supported video/pictures along with any identifying marks such as serial numbers.  Do your best to gauge current market value.  You may have a video camera that is 10 years old, but if you had to go out tomorrow to replace it, what would you realistically spend?  Place your inventory list with sales receipts in safe keepings like a safety deposit box or burn it onto a CD and store elsewhere.

For extra tips, video tape individual rooms from top to bottom.  Then take close ups of items of high value, i.e. silverware, china, crystal and such.  When you have finished each room, go to closets, attics, basements and garages and do the same.  Don't forget to catalog tools and appliances.  These items are costly and easily overlooked.  Leave yourself a reminder to update every 3 years. 

If you have any collectibles or items without a bill of sale, get them professionally appraised.  You want documentation of what it would cost to replace the items, even those items that are considered irreplaceable. 

By taking some preventive steps you can ease the suffering brought on by a theft or loss.  It can happen to anyone. 

Property Taxes in Chicago

Posted at 5:58 AM, Sep. 22, 2008

Here are some of the basics you should know regarding property taxes.  First being, What role do property taxes play?  Property taxes support local governments with a district.  About 62% of that goes to schools.  The tax cycle is generally every two years.  A tax year is the year of assessment and reflects the value of the property as of January 1st of that year.  We pay our tax bill in two installments and in arrears, which means, the 2007 tax bill will be paid in 2008. 

How is a property assessed?  The level of assessment is 33 1/3 percent of the property's fair market value except in Cook County.  You will be notified of any increases.  Every four years, all properties are reassessed to detect any market changes such as:

*The property values in the area are increasing.

*Improvements were made to the property (deck added, extensive remodeling, additions added).

*The property was under-assessed in relation to other properties and this error has been corrected.

*The property has an homestead exemption or senior-freeze that has been removed.

How do I know if my property has been fairly valued?  Your first step is to make sure the information on the public records is accurate.  Secondly, contact your local Realtor for comparables of homes in your immediate area.  If you believe you have been wrongly assessed, you can file an appeal with the Illinois Department of Revenue.

Energy Saving Tip #3

Posted at 10:47 AM, Sep. 19, 2008

It Pays To Update- Not only can you save on ever increasing energy bills by making some small changes and updates, but you may also be eligible to receive up to $500 in federal tax credits.  For more information visit www.engergy-gov.gov (click on "The Energy Bill and You") or call 1-800-342-5363

www.homeimprovementmag.com

The Price Is Right

Posted at 5:20 AM, Sep. 17, 2008

Sellers are definitely feeling the bite when it comes to selling their home.  I have had to tell many, if you don't need to sell, don't.  You will not outsmart the market.  Your property is not exempt from the effects of the downturn.  This has been extremely difficult to those needing or choosing to sell and have own less than 5 years.  Fact:  if you bought at the height of the market you WILL lose money if you sell now. 

Too often though, I hear the pleads of their special circumstances.  My rate is adjusting, I have been relocated, we need more space, etc.  The reasons are common.  I don't think I have taken a listing yet this year from a seller who DIDN'T have a special need.  Face it, we are Realtors, not magicians.  We are not going to create a market of buyers just for those sellers in need.  I would not be surprised if there are numerous professionals out there turning down listings if they know up front they'll be a waste of their time and resources.  The time is now to get serious.  Sellers, we as professionals have been shouting from the roof tops things you must do even to get in the game.  At the risk of repeating, here they are again:

PRICE COMPETITIVELY!  This is KING!  Have a Realtor look at the last 3-6 months and look at what is currently under contract, even before what has sold.  That will tell you what today's buyers are willing to make offers on.  If you have solds, use them as bookends if you will.  Know that in a depreciating market, your property may be worth a certain percentage less than the last sold. 

Also, know your competition.  In Chicago, the fatal mistake I hear is, " Well, that property is not like mine so it can't count!".  Truth is, if a buyer is looking at yours, he or she will look at others in a similiar price point.  Smaller, bigger, more amenities, less.  Don't underestimate your competition.  Plus, realize cross neighborhoods.  If they are looking in one, they may realistically be looking in another nearby.  There might be a larger pool of properties you are up against than you realize.

GET IN TIP TOP CONDITION!  There is no excuse for poor presentation.  If you property is in disrepair, price it accordingly.  But note, buyers will STILL offer less if the property has been on the market more than 30 days.  Buyers are not interested in the fixer-uppers unless the price is a steal.  Minor things such as a squeaky door, clutter and outdated paint and carpet can cost you market time which translates into dollars; lots of them.

DON'T OVERLOOK CURB APPEAL!  Your home could be a dream on the inside, but if the outside leaves much to be desired, change it.  Ask others for suggestions or perspectives on what you can do to make a buyer say, "I would like to check that out."  It takes a lot less to WOW than you may think.

DON'T USE A REALTOR WHO WON'T DO YOU JUSTICE!  I will say this till I am blue in the face; pictures, pictures, pictures.  REAL pictures.  Not of the door frame, the window or the oh so famous sky line.  Leave the details for when the buyer tours your home.  But facts are buyers will most likely not consider a home or will have lower expectations of those without pictures to look at.  I don't even consider homes without them.  You will lose a huge audience if you fail to post pictures of the interior.  Buyers want to grasp a feel of the home before they will bother to see it.

Next, ditch the fluffy lingo.  Beautiful, Amazing, Spectacular.  Guess what?  Buyers aren't buying it.  Have your professional talk about tangible pluses.  Ask yourself this, "What makes living here so great?"  You are going to appeal to a lifestyle before anything else.  Lots of space, close to transportation, shopping, first floor bedroom, office space, etc, all the things that actually make a buyer's want list.  State the facts and court them with the pictures.  If you can, give yourself the advantage by addressing any negatives in advance, i.e. parking, noise, etc.

When sellers are ready to take the reins back, buyers will move forward.  The power to change the atmosphere is in your hands.  Interest rates are dropping and buyers will buy when they can perceive the value. 

Get While the Gettin's Good

Posted at 5:05 AM, Sep. 15, 2008

Just as any good thing comes to an end, so will the buyer's market.  There is still a surplus of properties waiting to be had.  Yet still, too many buyers are riding the fence; debating with themselves whether or not is this the right time.  There is no right time.  Ever.  Not to have kids, change jobs, move, get married, buy or sell anything.  This is what I know to be true.  There is only right now.  Anything that requires major change will require faith.  Faith that for YOU, this is your moment. 

So, if you are going to take advantage of this market trend, do so with a few pointers in mind. 

Start with what you want.  Forget the numbers and look at where you are in your life and where you would like to be in the next 10 years.  It doesn't have to be a near reality, just a desire.  Seperate those wants with what is necessary and what is a desire.  Do you need to be close to the train, or do you want to be close to the train.  How would you decifer that?  Ask yourself, would you pay $20K more for a home for that privledge?  If not, that it isn't a need.  Apply that to your entire list.  If you get these things on your list without paying extra, well, that's just gravy!

After you have established that, look at your numbers.  Pick a reasonable range that reflects your need list and broaches perhaps your wants.  From this, you can realistically see a good deal when it presents itself.  Then ask yourself, do you expect to move, or are you just entertaining it because of the times?  No one likes a luke warm buyer anymore than a self-decieved seller.  If your not in it for keeps, get out.  Rules to live by.

Energy Saving Tips #2

Posted at 10:44 AM, Sep. 12, 2008

Stop Money From Going Through The Roof-Literally, heat rises so make sure your ceilings and attic are property insulated.  Check the thickness of the insulation under the rafters in your attic.  In Chicago, it is recommended to have at least a foot of high grade insulation.  This could save you about 25% off your energy bills.

www.homeimprovementmag.com

The Old House New House Show

Posted at 10:39 AM, Sep. 10, 2008

The Old House New House Home Show

September 26-27-28

Pheasant Run Resort

4051 e. Main St. (North Ave) in St. Charles

Fri & Sat 10-7, Sun 10-5

Admission is $7

Seniors, children and parking is free

1-630-515-1160

www.kennedyproductions.com

Explore 300 deluxe displays and preview the latest in kitchens, baths, remodeling, additions, interior design, countertops, energy efficient and green products, roofing, insulations, heating and air, landscaping, windows, doors, floors and more.

Meet Kevin O'Connor Host of This Old House

12:30 and 3:30 pm Saturday only.

Energy Saving Tip #1

Posted at 10:54 AM, Sep. 5, 2008

Check The Wattage In Your Cottage- Replacing standard light bulbs with compact florescent lamps (CFLs) can lower your electric bill by more than $60 annually.  CFLs use almost 75% less energy than regular bubs and CFLs last up to 10,000 hours.  Standard light bulbs last only about 1000 hours.  Long term, this simple change can save up to $30 per bulb. 

www.homeimprovementmag.com

Why Real Estate Is Still A Good Investment

Posted at 12:59 PM, Sep. 3, 2008

Why Real Estate Is Still A Great Investment

Source:  HousingMarketFacts.com