12/28/09: A Good New Year?
By Benny L. Kass
As we enter into a new decade, we are asking a lot of questions. Will the economy get better? Will jobs be available? Will these terrorist plots such as happened last week on Northwest Airlines ever end? Will health care reform be enacted and if so, will it really work? And what will 2010 bring for the real estate market?
Every year at this time, I take a break from trying to answer the many questions I receive from readers. Instead, I peer into the two crystal balls sitting on my desk to determine the future of housing -- at least for this new year.
Foreclosures will continue, although not at the same magnitude of the previous two years. The residential housing market is rebounding, but a growing crisis is on the horizon for commercial properties. If landlords - big and small - lose their properties, how will this impact the rest of us? That is a question yet to be answered.
Every year at this time I urge the financial community to cut down on the number of legal documents that consumers have to sign when they buy - or refinance - a house. My pleadings have fallen on deaf ears. Indeed, this year, we will see new forms, mandated by the Department of Housing and Urban Development and the Federal Reserve Board.
Beginning January 1, 2010, within three business days of receiving a loan application, mortgage lenders must provide potential homebuyers with a Good Faith Estimate (GFE) that clearly discloses key loan terms and closing costs. For the first time, consumers will be able to effectively shop and compare mortgage loans from different lenders, so as to try to get the best deal. The GFE will include such items as whether your loan rate is locked in, and if not how long the stated rate will remain in effect; it will tell you the total charges you will have to pay your lender; and it will advise you whether the lender is requiring escrows for real estate taxes and insurance.
Clearly, this is a good starting point for consumers. Additionally, HUD has prepared a 49 page booklet entitled "Shopping for Your Loan", and this also must be provided to potential borrowers at the same time they are given the GFE.
Armed with these two new documents, the theory is that consumers will shop and compare before making a commitment to a particular mortgage lender. However, as it is said "the proof is in the pudding". According to etymology sites I found on the internet, this phrase means that the true value or quality of something can only be judged when it is put to use.
If consumers will not take their time to review the material carefully, and talk to at least three mortgage lenders, these will be just more papers to stuff into a file that will never again be read.
Last year we also learned about a new concept called "short sales". This is where a lender allows a home to be sold for less than the outstanding mortgage. But many lenders who allowed such sales were not letting their borrowers of the hook for the difference between the sales price and the mortgage loan. Indeed, many lenders actually authorized collection agencies to pursue these deficiencies. Hopefully a recent statement from the Treasury Department requiring that "borrowers must be released from any future liability for the unpaid debt" will allow more borrowers to free themselves of their mortgage obligations and try to restore their credit rating. However, this was only a Treasury guideline and not a directive.
Interest rates were historically low last year. Unfortunately, this will not continue and it is anticipated by the end of this year, rates will be hovering around 6 percent. That's still a good and comfortable interest rate, but if you have an adjustable rate mortgage that will adjust this year, and if you plan to stay in your house for a while, you should consider refinancing as soon as possible.
But that will not be easy. Loan requirements have been dramatically tightened, and you will need a good FICO credit score to get a prime rate loan. And if you are buying or refinancing a condominium unit, you will find that your lender will carefully review the association's legal documents and its budget to make sure that the association is economically sound.
If you can obtain a loan, it clearly is a good time to buy. It is - and will continue to be for the rest of this year, a strong "buyer's market".
The residential rental market will continue to be strong this year. Although consumers are attracted by low interest rates and the first time homebuyer credit enacted by Congress, many people are still waiting for prices to come down. And many more are just not able - or willing - to buy, and would prefer to rent.
Congress continues to search for revenue, and I believe that the capital gains tax - currently 15 percent - will be increased to at least 20 percent this year. What will this mean for investors? They will either keep their properties or enter into Section 1031 (Starker) exchanges. While people mistakenly call these "tax-free" exchanges, since you generally do not have to pay any tax if you conduct a successful exchange, in reality it is only a "tax-deferred" process. But call it what you will, such an exchange is a good way to divest yourself of property that is no longer productive, and obtain (in exchange) property with more potential.
Additionally, for those investors who plan to retire in a couple of years and move to a warmer climate, the exchange process makes sense. You obtain the replacement property in the area where you plan to live, rent it out for a couple of years, and then move into the house and treat it as your principal residence. There are significant tax advantages if the process is done right.
What are some of my other predictions for 2010? Reverse mortgages are becoming more popular, especially as more and more baby-boomers - who did not bother to save money in the past - are reaching age 62, and realize that their only asset is the house they live in. And now that major reforms have been instituted to curtail the abuses - and some of the high costs - involved, a reverse mortgage may be right for you.
On the dark side, however, we will continue to see mortgage and homeowner fraud. Whenever a new program is instituted to assist consumers, clever scammers come up with new ideas to take advantage not only against the general public but against government as well. Witness the large number of fraudulent applications for the first time homebuyer credit that was recently disclosed by the Internal Revenue Service. Six and seven year old children were listed as being eligible for that credit.
While Congress has attempted to curtail these activities when it enacted the revised home-buyer credit, fraud will never end. As consumers, we must all be on our guard to protect ourselves. The internet is good - but yet it encourages bad practices. How many times does the IRS have to tell us that it does not send notices by email, before we stop giving our personal information, bank account and social security numbers to a faceless, nameless person by email?
Have a happy, healthy and prosperous new year.