Twin Cities Real Estate News

Minnesota mortgage broker makes an attempt at explaining complex economic variables.

I am writing this tonight to make you aware of a HUGE opportunity that I perceive in the mortgage market to refinance. This is called turning a lemon into lemonade. You might have noticed that the DOW backed off it’s high of about 14K to about 12K as of Friday January 18th. So while we are all losing a ton of money in the market, we can take solace that the trade-off may be a lower cost of borrowing on our debt instruments. If you have an adjustable rate loan, think about turning it into a fixed rate soon. In the past week, I’ve seen rates drop almost 1/2 percent on 30 year fixed rate loans. In Minnesota, depending on your loan to value, property type, and credit score it may be possible to obtain a 30 year fixed rate mortgage as low at 5.375%. Maybe this will be the catalyst to kick start renters into becoming buyers.

Today was Martin Luther King day, so the US markets were closed. In Asia and Europe today, stock markets had a one day drop that we haven’t seen since 9/11. What does this mean for tomorrow? FEAR is in the air. The future markets are indicating that the US stock market will follow suit, and drop precipitously. This of course may or may not occur, as I am writing in advance of tomorrow. I won’t give you advice on what to do in the stock market, other than to indicate that I’m staying the course with my portfolio. Eventually GREED will return to the market. When that happens, money will flow out of treasuries and mortgages and into the stock market. When this happens, mortgage rates will increase. See how the pendulum of fear and greed rule the financial markets?

Let me attempt an explain of the economics behind the recent mortgage rate drops. We are seeing the affect of huge stock market volatility. When investors fear the market, they take flight to the 10 year US Treasury notes. This is a typical benchmark of which mortgages are priced off of. So, if there is more demand for the safety of bonds and mortgages, the price of these debt instruments will generally go up, which means their yield will go down. When yields drop, so do the interest rates on the pricing of new debt instruments. So, the offset to stock market volatility can be lower mortgage rates. Will this be the silver lining to our current economic problems? Trillions of dollars of Adjustable rate mortgages NOW have the opportunity to convert their mortgages to fixed rates that are very close to the initial rate on their ARM. This means the payments might not be that different from which they have become accustomed. This should help slow the rate of foreclosures as their home remains as affordable as it was when they bought it.

There are variables to consider too-the federal reserve “imminent” rate cut and the stimulus package that was just proposed. The rate cut will lower the cost of lines of credit, credit cards and other variable rate debt tied to indexes affected by the rate cut. This will put more money in the pocket of the consumer and hopefully the economy, which in turn reduces the chances of a recession. The collective effect should act as a multiplyer, i.e exponential effect.

Approximately one month ago we had the Mortgage Forgiveness Act of 2007. Most recently we have the proposed stimulus package and yet another rate cut. The government is trying. For some it’s not enough. For others it’s too little too late, and for others it’s too much. Regardless of where you sit on that spectrum, action is being put into place. Let things play themselves out. Remember a rate cut, new tax law or stimulus package take time to reverberate throughout the economy. It won’t be immediate. At the same time, I highly recommend you grab this window of opportunity and get a low interest rate on your mortgage if you can. Visit us online at http://www.ventureloanapp.com

What’s positive about being foreclosed upon or selling your home for less than you owe? Well, for most people, not much. Yes, you are relieved of an onerous mortgage loan and you are now free to find housing that is more affordable within your budget. But not everyone fully understands the lingering effects of a foreclosure as it pertains to the mortgage debt forgiveness. This applies to foreclosures, short sales and a deed in lieu of foreclosure.

Foreclosure can be one of the most devastating things a homeowner can face. At a minimum, they will end up with damaged credit. Until recently, the tax laws further penalized homeowners who were relieved of mortgage debt obligations with additional taxation. Homeowners owe taxes on the amount of the debt obligation from which they are relieved. For example, let’s look at a short sale. If a bank agreed to accept $200,000 as payment in full to satisfy a mortgage where the homeowner owed $250,000, the homeowner would owe taxes on $50,000. They were relieved of repaying $50,000 in mortgage debt. When you are relieved of debt, you are actually benefiting because you no longer have the obligation to pay it back. Hence you must pay tax on this “unrealized income” even if there was no direct corresponding benefit, such as equity proceeds from a sale. At the same time, how is the homeowner who just lost everything going to be able to pay tax on the differential of the satisfied mortgage obligation when they received no tangible proceeds from the sale?

As we have just seen, the amount of debt forgiveness is considered income. All debt forgiveness, not just mortgage debt, results in reportable taxable income. Many people who’ve walked away from their homes have found this out the hard way. Many found out at the end of the year when they opened their mail and found they’d received a 1099C. The 1099C is the IRS form that the creditor gives the debtor when they have forgiveness of debt.

Today we have a record number of foreclosures. When banks and lenders sell homes they’ve gotten back during the foreclosure process they are less concerned about the bottom line and more concerned about being rid of the collateral. This can result in spiraling downward values in areas or communities where foreclosures are high. Large numbers of foreclosures like we are currently experiencing are hurting our overall real estate market valuations.

One solution to the problem has been to encourage those homeowners in distress to work with the bank to sell the home while they continue to occupy the property. This may result in a short sale, whereby the bank agrees to accept less than is owed on the outstanding mortgage. Together, the bank and homeowner work to sell at the highest possible price given the conditions of the prevailing market. Working together allows the home to be maintained and occupied during the course of the sale. This generally is less costly to the lender and is one of the reasons why they entertain short sales.

In general, short sales are less “shocking” to the market values in comparison to a lender going through the foreclosure process and then reselling the property as an REO. This should be encouraged where possible.

Tax wise, homeowners still receive a 1099C. From a credit report perspective, the lender usually won’t report a foreclosure against the homeowner if they sell with a short sale. A short sale in that instance will be beneficial to the seller’s credit and may be helpful when the seller becomes a buyer and wants to obtain another mortgage in the future.

In Minnesota we have a unique situation regarding foreclosures. For owner occupied properties, we have a 6 month right of redemption from the date of the Sheriff’s sale. Because of the long redemption period, during which no payments are due, many in Minnesota are opting to be foreclosed upon instead so they can live in the home for free. You see this occurring most often where preservation of a one’s credit rating is no longer important to the homeowner.

To encourage lenders and homeowners to work together, the government has just created a new law. The law is H.R. 3648, entitled Mortgage Forgiveness Act of 2007 and was signed into law as of mid December 2007. Here’s what the law does: it waives taxes for debts forgiven from the beginning of 2007 to the end of 2009. This means no more 1099C, at least during this time frame.

Can you see the implications? This means that homeowners and lenders can work together to either sell or refinance the existing mortgage debt, without having to recognize the taxes due on the amount forgiven. It provides an incentive to protect your credit and work out an acceptable solution, such as a short sale. Income taxes are taken out of the equation since there isn’t anymore inherent tax liability from mortgage forgiveness.

This should slow down the foreclosure crisis and allow values to stabilize. This is a good law that should help ease the mortgage and real estate crisis we are facing today.

Remember that real estate investment is part of an overall financial plan-it shouldn’t be just stocks, bonds, and mutual funds. Investing in real estate requires specific tax, spending, budgeting and people management advice. Based on your other assets and your overall financial plan, investment property might be a worthy goal, but only if it fits your investment strategy and if you’re willing to put the time and effort into creating a successful business. Many investors exclude real estate investing because they think it is too difficult. It really isn’t that hard to do successfully, but you do need to educate yourself. REMEMBER-if you act like everyone else, you will end up like everyone else.

Don’t spend until you study: If you don’t have an intimate knowledge of neighborhoods, rental rates, commercial traffic or any of a dozen more factors that make real estate investments a particular success in one community and not in others, don’t even start. John Mazzara recently wrote a book entitled “Reality Based” Real Estate Investing. You can order the book and learn more at http://www.RealityBasedRealEstateInvesting.com There are many helpful tips and technique in addition to some humorous real life stories.

The most successful people in real estate investment have taken the time to learn about the properties they’re buying, sensible ways to borrow and economical ways to manage the buildings they have. Make sure you assemble a good advisory team around you starting with your financial planner, your tax adviser and an attorney knowledgeable about real estate transactions. They’ll teach you and keep you from making serious mistakes. Experience counts. Don’t pick advisors who’ve never been involved in what you want to invest in. You will provide their education. You can visit http://www.edinamortgage.com to see some of the programs that might for you.

A slower market doesn’t mean a bargain market. Even though the gains of the past 15 years aren’t what they used to be, keep in mind many sellers aren’t terribly desperate to sell and they’re not dropping their prices all that much. Make sure you take the time to study a particular market not only for gains in price, but for stability in rent and overall quality of the property and neighborhood you’re examining. You might hear about a downtrodden neighborhood ready to “turn,” but that rotation might take years – start slow and pick properties with the best chance of appreciation. Recently, I’ve seen some huge opportunities within the Twin Cities marketplace. At the same time you need to be careful so you know what you’re buying, especially if it was bank owned.

Unlike a pure rental property, home ownership is not a real estate investment. If you’re thinking about leapfrogging from one residence to a new one in hopes of huge gains when the market returns, give yourself a reality check. An investment is something you can sell when the moment is right without any hesitation. Is that something you can really do with a home you’ve grown comfortable in? When the market goes up or down, we don’t necessarily think of dumping our principal residence. There are emotional ties as well as physical ties to a home – whereas real estate bought as an investment must produce income during ownership or a profit at the time of sale without exception. We are making a strategic decision to sell one of our rentals at this time because we recognize that for certain reasons, the best time might be now. It is an unemotional decision. This usually isn’t the case if you have a primary residence.

Real estate is not an automatic ticket out of financial trouble. In fact, you may end up in trouble. Some people have gambled their way out of debt by buying distressed properties and reselling them at a profit. They’re the lucky ones – and after hearing so much about the “flipping” phenomenon, many of those success stories might be apocryphal. Be aware of your risk tolerance at all times. Think about all the people who joined the “real estate party” late-such as condo buyers at the end of the boom in Florida, Arizona, and Nevada. Many will take huge losses. They were a victim of Greed, not careful analysis.

Enter the foreclosure market carefully. With all the reports of subprime borrowers losing their homes in recent months, don’t think those foreclosure numbers will automatically provide you with a can’t-miss opportunity in real estate. Taking advantage of the foreclosure market is both a learning exercise and an emotional one. It takes time to learn all the correct avenues in a community toward investing successfully in failed properties, and actual contact with families losing their homes can be wrenching even if you do know what you’re doing. Foreclosure and pre-foreclosure investing is not for the faint-hearted. There is a new law change regarding short sales. Basically, the sellers can sell a home and not have to recognized tax liability on their debt relief. Debt relief is the amount sold for less the outstanding loan balance.

Cash and credit lines are king. During the white-hot real estate market, people were buying and selling property for little or no money down because lenders were willing to take that risk. Today, in a higher rate environment, that’s definitely changed. While many successful real estate investors choreograph borrowing seamlessly into their strategy, cash is an important decision for down payments and covering ongoing expenses. This is where your advisory team comes in.

Keep your credit report clean: Only borrowers with the highest credit scores will find the best lending deals if they need to borrow. Make sure your credit report is clean before you enter the market. We at Venture Development will be happy to provide you with a copy of your credit report if you live in MN. There is an upfront cost to you and you will need to fill out our application and credit authorization. We are a Minnesota mortgage broker, so we ask that only Minnesota residents go to our site and fill out the loan application at http://www.ventureloanapp.com/apply.html

Sellers: Think about the statistics in the report below. Are you marketing your home correctly given the data below? If you’re not, then you’d better think twice. The data below is comprehensive and tells you who the buyers are in today’s market. Do you see what it doesn’t say? It doesn’t say they read the newspaper or go to open houses. That’s what our generation of buyers and sellers did-before the internet. This is why you need an updated internet based marketing campaign. You may be best served to select an agent who is in tune with these statistics.

MNAR has Minnesota home buyer characteristics from NAR report
The last section of the Minnesota Association of REALTORS® (MNAR) Resource Update highlights information specific to Minnesota that was generated from NAR’s Home Buyer and Home Seller Survey.

The data was collected by NAR as part of their annual profile. NAR received 9,966 responses nationally, and an additional 441 in Minnesota.

Some characteristics of Minnesota home buyers:

Median age of all home buyers was 36 years old. For first-time buyers, the median age was 28.
Household income of home buyers was $69,300.
69 percent of home buyers said there were no children under 18 residing in the property.
56 percent of home buyers were married couples, 24 percent single females, 11 percent single males and 9 percent were unmarried couples.
6 percent of home buyers were born outside of the U.S., compared with 9 percent nationally.
First-time home buyers accounted for 42 percent of homes purchased in 2007.
66 percent of first-time home buyers were between 25 and 34 years old.
30 percent of buyers use social networking websites (e.g., Myspace, Facebook, Linkedin).
Among home buyers aged 18 to 24, 59 percent reported using social networking sites.
19 percent of homes purchased were new construction.
64 percent of homes purchased were detached single-family.
The typical home buyer purchased a home 14 miles from their previous residence.
The median price of homes purchased was $221,900 compared to $215,000 in the U.S.
The typical buyer purchased a home that was 1,850 square feet in size.
Recent homebuyers plan to live in their home a median of 10 years.
Source: Minnesota Association of REALTORS®

If you want to begin an online search for a new home, one excellent place to start is on my website. http://www.selling.mn

Have you found the home of your dreams? If your response is a resounding NO, then I suggest you take a gander at current real estate listings. There are more than a few to choose from. Regardless of your preferred area, you’re sure to find current real estate deals if you exhaust your sources. The funny part is, our property market has never seen such a slump since the 1970s. That was quite a while ago. Nevertheless this is an ideal time for those in the market to take full advantage of excellent real estate listings. You definitely shouldn’t expect this slump to remain forever.

Welcome to a buyer’s market. Although the current real estate market stinks if you’re striving to sell a home, there are ample properties available to those seeking a new abode. This means that interest rates are working in your favor, and the countless real estate listings you find on the web are likely to be very reasonably priced. In short, hundreds of individuals and families are finding homes that would typically be out of their price range, but they’re able to afford them at this time due to the massive supply of houses on the market. A few websites to begin with are homes.com, realtor.com and justlisted.com. Any of these will do the trick for home buyers just getting started. I prefer the website/search engine homes.com simply due to the fact that it’s easy to navigate. You can narrow your search by price range, city, home style, community amenities and more. Therefore you won’t have much trouble finding real estate listings that suit your needs and budget. You just might be shocked at how much affordable real estate is available everywhere.

If you are in Minnesota, You can begin the online search process from my site http://www.selling.mn We allow you to search through their numerous listings without any strings attached. Start your search for great real estate listings right now. You’re sure to spot a bargain!

Common sense tells you that when you move – you have a change of address. Whether you’re moving to a mansion across town or going to college in another state, you have a new address. And, if you want to get your mail – you have to fill out the change of address forms. It really is rather simple. And yet, so many people dread actually doing it. The change of address forms can be picked up in person at a local post office or downloaded and printed off of the internet. It truly cannot be any simpler.

However, the consequences of not changing your address can be quite annoying. The government insists that you fill out a change of address for your driver’s license within a few weeks. Each state may vary, be sure to check with your local driver’s license center. But, that is still simple as well – you can do that in person and wait in the long lines or you can complete that online too. Isn’t it amazing how many things you can do on the internet these days? If you don’t get a change of address card to carry in your wallet and make the government happy, you can actually get some fines if you ever get pulled over. The government always wants to know exactly where you can be found.

Of course, your mail cannot be forwarded if you don’t fill out a change of address form with the post office. The bills won’t go away just because you didn’t tell people that you were moving. What is recommended is that as soon as you know you will be moving and what your new address will be, you should notify all of your creditors and anyone else who sends you monthly bills or mail. Your credit card companies may not be too lenient or understanding if you moved and don’t receive your statements until after they are overdue. Giving them a heads-up can save you quite a bit of grief. Magazines and catalogs usually don’t get forwarded through the post office, so the next person who moves into your old house or apartment just may appreciate the subscriptions that you’re allowing them to utilize. Make sure you write to them and give them your change of address so that you continue to get your monthly magazines.

And of course, your utility companies need to know when you’re moving. They need to know when to turn off your old services and where and when to begin your new services. Of course, they also need a new address on file in order to send you one of their famous final bills.

Yes, it is simple. Most of the aforementioned tasks can be completed online. They may take a few hours of your time but save you hours and hours of grief. And life is way too precious to waste dealing with the grief of not completing a simple task such as filling out a change of address card.

A lot of the press today is states that interest only loans are “bad” and that they should be avoided. Instead, let’s examine why you might want to get an interest only loan. Once you understand how the typical product works, you can make your own educated decision. Think of your mortgage as a financial instrument that needs to be managed and integrated with your other financial goals.

A conservative example of an interest only mortgage product allows for ten years of “interest only payments”. The repayment period of the loan is traditionally 30 years. The interest rate is fixed during the entire 30 year repayment period. This loan offered through lenders selling to Fannie Mae. Fannie Mae is a government sponsored entity. They are very large and significant purchaser of loans, so you shouldn’t have too much trouble finding this loan. Most mortgage brokers will be able to offer it to you. This loan is one of our favorites-Minnesota mortgage broker Venture Development-http://www.ventureloanapp.com/interest_only.html

This loan product allows the first ten of the thirty years to have payments based on just repayment of the interest or “interest only”. After the initial ten year period, the outstanding remaining balance, often the same as it was in the beginning, needs to be amortized and paid off. You now have a 20 year loan, which represents the remaining time left on the mortgage. The interest rate remains the same as the initial rate. There was NO change in the interest rate. There is no interest rate risk. The only variable that changes is the amortization period, having gone from 30 to now 20 years. If you want interest only payments again, simply refinance. In fact, there are no prepayment penalties to pay off this loan.

How can an interest only mortgage be a good thing? Your mortgage payments are less than a traditional amortizing loan. The actual payment differential is about $100 per 100K borrowed. This means you can get the home you want for a lower payment. This allows you to allocate the “savings in payments” into other places. One good place might be your retirement plan. For example, maybe you are not taking advantage of a retirement plan at work or the employer match. Salary deferred into a retirement plan is generally on a pre-tax basis. This allows you to pick up the differential in dollars that would have been lost to taxes. Instead these tax deferred dollars are compounding in your retirement plan. If you are able to pick up the employer match where you hadn’t before, you effectively are earning up to 100% on your deferred dollar, assuming the match is dollar for dollar.

Interest only payments enable you to buy a larger home with the payment you find comfortable. This generally translates into 20% more of a home for the same monthly payment. This extra 20% of buying power might allow you to “buy up” to what you really want. Getting more of what you need in a home will allow you to remain in that home longer and build more equity. Moving often may strip you of a lot of your potential equity due to the costs involved in buying and selling a home.

You can’t deduct principal. At the end of the year, your lender will send you a 1098. This form represents the amount of interest that you’ve paid in the previous year. This is what you may be able to deduct on your taxes. Principal repayment is never deductible and may actually accelerate the loss of your “tax deduction i.e. mortgage interest” by reducing the outstanding mortgage balance from which interest is calculated.

You may be able to earn a higher rate on your invested funds than the rate you are able to borrow money at for a mortgage. This is mortgage interest rate arbitrage. This is why you might want to borrow as large a mortgage as you feel comfortable maintaining and invest your equity somewhere else. Following this strategy, you are doing the same things that banks and insurance companies participate in. Last time I looked, it worked pretty well for them.

Your equity due to appreciation grows the same way regardless of how you finance a home. Equity growth is based on the appreciation of the underlying property. Consider this: if you can buy more of a home with an interest only loan, and if all homes appreciate by the same percentage, then you will gain more equity from the home that initially costs more. The equity that you are building through amortization by paying down on a mortgage is really just a “forced” savings plan. It may be possible to take these payment savings that you pay into the “forced” savings plan and instead invest them into some alternative investment that will appreciate at a higher rate. If you should want your home paid off or paid down in the future, simply liquidate this alternative investment and apply it to your outstanding mortgage balance.

What are the negatives? You might be able to argue the other side of the advantages I’ve outlined, but I think you would be remiss. For example, you could argue that there are no alternative investments that offer a higher rate than the net rate you’re paying on your mortgage based on the risk you are willing to take. This might be the case for the most conservative. If that’s the case, I still think the other advantages provide enough reasons to consider an interest only loan. To be objective there might be one risk to consider. If you don’t think you can make the mortgage payment after the interest only period and you feel that in the future you might not be able to refinance or sell your home, for whatever reason, then you should stick with a traditional 30 year fixed conventional loan.

Who would have thought that Countrywide would have been bought for approximately $7.50 a share? This is an example of over leverage and a toxic portfolio of non performing debt. Countrywide was too agressive in their lending. Now it is their demise. Bank of America may have bought gold or “fools gold”-only time will tell.

Many people are kept out of the housing market due to lack of sufficient down payment and/or funds available for closing costs. Yet these potential homeowners can afford to make a rental payment that would be equivalent to a mortgage payment. In fact, the lack of resources keeps veterans renting instead of becoming owners as they try saving money to buy a home. Meanwhile home prices continue to appreciate as housing continues to rise in cost.

Here is where the Veteran Home loan program excels over competing loan products. VA mortgages allow for a home to be financed in one loan up to 100% of the acquired home’s value. In addition, the seller is allowed to pay most-if not all-of the closing costs and prepaid items. This means little to no cash out of pocket. Most housing types are eligible: residential homes, condominiums, townhouses, manufactured homes, new construction and even 1-4 unit rentals (additional conditions apply). If lack of available funds is the issue preventing home ownership, VA Loans offer the solution.

Still, very few veterans take advantage this type of mortgage. It is a shame that more veterans don’t familiarize themselves with this benefit. The interest rate is the same or lower than most conventional financing. The mortgage products offered range from 10-30 year fixed rate mortgages, ARM’s (adjustable rate mortgages), and even temporary buy-downs are allowed. The eligible loan amount is the same as a conforming conventional loan-currently at 417K. In addition, VA financing can be used for refinancing existing homes. As you can see, the product isn’t the problem. The product is as competitive as most that is available. The lack of awareness is the problem. Ask your mortgage broker or lender to explain your options. If they don’t offer the VA mortgage, then find someone who does. We at Venture Development offer VA loans-
http://www.ventureloanapp.com . In the end, you may end up with a conventional or FHA loan if these products are better suited for your situation. Until you compare mortgage options you won’t know what is right for you.

Another advantage of a Veteran mortgage is the flexibility found within the underwriting process. Employment history is very flexible. Credit for all types of mortgages is more stringent today than in the past. That being said, the focus is going to be on the last 12 months of payment history. Underwriting can use alternative sources of credit such as utility bills and cancelled checks if the credit depth is weak. A prior BK or foreclosure is also forgivable. Depending on the type of bankruptcy, you would be eligible one to two years following your discharge date if you’ve reestablished positive credit.

Who is eligible to obtain this loan? Many veterans and even some of their spouses can obtain a veteran mortgage. Here is a very short list of who is eligible: Veterans who served during WWII, Korean Conflict, Vietnam War, or Persian Gulf Conflict AND who have served 90 days of active duty, or have been honorably discharged, or were National Guard/Reservists activated. Veterans with service during Peacetime periods and active duty military personnel must have had more than 181 days of consecutive active service before becoming eligible. Reservists and National Guardsmen are eligible after 6 years of enrollment in a selected service. There is even a program for non active duty spouses. Consider this: an un-married spouse of a veteran who died while in service or from a service connected disability or a spouse of a serviceperson who is considered MIA/POW for at least 90 days are also eligible.

Veterans have spent a part of their live defending our way of life. Freedom isn’t free. Why shouldn’t they be allowed to participate in the very same American Dream that they selflessly protected for you and me. The VA loan was created to help those that have helped all of us. Collectively we can spread the word about the benefits of this unique type of loan.

A friend of mine started a group in the Twin Cities called the Internet Practioners. Hi name is Daniel Prins. You can join his online group at http://www.internetforum.ning.com We also meet monthly for lunch to discuss ideas. It is free to join-the only cost is your lunch. Dan has assembled a FREE downloadable ebook giving all of his tips and techniques-absolutely nothing to buy. Here is the link