Mortgage Matters

Here are some of the most asked questions concerning the recently enacted economic stimulus law that contains the NEW tax break for many homebuyers… please be aware that I always recommend that you seek the advise of a professional tax preparer, to make sure you are getting the best tax advice.

Q: Who can claim the credit as a first time home buyer?

A: The IRS says you may be eligible if you bought your main primary residence home, located in the United States, after April 8, 2008, and before December 1, 2009.   And if you and your spouse, if you’re married, or if you’re single for that matter, haven’t owned any other primary residence home during the three year period ending on the date of purchase.  You may be eligible even if you owned a home for many years before that period.  Please be aware there are other considerations for qualifying as a first time home buyer.

Q: Is the tax credit $7500 or is it $8000?

A: That depends on when you bought the home and other factors relating to your income and the home purchase price.

If the purchase of your home was during 2008, the maximum credit you would qualify for is $7500.  Now this would also depend if you filed separately or jointly.  If you are married, filing separate, then the credit would be half this amount.  And even though it is called a credit, it is actually an interest free loan, and the payback should occur over the next 15 years.  Now this assumes that you would pay back the amount in equal payments over the 15 years.  If your payback meets with any other schedule, then there are different rules that would apply.

If you purchase a home in 2009, then the $8000 is actually a tax credit, not a loan, as there is no repayment schedule to adhere to.  If you are married filing separately, then you would be entitled to half this amount.  Now if you were to sell the property within 36 months of your acquisition, you would need to know that the interest free loan may not apply.  A lot of buyers ask about whether they purchased the home in 2009, but want to apply the tax credit to their tax return for 2008.  The IRS interpretation is that this can be done, however keep in mind that if you purchased your home in 2008, you will be limited to the $7500 that is to be repaid.

Q:  What are the income limits?

A: If your adjusted gross income is $75,000 or less filing married separately, or $150,000 or less filing married jointly, you should qualify, although please be aware about the adjusted gross income with modifications.  There are certain limits to income, so you may not qualify if your income exceeds amounts of $95,000 if filing separate and $170,000 filing married jointly.

Q: What type of home qualifies for the tax credit?

A: This includes just about any home that you would live in as your primary residence.  This would include a manufactured home, a house boat, a trailer house, a condominium, a cooperative apartment, but these are not the limits to what types apply, and if you think you are outside the normal range of property types, it is wise to consult the IRS for guidance.                                                                                                                                     

Q: What form do I use when filing my return?

A:  Form 5405.  This form has been revised as previously mentioned; the tax credit used to be $7500 in 2008, and now is $8000 for the home purchase in 2009.  Any forms you will need can be acquired on the IRS web site www.irs.gov.

Q: What if I don’t owe any taxes?

A: If you owe no taxes and purchased a home in 2009 as an example, then the credit would be applied to any refund that you would receive.  The same applies to if you already filed your 2008 tax return, and you are getting a refund, then you would receive the additional funds by filing an amended return and use Form 1040X and simply attach Form 5405.

Q: Should I buy a home this year, should I file for the tax credit on my 2008 return or on my subsequent 2009 tax return?

A: Generally I would say that the sooner you could get the money the better.  Professional tax advice is highly recommended, as your situation could change in the calendar year of 2009, and your tax preparer and you could discuss your options.  Of course this could also be the reverse, that if would be better to file for the tax credit in 2009, if your circumstances such as income were to change.  Say your income was too high in 2008, and then it changes in 2009 to be lower, within the guidelines.

I am always thrilled to be able to talk to home buyers especially first time home buyers.  My delight is in sharing my thoughts and advice on a subject that I am very passionate about, arranging the absolute best financing package, for my clients. 

A lot of first time home buyers, don’t have a clue about how mortgage rates are determined, really.  I believe that if one does not understand the make up of how mortgage rates are determined, then it is extremely important that the mortgage person that they are dealing with has this experience, this basic knowledge to give the best guidance to the client.  My reasoning is very simple.  If the person that you are entrusting, with possibly the biggest investment in your life, the financing of your primary residence, does not understand how mortgage rates are determined with certainty, and or competently explain this to you; you, the would be client, will not be getting the proper guidance.  Another simple way to but this is, the blind leading the blind.  Don’t get me wrong, there are a lot of qualified lenders, true mortgage professionals that really understand the how and why of mortgage rates. There has been a lot of publicity about the subprime loan debacle, and who is to blame for all the bad loans out there in the country.  Mortgage brokers have the likeability and competency rating, somewhere just under used car salesman, all due respect to all the true quality car sellers. I will never forget how I was introduced to about 200 real estate investors at a workshop in Houston, about a year ago.  The person that introduced me, asked this question to the audience. “Let me see a show of hands, who of you feel that you did not get really good advice from your mortgage broker when you purchased your first property?”  The show of hands was overwhelming.  Needless to say, it took a while for the crowd to warm up to me. 

So the real question is, how do you, as a first time home buyer ferret out this information, so you do get a true professional to give you the experience you so dearly need.  The most important question, that anyone looking to finance or refinance can ask when getting together for the first time with the mortgage person is to ask that person to explain this cause and effect.  Like a lot of other businesses and industries, the 80/20 rule is very applicable; at least that is what I have found consistent when I talk to clients.  Actually, I do find that over 80% of home buyers where not told about this, and that is probably because their mortgage person just unfortunately didn’t know this themselves.  My contention is - if every last one of these home buyers that were victims of the subprime home loan debacle, got into a loan product that was not good for them, if they would have qualified their mortgage person, they probably would not have gotten involved in the toxic mortgage loans that so many millions actually did, and wish they hadn’t. 

The good news right now is that rates are exceptionally good, as compared to historical statistics.  I find that most young home buyers, born in the late 60’s and 70’s, weren’t around enough to know what rates where doing during the late 70’s and early 80’s.  It just wasn’t on their radar screen, as compared to kindergarten, elementary school, and pre-teen adolescence.  In other words, they were just being normal kids, adjusting to society.  So the fact that rates were in the 13 to 15% range, for people with good credit, is always something that is taken in by an unbelievable reaction by the looks on their faces.  Why would anyone get into a home loan at 15%?  Why does anyone buy a cup of coffee for $5?  Answer is:  that is what it cost if they want one.  The coffee analogy is somewhat misplaced, so this assumes that the only place to get coffee is Starbucks, and they don’t sell regular coffer in small cups.  Answer is:  That is what the market price on home loans rates where at that time.   If you wanted a home, that was the best rates at that time.  And history tells us that there were a whole lot of buyers back then.  And there are a lot of lessons to be learned from this.  Ask most people that purchased and I think that what you would learn is that they would tell you that this was one of the best buying opportunities that they ever had experienced, and what a wonderful benefit it truly was for them.  One lesson is you really can’t time the market when it comes to mortgage rates, just like you can’t time the stock market regarding bottoms and tops, levels of support and resistance.  There are many factors that would determine your motivation to jump into the market.  The good news is if rates are really high, you will have amble opportunity to lower your rates and refinance when rates drop.  And that opportunity is now presenting itself today, actually, right now. 

I am always honored to go into detail about the foregoing, as I do for all my clients.  It is important for me to not only have this information, but to be able to communicate this to my clients, so that they have this information and understand it, for their own real benefit.  For all my clients, I show them how to protect themselves, actually guaranteeing them the lowest rates in the market, no matter what the market is doing. 

It seems that we are still at an impasse.  We have injected billions upon billions of funds to try to get the banks to lend to each other and encourage the flow of funds to provide liquidity to the market.  Unfortunately, not only is this not the solution, it only exacerbates and prolongs the situation that we face today.

You see, what is happening today is somewhat of a dichotomy in the economy.  There is a liquidity issue, but then again there is not.  What is causing the lending institutions from lending capital is not a lack of it.  To the contrary, they are flush with cash.  The issue is valuations of assets that are on the books of all who cosumned mass quantities of toxic notes.  First, do we really know how much is out there in the first place.  The next issue is, at what price is the acceptable price at which the value of that asset really is?  If the government offers to low a price the holder of the note is not willing to accept.  Furthermore, there is fear that if low valuations are realized, then the insolvency of many intuitions is at stake. 

So the real issue, the bedrock of the larger issue of the frozen fearful market is one of absolute valuation.  Accounting issues aside, whether you debate mark-to-market or fair market value, we at least will agree on the premise.

Accepting this, we must accept another fact in reality in the market of which we partake, that being one of an open market, one free of restraint and encumbrances.  That issue is what we all have learned in our life through real life economics 101.  And that is – that something is only worth what someone else will pay for it.  Simple.  Right now, billions upon billions of assets are sitting with no market interaction.  These notes are not only not performing, but are cause and effect crippling not only our economy, but the entire global economy, with no end in sight.

I say that these assets have value, and sitting vacant waiting to be sold, when the lending institutions are hesitant to not lend simply causes a continuous loop that is an endless cycle of dilemma and revolving causation. 

First let us identify all the non performing assets, the actual collateral that is out there, now.  Every institution that holds such assets on their balance sheet, present this collateral to the Federal Reserve and or the Treasury.  These items could go into a common entity, funded by investors that want to fund the management of these assets for the good of the investors, and holders of the original notes.  The management of such assets should not be done by any government agency.  The will only complicate the issue, as they are neither in the business to run these type of endeavor.  Let the market run this entity, by willing investors that will sell, rent, change, do whatever to make value where no value is perceived today.  The holders of this toxicity on their balance sheets have nothing today.  No value, no benefit, and to the contrary are actually frozen.  Let us thaw out by putting the free market to work, as only the free market can.  It will find a value.  Today, investors can invest in the equity market or they may choose to invest in these real assets, but at the present time, the market is not working.

Now understand, whether these assets go into a company with a stock offering composed of willing investors, or is even controlled by a resurrection of the Resolution Trust Corporation, these assets have to be identified, and managed back into a worth at a value.  I truly believe that this is a step toward getting to the root of the problem. 

And just what are we doing bailing out Rick Waggoner and GM?  This company does not deserve to be bailed out, and actually should be let to fail like any other company / corporation.  We are headed in the wrong direction.  Additionally, I have had many clients in the last month, contact me with concerns about the safety of their money, and what to do with their cash.  I know what they are asking me, and that is, “Should we bury our cash in the backyard, or should we leave it in FDIC insured accounts, money market accounts, or actually T Bill, T Note or T Bonds”?  I believe you must weigh everything with regard to risk and liquidity for your own particular situation.  However, if you are expecting to retire in the next 2-5 years, and you are 100% vested in equities, I would say you should not have been in this position in the first place.  Many of you know that because of what the Federal Reserve was not saying, AND NOT DOING over a year ago; the collapse of the two Bear Stearn hedge funds late last summer; and my continured skeptism that the Fed and the Treasury are not on target, make me a spectator in the equtiy markets, as I got out of the stock market entirely last year.  (See my earlier comments on Countrywide Fiancial that occured in September of ‘07.  I sincerely believe that real assets are going to have the best appreciation, and make the best capital investments.  Be prepared to take advantage of the coming situations, that are being caused today.

“Who or what are they, and what do they have to do with me, and getting a loan with a low interest rate?  This is what most borrowers are saying or thinking when the are trying to get a home loan to finance their purchase.  How do we know that this is the thought of a big majority of prospective buyers in the market today?  Well, that is because we ask them, and this is what they tell us. 

As I speak with borrowers across the country, I get a keen sense of what are the thinking, by a dialogue and communication.  Many are first time home buyers.  Even many experienced buyers, those who have gone through the loan process to at least 2-5 times, seem somewhat ambivalent to these entities, and how it affects their loan, their loan interest rate, and how does all this have relevance into a overview of their financial plan and strategy for loan term financail goals.

Fannie/Fannie Mae and Freddie/Freddie Mac, are the two GSE’s (government sponsored enterprises) that buy the paper that is created by the loan process, the debt, and sold to third party investors.  This action keeps the ”wheels greased” in the financial home loan business, and making the firms that originate whole again, by replenishing those funds, letting the originating lending source, to go out and do it again.  Fannie and Freddie, are not only the biggest buyers of this debt, but they underwrite the loan, regarding the approval process, and the guidelines that are followed, in order to conform with their requirements, and thereby making its process flow as smoothly as possible, to ultimately make profits.  

Fannie and Freddie have always had the implicit guarantee that if they needed, the Federal Government, would step in and come to the aide of these companies, in the event that this would be necessary.   They are not government agencies.  They are public companies that you and I could buy stock in, just like Dell Computer, Target Stores, or Coca-cola.  The differences are inherent in the nature of what they do and how they affect so much of our economy.  I mean, if the manufacturers stopped making computers, Target went away as a retailer, or the world could not get a can of the Coca-Cola, this would have an impact on many people, especially to users of those products, but the world as we know it would go on.  And most probably, others would come into the market and make products that would satisfy the demand, as a substitute to the “real thing.”

I oftern ask my clients, “You probably have heard on the news, or read in the paper about the current state of affairs in the  real estate, and mortgage market?”  You would have to be living under a rock, or in a third world country, to not have heard about all the commotion about all the foreclosures that are happening, and have been going on for quite some time.

It is interesting, to say the least, to hear the comments of buyers/borrowers when I ask this question.  A woman in New Orleans stated that she had no idea what I was talking about.  Yet an enlisted military officer, returning from Iraq, told me that he was aware of these events through news rebroadcasts and by the Internet.  A large percentage of buyers that admit knowing of these events, are generally the same people that are trying to buy a foreclosed home.  Good for them, they are paying attention.

The ease and access to credit will be affected by all of these events.  Lenders, investors, those that purchase this debt to make a return on their investment, understandably don’t want to loose money.  With all of the billions of dollars in losses, it is understandable that the largest buyers of this debt, don’t want to take on more losses.  So, like any prudent business, it will try to limit this in the future.  Fannie and Freddie will change the way they did and do business to stem the losses, as well as all the investors.  They will do this by tightening their guidelines, and make loans to would be home buyers, to the best risk customers that they can.  But at the end of the day, even if Fannie and Freddie take on losses, they know they will get bailed out.  Where is the incentive?  At a different time, I will discuss the cause of these events.  Today, I am simply trying to make common buyers/borrowers understand the realities of today’s market. 

I use this analogy when discribing these events.  You and a close friend, travel to Las Vegas on a two day stint, or binge, you might say.   Taking the red eye shuttle, you arrive and immediately go to gamble with all the money that you have taken.  The beds in the rooms you have reserved, will not be slept in.  You are spinning in the world that you are in, simply putting up bets, over and over.  At the end of the second day, your friend taps you on your shoulder and remarks, that it is time to cash in your chips, the return flight home is getting near.  For the first time, you will get a true and correct indication of how your gambling/ and or investing did.  Stark, butal reality.  Wall Street did a very similiar thing, and some term this a binge.

You see, across the county, the collateal for the loans, the properties themselves, will need to clear at a price.  And if lending standards continue to tighten, one can theorize that this may cause a domino effect, whereby, if more people can’t get approved for a loan, who is going to buy these properties, and won’t this take longer to have these properties sell.  Well, yes and no.  So far we have seen the holders of the securties, reluctant to sell and actually realize the loss.  This term you hear on Wall Street called, “mark to market.”  And the contracts between the servicing agents that collect the mortgage payments, and the covenants signed by the mortgage backed security owners, have stipulations inherent in those agreements, that have made it difficult to establish the authority to discount the property, and alter the profit structure of the original MBS agreements.  Wall Street’s bet on one main concept, that the properties that they loaned money on, would go one direction, up.

We have seen these events in history before.  The savings and loan debacle in the eighties. The Long Term Capital fiasco of 1998.  And we will see similiar events in the economy happen again, as we learn that history does repeat itself.  Bubbles in the economy happen, and then they retract.  It is my firm opinion, that willing investors, be it private individuals, or by large hedge funds, REITS, etc., will enter into the market and purchase the excess inventory at a price.  Then we will know what the true value of these assets are worth.  Simply put,  what someone is willing to pay for them, based on market conditions.  The fact that we started to see these signs since the end of 2006 (values of property in California, Florida, Arizona started to go flat or down).   New Century Financial went down faster than a speeding locomotion, filing bankruptcy April 2, 2007.  Two large Bear Sterns hedge funds go out in the late summer of 2007.  Look at what happened to Jimmy Cayne, once the head at Bear Sterns.  Some people theorize that his card game that summer, was undoubtedly the most expensive game ever played… bridge (who would have thought that)?  Or Stan O’Neil, top dog at Merrill Lynch, both no longer with their respective companies.  One company totally out of business, one still hanging in there.  And we have seen billions of dollars, each quarter, continuing to be written off by almost every player in the market.  I have previously commented on Countrywide Financial.  Contrary to statements made in denial of any problems, Angelo Mozilo and group, were rescued by Bank of America, or they would have certainly seen bankruptcy, as one Merrill Lynch analyst predicted. 

Fannie and Freddie are coming out of a period of years of bad accounting practices, too loose government oversight, and yet when the opportunity to recapitalize these companies and or basically shut them down, and reform them for the good of the ecomony, we are still in capitulation on this taking place. Henry “Hank” Paulson, Secretary of the Treasury, is in favor of leaving them in place, not wanting them to be taken over with an explicit quarantee of the governement/ the American tax payers.  Oversight watchdog for Fannie and Freddie,  OFHEO, Office of Fedeeral Housing /Enterprise Oversight, has now been regrouped to the new Federal Housing Finance Agency.  And the best of luck to James Lockhart, the watchdog’s top dog.  Unfortunately, all the kings men have a terrible track record for overseeing these huge companies.  Relevant questions, like, “Why should these companies continue to pay out hugh salaries and perks to its management and upper executives, when they not only make bad decisions, and still have the implicit quarantee of the U. S. taxpayers?”  “Why should these companies be allowed to lobby the very people (your elected officals in Washington D.C. ) that seemingly keep them in place, by spending millions of dollars in campaign contributions?”  What the heck is going on here? 

So, when I try to explain this to borrowers, ultimately they tell me they don’t want to hear about it, they don’t really want to know.  “It is all so boring”.  Well, it probably is until it is your turn to get a home loan, and you may not be able to get one.  The credit crunch is a bad event, but it is especially catastrophic when it affects you or yours.  Bubonic plague was a terrible diseasse.  But it was especially bad when it happened to you and your neighborhood, i.e., the massive foreclosures in may pockets of the country.  All the world’s bad events, disease, hunger, financail crisis, are terrible,  and they begin to get resolved when the world started looking beyond and simply asking the question, “What is going on here.”  Only when a majority wake up and find out what is causing this problem, and let’s cure it once and for all, will we solve the problem of Fannie, Freddie in the “real world”.

It was April 4th of 2007, that I attended a luncheon that featured the president of the Dallas Federal Reserve, Mr. Richard Fisher.  You know, the rubber chicken lunch served to several hundred interested banker types, at the Austin Mortgage Bankers Association.  But we weren’t there for the nutritious lunch, as we were wanting to feed on the thoughts and intellect of one of the voting members of the Federal Reserve, that shapes and influences our entire economy. 

The text of Mr. Fisher’s speech, if you are interested in reading it, and I recommend that you do, will be at the end of this post.  So, at the conclusion of his speech was a small window for questions from the audience.  After a few questions, as I thought about the context with the fresh meaning of his words, I was enlightened and embolden to ask my question.  

I followed the gal that asked “Mr. Fisher, what will the Fed do regarding interest rates”?  Of course, this got a round of chuckles from the audience, as she knew that this would probably be the response.  And although I don’t recall the answer he gave, it was delivered back in the same manner, lighthearted.

So there I was at the microphone with Reuters, and Thompson services there all waiting and watching.  I introduced myself, and humbly thanked Mr. Fisher for being there, and having the opportunity to engage me with my question.

“With the understanding that liquidity certainly has stimulated demand, and caused valuations to run up in many areas of the country, certainly on the east and west coasts, and other areas, can the Fed, should the Fed, or will the Fed do anything to prevent the opposite effect from taking place, (valuations going down) as to cause a systemic problem in the economy that could lead to contagion for the financial market”?  “And to give everyone a sense of numbers and dollar amounts, New Century Financial, a large subprime lender had revenues for 2006 of $500.6 billion dollars.  As of today, they are not conducting business, and the likelihood of having to file bankruptcy look very probable.  And being an avid golfer, I read that all of golf’s global revenues proported for 2007 was predicted to be $580 billion”.  ”New Century is one of a handfull of companies that have imploded, and it looks as if there are many more to follow”.  {end of my question and statement}  [ I read alot, and being a golfer, I remember things like this that I'm interested in, although I must say, that I have never verified either dollar amounts.  On New Century, unfortunatley, I was getting a pay check with their name stamped on my compensation, but I promise I didn't have anything to do with the subprime loan debacle.  As a matter of fact, I always found New's guidelines tougher than say Countrywide's or as those in the biz warmly refer to them as "Countyslide"]. 

Now here is where it gets kind of interesting for me.  Mr. Fisher, as I recall, said that he would not make a comment regarding a publically traded company and its financial position, or something to that effect.  [Not that I was looking for his comment on New, but rather simply to give a sense of what kind of numbers we were talking about]

He went on to say that “We will never look to one asset class, on how we (the Fed) deal with inflation”. 

Huh?  Inflation, I asked myself, what inflation.  Retorically, I understand.  But that is not and was not what I was talking about.  You see, at the time, being in the business, we could tell that there were a lot of bodies to fall, and in April of 2007 was just the start of the epicenter, that was certain to occur.  Certainly someone as smart and intelligent as Mr. Fisher is, and being a member of the Federal Reserve, he was certainly more in touch with what was really going on, than say your run of the mill grunt, originating home loans in the market?

Well, when I read and hear that the Federal Reserve is “looking in a rear view mirrow”, I now have a differnet perspective on the meaning of that saying.  And I have asked Scott Eggen, a vice-president with our mortgage division, that if he ever bumps into Mr. Fisher, (since both live and work in Dallas), to ask him my question again to see what answer he gives.  (My bet, in all due respect to him, would probably be different, I trust.  But of course hind sight is 20/20!

Why this is important, needless to say, is that sometimes, one needs to know where we have been to understand where it is that we are needing to go.  When speaking with a mortgage consultant, it is so bloody important for the consultant to understand risk based pricing, and market conditions, and to communicate this to the prospective buyer/borrower.  This way the buyer/borrower will get the absolute best advice for purpose of the home loan and wealth planning for American families and individuals.

  Read all »

Welcome to WordPress. This is your first post. Edit or delete it, then start blogging!