The Portland Housing Bureau is preparing its budget, and wants to know what YOU think its priorities should be for the next fiscal year. Please take 5 minutes to complete our survey at fmrsurvey.com/DHM/BHC2/BHC2logn.htm. Feel free to forward this email to other interested parties, and please excuse any duplicate distributions! Thank you!

For more on the Portland Housing Bureau’s FY 2010-11 budget process, please visit portlandonline.com/phb/budget

Homebuyer Alert…

For prospective homebuyers who are on the fence about making a home purchase, the next few months represent a countdown of sorts for two reasons.

The first of these, the coming expiration of huge tax incentives, may be a bit more obvious to most borrowers. April 30, 2010 is the last day to enter into a home purchase contract and still potentially qualify for a federal income tax credit of up to $8,000 for first-time homebuyers and up to $6,500 for repeat homebuyers. The credit can be claimed only on contracts that close by June 30, 2010.

Secondly, beyond the waning benefit of the Federal income tax incentive, another form of stimulus will soon disappear, as the Federal Reserve winds down a program that has been keeping home loan rates artificially low.

Rate Alert…

The lowest rates of 2009 were driven down to their attractive levels because of the Fed’s Mortgage Backed Securities (MBS) purchase program. Home loan rates have an inverse relationship with the value of MBS. When these securities trade higher on the market, rates move lower and vice-versa. So when the Fed originally agreed to be a big buyer, it helped provide a market for MBS, which helped keep prices high and, as a result, helped push home loan rates low.

And while the Fed continues that program through the end of March 2010, the reality is that the Fed‘s “extension” was really more of a rationing intended to prevent home loan rates from spiking as the program is phased out. It’s sort of like weaning the market off of its life-saving treatment instead of forcing it to go cold turkey.

Already, some in the media have mistakenly reported the extension of the program through March as good news, telling consumers that rates will continue to decline, and remain low into the spring. This gives a false sense of security that homebuyers and refinancers simply cannot afford.

The problem is…

Those reports do not accurately report what’s going on or where rates are really headed. That can have a very costly impact on consumers who may miss out on historically low rates if they listen to these media outlets.

Here’s what’s really going on…

In May 2009, the Federal Reserve’s purchases of MBS peaked at an average of $25 Billion per week. As of November, the average weekly purchases dropped down to $14 Billion. At the end of November, the Fed had already used over 80% of the allocated funds for MBS, meaning less than 20% remained to be used over four months.

Making the problem worse is that the Fed now has less money available to purchase MBS while at the same time, the supply of these securities has increased as a result of refinance and purchase activity that was triggered by lower rates.

Why is that important?

As the Fed now has fewer funds to last through the remaining months of the program, its ability to keep rates low will wane.
As the Fed’s program winds down and ends, we’ll likely see two things happen.

First, we will probably see higher levels of volatility—with rates sometimes shifting dramatically in the middle of the day. That means it is more important than ever for buyers to work with a knowledgeable mortgage professional who has a finger on the pulse of the market at all times and can provide trusted, proven advice.

Second, since MBS will have less support from the Fed, rates are likely to rise over time.

In short, while rates are still very good, they may not be for long.

What should you do to protect yourself?

First and foremost, work with a knowledgeable mortgage originator who studies and monitors the market.

Second, don’t be fooled by media stories that only report the headlines and don’t understand the underlying implications of the Fed’s actions. If you ever hear something in the news but aren’t sure what it means to your situation, feel free to call or email me for in-depth answers and advice.

Finally, if you haven’t yet explored how the current rate environment might benefit you or someone you know, let’s arrange a time to sit down and discuss your unique situation as well as your short- and long-term goals. Remember, rates are still very good, but they may not be for long.

**Reprinted courtesy of Cecelia Kern of Mortgage Trust.  For more information contact me at kathryn@kjkproperties.com.

EXCHANGE COMPANY REGULATION

TAKES AFFECT IN OREGON

Beginning January 1, 2010 Oregon requires exchange companies to: 

·         Maintain a fidelity bond of $1.0m or, in lieu of a bond, hold the funds in a qualified escrow or trust.

·         Maintain errors and omissions coverage of $250,000.

·         Invest funds in accordance with the prudent investor standard.

·         Prohibits the exchange company from loaning funds to any related entities.

·         Prohibits commingling exchange funds with operating accounts.

This is a requirement of lending.  Lenders do not like to see “flipping,” and require that the title “season” before they will loan on the property.  Without seasoning, the lender cannot package the loan for sale on the secondary mortgage market.

The secondary mortgage market is what we commonly hear called “Fannie Mae” or “Freddie Mac,” two of the largest buyer’s of mortgages in these times.

Recently I learned that this even includes an investor who transfers a title in and out of their LLC for lending or liability purposes.  Doing so renders a buyer unable to obtain a loan, no matter how long the “real seller” has been a constructive owner.  The law only cares that the title transferred.  This is a serious point to consider.

Why would this matter?

If the loan cannot meet underwriting guidelines the lending fails.  The lender won’t loan, the mortgage insurance company won’t insure the mortgage, the lender can’t sell the loan.  All around it makes selling a property impossible unless it is a contract sale, a loan that doesn’t require mortgage insurance (such as a 20% down mortgage), or a cash offer.

For a lenders description of this, I obtained the following explanation from Cecelia Kern, of Mortgage Trust:

“Purchase transaction require the subject property be owned by the seller for at least 90 days from the date of the purchase agreement unless the seller meets one of the following conditions:

Individuals, companies or investors who purchase foreclosed properties and sell them are not eligible for this exemption.”

(November 6, 2009)

Q.  Can a buyer have a provision in their offer on a short sale that says the seller cannot submit other offers to the lender until the lender has decided on the buyer’s offer?  What happens if the seller gets three such offers, each with the same clause?

A.  Sure the buyer can have such a clause.  The question is what will happen if they do?  Short sales are seriously misunderstood and difficult transactions.  There is tremendous ambiguity and uncertainty for both the seller and the buyer in a short sale.  The seller wants to avoid foreclosure and may not care much about price.  The buyer wants a deal.  Neither needs the uncertainty associated with an ongoing bidding war conducted by serial offers being presented to some distant, unresponsive, disinterested, overworked employee of a troubled lending institution.  The clause you reference is just the kind of thing you’d expect a buyer seeking to reduce uncertainty would come up with in such a dysfunctional market.

Whether a seller can or should accept an offer with such a clause depends on the situation.  In a short sale, offers are going to be contingent on the seller getting the lender’s consent sufficient to clear title.  That means two agreements.  One is the real estate deal between buyer and seller.  The other is the agreement between the lender and the seller regarding the seller’s debt to the lender.  Making the real estate deal contingent on the seller/lender agreement doesn’t make the lender a party to the real estate deal itself.  The seller therefore retains the right to accept or reject any offer on any terms.  Retaining a right doesn’t, however, mean the seller can do whatever they please.

Whether a particular seller should (normative question) accept an offer with such a clause depends first on the seller’s position.  If there is a chance the lender will demand a personal note for the deficiency, or the seller’s taxes will vary with the deficiency, the seller may have no reason to accept such an offer.  On the other hand, if time is short and the size of the deficiency doesn’t matter that much to the seller, they may like the idea of one offer.  It is, in the first instance, their call. The concern, of course, is that accepting such an offer may somehow defraud the lender or involve the agents in misrepresentation.  Everyone is, and ought to be, a little paranoid about lender fraud after it brought down the whole real estate market.

Fraud and misrepresentation by silence require hiding material information.  A seller negotiating with a lender regarding the seller’s debt to the lender owes the lender the duties of good faith and fair dealing. They cannot hide information from the lender that would be material to the lender’s decision regarding the debt.  Here, that means they could not deliberately hide subsequent better offers without the lender’s knowledge.  In this case, however, that is not a problem.  If the seller accepts the offer, the single offer submission term will be contained in the offer forwarded for the lender’s approval.  If the lender doesn’t like that approach all they have to do is say no.   Of course, that may take a month or two and by that time the seller may be foreclosed, but that just takes us back to the normative question of “should” the seller accept such an offer.

The “two agreement” nature of short sales means the seller must consider both their own needs and their duty of good faith and fair dealing to the lender.  Their own “needs” means answering a context-specific normative “should” question.  Once the seller has that answer, the issue becomes their obligation to deal honestly and fairly with the lender.  That can be done just by submitting the offer with the “one offer clause.”  It could be done by working with the lender ahead of time to determine how to handle such things.  That can be done by phone and confirmed by email.  Remember, on the seller/lender side we are talking about disclosure of material facts relevant to the seller’s debt to the lender.  All that means is not hiding important things from the lender.  The single offer presentation clause is actually an easy one because the disclosure issue is taken care of by the provision being presented to the lender in the offer.  It is secret procedures like unilaterally deciding to take backup offers and submit them serially to the lender without the lender’s knowledge that may cause real problems.

Alright, so what about the multiple offers all with the same single offer presentation clause?  It’s the same thing.  First the seller deals with the offers as offers.  A seller with multiple simultaneous offers will normally reject all offers and ask each buyer to make their last best offer.  It doesn’t matter if the buyers come back with last best offers that all contain the single offer presentation clause.  At that point, the seller will (assuming it is in their interest to accept any offer with such a clause) simply accept the best offer and forward it; just like they would had they received only one offer.  It is just an application of how to deal with multiple offers coupled with how to deal with short sale negotiations.  For more information, you should read the new “Dealing with Multiple Offers in Short Sale” section of the Oregon REALTORS® Risk Management Toolkit.  Contact me at kathryn@kjkproperties.com if you’d like a copy.

As the owner of real estate assets that have been used and abused by the current market, I have had the opportunity to evaluate my long term goals.  I have always used the business mindset with the belief that my rentals can pave the path to retirement down the road.
 
Have you evaluated your own real estate holdings?  Are you the owner of a house you would rather see “sold?” Are you a landlord by default?  Here is a thought – try renting the assets with a concurrent lease option.  Who is it best for? This fits an existing investor looking for income, and anyone with a “due on sale” clause that has considered selling on contract.
 
There are many benefits to concurrent lease options, but they are not for the faint hearted.  If you have a business mindset about owning a rental, this option could be for you.  Contact me for a full article on this topic.

For more information and a private consultation on how to use your own real estate assets to your benefit, please contact me.  We can discuss value, reasonable rents, concessions, capital improvements, and the prospect of increased cash flow with a lease option.  The best business person does their due diligence and makes wise decisions based on facts.  Now is the time to evaluate your real estate holdings with a long view.