RISMEDIA, June 4, 2009-Real estate investors and vacation home buyers represented 35-40% of all residential property purchases in the years before the market downturn. Yet, many of these same investors are now experiencing serious negative equity and cash flow issues, and they are wondering if and when they will start seeing some relief.
“Although the economic stimulus and housing rescue plans have not been specifically targeted at investors, there are three strategies that can be built around all these new laws that benefit real estate investors,” said Gibran Nicholas, Chairman of the CMPS Institute, an organization that certifies mortgage bankers and brokers.
1. Reverse Mortgage for Purchase Transactions. “Until the end of 2009, an investor who is age 62 or older can purchase a 1-4 unit property worth up to $625,500 with a 30% - 35% down payment, live in one of the units, generate income by renting out the other units, and never have to make a mortgage payment for the rest of their entire life,” Nicholas said. “This opens up a lot of options for seniors and investors who are wondering how to supplement their retirement income now that their house values and retirement accounts have taken such a huge hit.”
The reverse mortgage for home purchase transactions became available on January 1, 2009, and the higher loan limit of $625,500 became available a few months ago as part of the 2009 economic stimulus plan. Investors who are trying to sell their duplexes, triplexes, or four-unit properties can utilize this strategy in their marketing as a way of stimulating potential buyers. “This strategy has been lost in all the noise of the last few months and very few people are aware that it can be done,” Nicholas said. “The $625,500 higher loan limit really opens up a lot of options, but it expires at the end of the year so you need to take action now.”
2. First Time Home Buyer Tax Credit. “The $8,000 first-time home buyer tax credit can also be utilized on one to four family properties,” Nicholas said. “The greatest thing is that not all buyers need to be first time home buyers. This means that an individual who qualifies for the credit can get their parents to co-sign on the loan and/or contribute to the down payment, and this would not disqualify the individual from taking the credit. A group of friends, relatives or investors could get together and buy a duplex, triplex, or four-unit property, and the credit can be claimed by any one or more of the investors as long as the individual(s) claiming the credit live in one of the units as their primary home for at least three years. They could claim the credit even though they are generating income by renting out one or more of the other units.”
The maximum FHA loan-limit on four-unit properties ranges from $521,250 in low cost housing markets up to $1,403,400 in the highest cost markets of the country. An investor who is trying to sell their one to four family unit property can also utilize this strategy to stimulate potential buyers. “This strategy just became a whole lot easier now that the FHA is allowing the credit to be utilized as part of the buyer’s down payment,” Nicholas said. “As of May 29, buyers are now allowed to borrow against the credit or sell it to their lender or another 3rd party as way of helping with their down payment.”
3. Rent-to-Own or Sale-Leaseback Opportunities. “There are a large number of distressed homeowners who will not qualify for the mortgage modification plans announced by the government,” Nicholas said. “These homeowners still need a place to live, and many will not be able to qualify for conventional or government mortgage financing for at least another three to five years.”
A rent-to-own strategy is where an investor or Realtor takes a potential home buyer house shopping even though the buyer can’t qualify for traditional financing. The investor buys the house, rents it to the tenant who picked out the house and wants to live there, and gives the tenant the right to buy the home at a pre-determined price at some point in the future. A sale-leaseback strategy is where a homeowner sells their current property to an investor and then pays the investor rent, with the option to buy back the home at a pre-determined price at some point in the future.
“While most real estate investors are scrambling to find tenants for their vacant properties, savvy investors could utilize either a rent-to-own or a sale-leaseback strategy to find tenants before they commit their investment dollars to a specific property,” Nicholas said. “This is a fantastic opportunity for investors to work with the large population of people who won’t qualify for the government foreclosure prevention plans.”
Even so, there are a few potential landmines to avoid. “If the tenant defaults on their rent or walks away from the deal, the investor could be left holding the bag,” Nicholas said. “Also, if the investor defaults on the mortgage and goes into foreclosure, the tenant may be evicted by the new owner,” said Nicholas. The new federal housing law provides two minimum guidelines that protect tenants in these and other situations:
- Tenants are now allowed to occupy the property until the end of their lease term (even after the landlord goes through foreclosure) as long as the new buyer does not intend to occupy the new home as their own primary residence.- If the new buyer intends to occupy the home as their own primary residence, the tenant must be given a 90 day notice before being forced to leave.
Thursday, June 4, 2009
Wednesday, June 3, 2009
Mortgage Rates Surge Late Last Week; 30-Year Fixed Rates Peak Near 5.40% But Fall Over Weekend
RISMEDIA, June 3, 2009-The weekly average mortgage rate borrowers were quoted on Zillow Mortgage Marketplace for 30-year fixed mortgages increased last week to 5.25%, up from 5.02% the week prior, according to the Zillow Mortgage Rate Monitor, compiled by leading real estate Web site Zillow.com(R). Meanwhile, rates for 15-year fixed mortgages rose to 4.78% from 4.60%, and 5-1 adjustable rate mortgages rose to 4.48% from 4.27% the week prior.
Mortgage Type Average Rate Average Rate % ChangeWeek ending 5/31/09 Week ending 5/24/09
30-year fixed 5.25% 5.02% 4.6%
15-year fixed 4.78% 4.60% 3.7%5-
1 ARM 4.48% 4.27% 4.8%
Rates dipped slightly over the weekend, but were expected to climb again during the week. The rate for a 30-year fixed purchase mortgage was 5.28% on Monday morning.
Thirty-year fixed mortgage rates varied by state. Maryland mortgage rates and Massachusetts mortgage rates were the highest, at 5.35% and 5.30%, respectively. Georgia mortgage rates were the lowest, at 5.15%. California mortgage rates were the most requested among all states.
State Average 30-yr. Average 30-yr. % ChangeFixed Rate
Fixed RateWeek ending 5/31/09 Week ending 5/24/09
Arizona 5.25% 5.04% 4.1%
California 5.24% 5.00% 4.7%
Colorado 5.23% 5.02% 4.1%
Connecticut 5.26% 4.99% 5.4%
Florida 5.19% 4.97% 4.4%
Georgia 5.15% 4.93% 4.5%
Illinois 5.28% 5.08% 4.0%
Maryland 5.35% 5.09% 5.1%
Massachusetts 5.30% 5.11% 3.7%
Michigan 5.21% 5.01% 3.9%
Missouri 5.25% 5.06% 3.8%
New Jersey 5.24% 5.02% 4.4%
New York 5.29% 5.05% 4.7%
North Carolina 5.27% 5.07% 3.9%
Ohio 5.28% 5.11% 3.3%
Oregon 5.27% 5.03% 4.9%
Pennsylvania 5.26% 4.99% 5.3%
Texas 5.25% 5.02% 4.5%
Virginia 5.23% 4.96% 5.5%
Washington 5.24% 4.98% 5.2%
The Zillow Mortgage Rate Monitor is compiled each week using thousands of mortgage rates quoted on Zillow Mortgage Marketplace by mortgage lenders to borrowers who have submitted loan requests. State-level data is gathered for the top 20 states with the highest quote volume on Zillow.
Mortgage Type Average Rate Average Rate % ChangeWeek ending 5/31/09 Week ending 5/24/09
30-year fixed 5.25% 5.02% 4.6%
15-year fixed 4.78% 4.60% 3.7%5-
1 ARM 4.48% 4.27% 4.8%
Rates dipped slightly over the weekend, but were expected to climb again during the week. The rate for a 30-year fixed purchase mortgage was 5.28% on Monday morning.
Thirty-year fixed mortgage rates varied by state. Maryland mortgage rates and Massachusetts mortgage rates were the highest, at 5.35% and 5.30%, respectively. Georgia mortgage rates were the lowest, at 5.15%. California mortgage rates were the most requested among all states.
State Average 30-yr. Average 30-yr. % ChangeFixed Rate
Fixed RateWeek ending 5/31/09 Week ending 5/24/09
Arizona 5.25% 5.04% 4.1%
California 5.24% 5.00% 4.7%
Colorado 5.23% 5.02% 4.1%
Connecticut 5.26% 4.99% 5.4%
Florida 5.19% 4.97% 4.4%
Georgia 5.15% 4.93% 4.5%
Illinois 5.28% 5.08% 4.0%
Maryland 5.35% 5.09% 5.1%
Massachusetts 5.30% 5.11% 3.7%
Michigan 5.21% 5.01% 3.9%
Missouri 5.25% 5.06% 3.8%
New Jersey 5.24% 5.02% 4.4%
New York 5.29% 5.05% 4.7%
North Carolina 5.27% 5.07% 3.9%
Ohio 5.28% 5.11% 3.3%
Oregon 5.27% 5.03% 4.9%
Pennsylvania 5.26% 4.99% 5.3%
Texas 5.25% 5.02% 4.5%
Virginia 5.23% 4.96% 5.5%
Washington 5.24% 4.98% 5.2%
The Zillow Mortgage Rate Monitor is compiled each week using thousands of mortgage rates quoted on Zillow Mortgage Marketplace by mortgage lenders to borrowers who have submitted loan requests. State-level data is gathered for the top 20 states with the highest quote volume on Zillow.
Monday, June 1, 2009
Distressed sales a factor in median price dip
Existing-home sales rose in April with strong buyer activity in lower price ranges, according to the National Association of REALTORS®.
Existing-home sales — including single-family, townhomes, condominiums and co-ops — increased 2.9 percent to a seasonally adjusted annual rate1 of 4.68 million units in April from a downwardly revised pace of 4.55 million units in March, but were 3.5 percent below the 4.85 million-unit level in April 2008.
Lawrence Yun, NAR chief economist, said first-time buyers continue to influence the market but there also is a seasonal rise of repeat buyers. “Most of the sales are taking place in lower price ranges and activity is beginning to pick up in the midprice ranges, but high-end home sales remain sluggish,” he says. “The Federal Reserve needs to help restore liquidity for the jumbo mortgage market by buying these loans under the TALF program.”
“Because foreclosed properties will likely be released into the market over the rest of year, it is critical that distressed homes be quickly cleared from the market,” Yun says. “Fortunately, homebuyers are being attracted to deeply discounted prices and are bidding up many foreclosed listings, particularly in California, Nevada, and Florida — this will set the stage for healthy market conditions going forward.”
An NAR practitioner survey in April showed first-time buyers declined to 40 percent of transactions, implying more repeat buyers are entering the traditional spring home-buying season. It also showed the number of buyers looking at homes has increased 14 percentage points from a year ago. “This is consistent with our forecast for home sales in the latter part of the year to be 10 to 20 percent higher than the second half of 2008,” Yun says.
The national median existing-home price for all housing types was $170,200 in April, which is 15.4 percent below 2008. Distressed properties, which accounted for 45 percent of all sales in April, continue to downwardly distort the median price because they generally sell at a discount relative to traditional homes.
According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to a record low 4.81 percent in April from 5.00 percent in March; the rate was 5.92 percent in April 2008; data collection began in 1971. Total housing inventory at the end of April rose 8.8 percent to 3.97 million existing homes available for sale, which represents a 10.2.-month supply3 at the current sales pace, compared with a 9.6-month supply in March.
“The gain in inventory is largely seasonal from sellers entering the spring market. Even with the rise, inventory over the past few months has remained consistently lower in comparison with a year earlier,” Yun notes.
Single-family home sales rose 2.5 percent to a seasonally adjusted annual rate of 4.18 million in April from a level of 4.08 million in March, but are 2.8 percent below the 4.30 million-unit pace in March 2008. The median existing single-family home price was $169,800 in April, which is 14.9 percent below a year ago.
Existing condominium and co-op sales increased 6.4 percent to a seasonally adjusted annual rate of 500,000 units in April from 470,000 in March, but are 9.4 percent lower than the 552,000-unit pace a year ago. The median existing condo price4 was $173,900 in April, down 18.5 percent from April 2008.
Regionally, existing-home sales in the Northeast jumped 11.6 percent to an annual pace of 770,000 in April, but are 10.5 percent below April 2008. The median price in the Northeast was $237,400, which is 9.6 percent lower than a year ago.
Existing-home sales in the Midwest slipped 2.0 percent in April to a level of 1.00 million and are 9.9 percent lower than a year ago. The median price in the Midwest was $138,800, down 11.7 percent from April 2008.
In the South, existing-home sales increased 1.8 percent to an annual pace of 1.74 million in April but are 8.9 percent lower than April 2008. The median price in the South was $148,000, which is 12.8 percent below a year ago.
Existing-home sales — including single-family, townhomes, condominiums and co-ops — increased 2.9 percent to a seasonally adjusted annual rate1 of 4.68 million units in April from a downwardly revised pace of 4.55 million units in March, but were 3.5 percent below the 4.85 million-unit level in April 2008.
Lawrence Yun, NAR chief economist, said first-time buyers continue to influence the market but there also is a seasonal rise of repeat buyers. “Most of the sales are taking place in lower price ranges and activity is beginning to pick up in the midprice ranges, but high-end home sales remain sluggish,” he says. “The Federal Reserve needs to help restore liquidity for the jumbo mortgage market by buying these loans under the TALF program.”
“Because foreclosed properties will likely be released into the market over the rest of year, it is critical that distressed homes be quickly cleared from the market,” Yun says. “Fortunately, homebuyers are being attracted to deeply discounted prices and are bidding up many foreclosed listings, particularly in California, Nevada, and Florida — this will set the stage for healthy market conditions going forward.”
An NAR practitioner survey in April showed first-time buyers declined to 40 percent of transactions, implying more repeat buyers are entering the traditional spring home-buying season. It also showed the number of buyers looking at homes has increased 14 percentage points from a year ago. “This is consistent with our forecast for home sales in the latter part of the year to be 10 to 20 percent higher than the second half of 2008,” Yun says.
The national median existing-home price for all housing types was $170,200 in April, which is 15.4 percent below 2008. Distressed properties, which accounted for 45 percent of all sales in April, continue to downwardly distort the median price because they generally sell at a discount relative to traditional homes.
According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to a record low 4.81 percent in April from 5.00 percent in March; the rate was 5.92 percent in April 2008; data collection began in 1971. Total housing inventory at the end of April rose 8.8 percent to 3.97 million existing homes available for sale, which represents a 10.2.-month supply3 at the current sales pace, compared with a 9.6-month supply in March.
“The gain in inventory is largely seasonal from sellers entering the spring market. Even with the rise, inventory over the past few months has remained consistently lower in comparison with a year earlier,” Yun notes.
Single-family home sales rose 2.5 percent to a seasonally adjusted annual rate of 4.18 million in April from a level of 4.08 million in March, but are 2.8 percent below the 4.30 million-unit pace in March 2008. The median existing single-family home price was $169,800 in April, which is 14.9 percent below a year ago.
Existing condominium and co-op sales increased 6.4 percent to a seasonally adjusted annual rate of 500,000 units in April from 470,000 in March, but are 9.4 percent lower than the 552,000-unit pace a year ago. The median existing condo price4 was $173,900 in April, down 18.5 percent from April 2008.
Regionally, existing-home sales in the Northeast jumped 11.6 percent to an annual pace of 770,000 in April, but are 10.5 percent below April 2008. The median price in the Northeast was $237,400, which is 9.6 percent lower than a year ago.
Existing-home sales in the Midwest slipped 2.0 percent in April to a level of 1.00 million and are 9.9 percent lower than a year ago. The median price in the Midwest was $138,800, down 11.7 percent from April 2008.
In the South, existing-home sales increased 1.8 percent to an annual pace of 1.74 million in April but are 8.9 percent lower than April 2008. The median price in the South was $148,000, which is 12.8 percent below a year ago.
Friday, May 29, 2009
HUD: Tax Credit Can Be Used on Closing Costs
FHA-approved lenders received the go-ahead to develop bridge-loan products that enable first-time buyers to use the benefits of the federal tax credit upfront, according to eagerly awaited guidance from the U.S. Department of Housing and Urban Development on so-called home buyer tax credit loans that was released today.
Under the guidance, FHA-approved lenders can develop bridge loans that home buyers can use to help cover their closing costs, buy down their interest rate, or put down more than the minimum 3.5 percent.
The loans can't be used to cover the minimum 3.5 percent, senior HUD officials told reporters on a conference call Friday morning.
Thus, buyers applying for FHA-backed financing with an FHA-approved lender that offers a bridge-loan program can get a bridge loan to bring down the upfront costs of buying a home significantly but would still have to come up with the minimum 3.5 percent downpayment.
There remain many sources of assistance for buyers needing help with the 3.5 percent downpayment, including many state and local government instrumentalities and nonprofit lenders.
In addition, some state housing finance agencies have developed their own tax credit bridge loan programs, so buyers in states whose HFAs offer such programs can monetize the tax credit upfront to cover all or part of their downpayment. These programs are separate from what HUD announced today.
The first-time homebuyer tax credit was enacted last year--and improved upon earlier this year--to help encourage households to enter the housing market while interest rates are low and affordability is high. The credit is worth up to $8,000 and is available to households that haven't owned a home in at least three years. The credit does not have to be repaid, and is fully reimbursable, so households can get their credit returned to them in the form of a payment.
Under the guidance, FHA-approved lenders can develop bridge loans that home buyers can use to help cover their closing costs, buy down their interest rate, or put down more than the minimum 3.5 percent.
The loans can't be used to cover the minimum 3.5 percent, senior HUD officials told reporters on a conference call Friday morning.
Thus, buyers applying for FHA-backed financing with an FHA-approved lender that offers a bridge-loan program can get a bridge loan to bring down the upfront costs of buying a home significantly but would still have to come up with the minimum 3.5 percent downpayment.
There remain many sources of assistance for buyers needing help with the 3.5 percent downpayment, including many state and local government instrumentalities and nonprofit lenders.
In addition, some state housing finance agencies have developed their own tax credit bridge loan programs, so buyers in states whose HFAs offer such programs can monetize the tax credit upfront to cover all or part of their downpayment. These programs are separate from what HUD announced today.
The first-time homebuyer tax credit was enacted last year--and improved upon earlier this year--to help encourage households to enter the housing market while interest rates are low and affordability is high. The credit is worth up to $8,000 and is available to households that haven't owned a home in at least three years. The credit does not have to be repaid, and is fully reimbursable, so households can get their credit returned to them in the form of a payment.
Speeding up foreclosures would help housing market
(Crain’s) — Sam Zell said speeding up the pace of foreclosures would be the quickest cure for the woeful residential market, even as some experts and housing activists say the federal government should slow down the wave of such lawsuits.
During an interview Thursday with Bloomberg TV, the billionaire investor repeated his prediction that the housing market would bottom out, this time by the end of summer, and then bounce along for six to eight months.
“Well, the inventory is going down,” Mr. Zell said, according to a transcript. “The affordability is going up. The government is making serious efforts to provide financing. And I think it’s slowly working. And the best thing that could happen is if we could accelerate all the foreclosures. Because I think they represent a drag on the market.”
Mr. Zell, who is chairman of Chicago-based Equity Residential, an apartment real estate investment trust, has previously offered uncharacteristically optimistic forecasts about the housing market, only to be disappointed. In February 2008, he said he saw the bottom of the housing market just ahead.
He is the former chairman of Equity Office Properties Trust, which he sold in 2007. In commercial real estate, he predicted that the current dearth of investment activity could continue until 2012.
“Well, there’s been a lot of speculation and a lot of journalists have written about the impending demise of commercial real estate,” he said. “First of all, I think that the fact that interest rates are as low as they are means that even if people are under water in commercial real estate, they still can carry it. And if you’re under water and you can carry it, the last thing you’re going to do is sell it, because you don’t get anything.”
“So therefore, that’s why we have no transactions,” he said. “And I think it’s going to take two or three years before we start seeing that happen.”
On other topics, Mr. Zell said:
• Unemployment, which hit 8.9% in April, is close to peaking.
• The federal stimulus package, which Mr. Zell says is working, is also the biggest risk to the economy because of the huge government debt it creates. “Married into that is the creation of all these massive new programs all at once,” he said.
• Asked about the best values in the housing market, Mr. Zell singled out Mexico and Brazil, where he owns stakes in developers focused on lower-cost housing. “In the U.S., I just think that the single-family market is slowly working its way through the morass,” he said.
During an interview Thursday with Bloomberg TV, the billionaire investor repeated his prediction that the housing market would bottom out, this time by the end of summer, and then bounce along for six to eight months.
“Well, the inventory is going down,” Mr. Zell said, according to a transcript. “The affordability is going up. The government is making serious efforts to provide financing. And I think it’s slowly working. And the best thing that could happen is if we could accelerate all the foreclosures. Because I think they represent a drag on the market.”
Mr. Zell, who is chairman of Chicago-based Equity Residential, an apartment real estate investment trust, has previously offered uncharacteristically optimistic forecasts about the housing market, only to be disappointed. In February 2008, he said he saw the bottom of the housing market just ahead.
He is the former chairman of Equity Office Properties Trust, which he sold in 2007. In commercial real estate, he predicted that the current dearth of investment activity could continue until 2012.
“Well, there’s been a lot of speculation and a lot of journalists have written about the impending demise of commercial real estate,” he said. “First of all, I think that the fact that interest rates are as low as they are means that even if people are under water in commercial real estate, they still can carry it. And if you’re under water and you can carry it, the last thing you’re going to do is sell it, because you don’t get anything.”
“So therefore, that’s why we have no transactions,” he said. “And I think it’s going to take two or three years before we start seeing that happen.”
On other topics, Mr. Zell said:
• Unemployment, which hit 8.9% in April, is close to peaking.
• The federal stimulus package, which Mr. Zell says is working, is also the biggest risk to the economy because of the huge government debt it creates. “Married into that is the creation of all these massive new programs all at once,” he said.
• Asked about the best values in the housing market, Mr. Zell singled out Mexico and Brazil, where he owns stakes in developers focused on lower-cost housing. “In the U.S., I just think that the single-family market is slowly working its way through the morass,” he said.
Thursday, May 28, 2009
Will Downpayment Assistance Help the U.S. Housing Market?
RISMEDIA, May 28, 2009-With home prices falling nearly 20% in the first quarter of 2009, Ann Ashburn, president of AmeriDream outlined four reasons why the U.S. economy and the next generation of homeowners would benefit from downpayment assistance funded in part by sellers (DPA). Congress is currently considering H.R. 600, bipartisan legislation that would make DPA an allowable gift source for creditworthy borrowers of Federal Housing Administration loans.
“AmeriDream continues to provide full support to H.R. 600, which will stabilize home values, protect taxpayers, encourage responsible homeownership, and create jobs,” said Ashburn. “These are four compelling reasons to make DPA an important part of our national economic recovery strategy.”
1. Stabilize home values. DPA can help stop the downward spiral in home values across the country by encouraging qualified homebuyers with FHA loans to enter the housing market. An estimated 300,000 homebuyers are eliminated from the housing market every year without DPA programs in place.
2. Protect taxpayers. H.R. 600 allows private partnerships between sellers and non-profits to provide downpayment gifts to qualified homebuyers at no cost to the taxpayer. That makes H.R. 600 a fiscally responsible alternative to government-subsidized downpayment assistance programs being considered by the U.S. Department of Housing & Urban Development.
3. Encourage responsible homeownership. H.R. 600 will enable 300,000 additional families and individuals- all qualified and approved for FHA loans- to become homeowners each year. The bill also requires that DPA recipients be offered homebuyer education courses to help them understand the financial responsibilities of homeownership. Lastly, H.R. 600 implements tougher credit requirements for DPA recipients, strict FHA underwriting guidelines, and stiff penalties for improper home appraisals.
4. Create jobs. DPA will create 235,000 jobs, generate over $4 billion annually in local and state revenues, and provide $2 billion annually in private capital for sustainable homeownership. DPA’s absence prompts fewer home sales, lower home values, more foreclosures, job losses, and lower revenues for cash-strapped local governments. H.R. 600 is a vital mechanism to stabilizing the U.S. housing market.
“AmeriDream continues to provide full support to H.R. 600, which will stabilize home values, protect taxpayers, encourage responsible homeownership, and create jobs,” said Ashburn. “These are four compelling reasons to make DPA an important part of our national economic recovery strategy.”
1. Stabilize home values. DPA can help stop the downward spiral in home values across the country by encouraging qualified homebuyers with FHA loans to enter the housing market. An estimated 300,000 homebuyers are eliminated from the housing market every year without DPA programs in place.
2. Protect taxpayers. H.R. 600 allows private partnerships between sellers and non-profits to provide downpayment gifts to qualified homebuyers at no cost to the taxpayer. That makes H.R. 600 a fiscally responsible alternative to government-subsidized downpayment assistance programs being considered by the U.S. Department of Housing & Urban Development.
3. Encourage responsible homeownership. H.R. 600 will enable 300,000 additional families and individuals- all qualified and approved for FHA loans- to become homeowners each year. The bill also requires that DPA recipients be offered homebuyer education courses to help them understand the financial responsibilities of homeownership. Lastly, H.R. 600 implements tougher credit requirements for DPA recipients, strict FHA underwriting guidelines, and stiff penalties for improper home appraisals.
4. Create jobs. DPA will create 235,000 jobs, generate over $4 billion annually in local and state revenues, and provide $2 billion annually in private capital for sustainable homeownership. DPA’s absence prompts fewer home sales, lower home values, more foreclosures, job losses, and lower revenues for cash-strapped local governments. H.R. 600 is a vital mechanism to stabilizing the U.S. housing market.
Wednesday, May 27, 2009
New Rules Imposed on Credit Card Industry Aim to Help Consumers
RISMEDIA, May 27, 2009-(MCT)-President Obama recently put forth law designed to rein in a credit card industry widely condemned for snaring consumers in financially crippling traps.
When the new law takes full effect next February, card issuers will no longer be able to impose sky-high penalty interest rates on customers whose payments arrive a day or two late.
Consumers will still face late fees, but they will have to be 60 days late to be pushed into default.
Barred, too, will be retroactive changes in terms affecting cardholders who had committed no infractions at all.
In urging Congress to act, Obama sharply criticized those sorts of “any-time, any-reason” rate increases that can suddenly double or triple the interest rate on a customer’s existing balance.
Many consumers complained that such tactics amounted to bait-and-switch.
Critics say the credit card industry’s outrageous practices caused its fall from grace even as it made Visa, MasterCard and American Express into synonyms for the good life and enabled U.S. consumers to build up nearly $1 trillion in balances on revolving credit accounts.
The credit card industry did not accept defeat quietly. To the end, it argued its detractors did not understand the sophisticated business model it had evolved: pricing credit according to risk, and repricing it continually as consumers’ circumstances changed.
One thing both sides agree is the new law reflects a shift in the political pendulum-away from the laissez-faire lending environment that allowed practices that federal regulators and lawmakers ultimately deemed unfair and deceptive, and toward a more regulated marketplace.
Advocates representing consumer groups and lenders both said the bipartisan success of the legislation, which will force credit card companies to revamp their business models, was a sign of the political moment.
They said the credit crisis, economic meltdown and bank bailouts made credit card lenders a politically juicy target and undercut the finance industry’s vaunted ability to get its way in Washington.
“There was a need for Congress and the president to appear tough on banks, and an easy and politically expedient way to do that was to crack down on card issuers,” said Mark J. Furletti, a credit card company attorney at Philadelphia’s Ballard, Spahr, Andrews & Ingersoll L.L.P. and a former researcher at the Philadelphia Federal Reserve Bank’s Payment Card Center.
To be sure, the industry has hardly lost its clout. Less than a month ago, Congress disappointed the same consumer groups that pushed for credit card reforms when it refused to allow bankruptcy judges to adjust, or “cram down,” the principal owed on primary residential mortgages.
Supporters said allowing judges to reduce mortgages to the level of a home’s actual market value-as they already can do with commercial properties, vacation homes and autos-was crucial to stemming the foreclosure crisis and the collapse of housing prices around the country. Bankers said it would reduce the availability of credit and raise its cost for everybody-the same arguments they made against the new credit card rules.
Why the difference? One reason is that the cramdown proposal was opposed by a broad group of lenders, including credit unions and community banks. Far fewer lenders remain in the credit card business, which became increasingly consolidated in the 1980s and ’90s as it turned to costly marketing and pricing models based on the now ubiquitous FICO score. But a bigger distinction was the difference between troubled homeowners and card users.
Rightly or wrongly, opponents of the cramdown proposal portrayed those who would benefit as irresponsible people willing to walk away from their debts. “They were able to paint them as deadbeats,” said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group. That did not work in the fight over credit card abuses, because such a wide swath of victims was affected.
Some were responsible citizens who got into trouble with credit card debt because of a personal crisis such as a job loss or medical problem-much like the profile of consumers who get in over their heads and eventually wind up in Bankruptcy Court.
Advocates such as Mierzwinski say the connection is not coincidental. As such borrowers struggled to stay afloat, their credit card lenders may have sounded sympathetic. But the lenders’ risk models showed they were more likely to default, so they were socked with rate increases even if they had managed to stay current on their cards. If treading water is tough at 12%, it is even tougher at 29%.
But it was another category of borrowers who surely became the industry’s worst nightmares. People like Larry Hrebiniak. A management professor at the University of Pennsylvania’s Wharton School, Hrebiniak was among tens of thousands of consumers who complained in recent years about sudden and unexplained changes in interest rates and other credit card traps.
Six years ago, Hrebiniak was a fairly typical “convenience user” of credit cards, like about 4 in 10 Americans, including a MasterCard from MBNA (now part of Bank of America Corp.). He paid off its balance every month, enjoyed an interest rate of 8%, and had a credit limit of $15,000.
His mistake? He decided to use of some of his MBNA credit to pay off some unusually large expenses over several months. His balance went as high as $10,000, and suddenly his rate jumped to 15.99%.
Hrebiniak complained to MBNA and bank regulators. Both reached the same conclusion: It was a contractual matter between Hrebiniak and his bank, and the terms of Hrebiniak’s card allowed MBNA to raise his rates at any time for any reason. All that mattered was whether it was properly disclosed.
But complaints like Hrebiniak’s kept coming, and two years ago key regulators decided it was time to act.
In new rules scheduled to take effect in July 2010, the Federal Reserve finally declared that disclosure was not enough and said it could bar practices such as “any-time, any-reason” rate increases under its authority to stop unfair and deceptive trade practices.
Now Congress and the president have gone further. The 33-page law that Obama signed mostly takes effect in nine months and bars a whole slew of traps that credit cards’ critics have identified over the years-including irritants such as vanishing grace periods, shifting due dates and the imposition of “over-limit” fees on customers who would rather just have a purchase declined.
To Travis Plunkett, who pushed for the new rules on behalf of a coalition of consumer groups, perhaps the most remarkable aspect of the turnaround was how it ended-with protections being added, not taken away.
Plunkett said congressional debate usually “gives industry lobbyists and special interests more time to work their magic” to weaken proposals. “But in this case the dynamic was the opposite. Public anger was so high, and concern in Congress was so broad, that the overall impact was to strengthen the bill.” Hrebiniak said he was happy lawmakers had acted, even if it took a crisis to push them.
“A lot of people have been yelling against the issuers of credit cards for years,” he said. “But I think it all resonated, it all came together, when the economy collapsed.”
Hrebiniak said he expected the market to adapt to the new rules. Despite card issuers’ recent dire warnings, he said he expected competition to keep offers flowing to creditworthy customers. At the same time, he said the new law would not be a panacea for financially stressed borrowers.
“Despite these protections, there are a lot of people who still can’t handle credit,” he said.
New credit card rules include:-Cardholders must be 60 days late before considered in default.-Except in cases of default, rate changes will generally apply only to new purchases, not existing balances.-Banks must send a bill at least 21 days before it’s due.-Payments received by 5 p.m. on the due date must be counted as on time.-Lenders must give 45 days’ notice before raising rates. (Consumers may opt out and pay under the old terms.)-Payments above the minimum must be applied first to highest-interest portion of the balance.-People under 21 must offer proof of income or have a co-signer to obtain a credit card.-”Over-limit” fees cannot be triggered by purchase unless cardholder agrees that lender should permit such a purchase.-Gift cards cannot expire in less than 5 years. Inactivity fees must be prominently disclosed.
When the new law takes full effect next February, card issuers will no longer be able to impose sky-high penalty interest rates on customers whose payments arrive a day or two late.
Consumers will still face late fees, but they will have to be 60 days late to be pushed into default.
Barred, too, will be retroactive changes in terms affecting cardholders who had committed no infractions at all.
In urging Congress to act, Obama sharply criticized those sorts of “any-time, any-reason” rate increases that can suddenly double or triple the interest rate on a customer’s existing balance.
Many consumers complained that such tactics amounted to bait-and-switch.
Critics say the credit card industry’s outrageous practices caused its fall from grace even as it made Visa, MasterCard and American Express into synonyms for the good life and enabled U.S. consumers to build up nearly $1 trillion in balances on revolving credit accounts.
The credit card industry did not accept defeat quietly. To the end, it argued its detractors did not understand the sophisticated business model it had evolved: pricing credit according to risk, and repricing it continually as consumers’ circumstances changed.
One thing both sides agree is the new law reflects a shift in the political pendulum-away from the laissez-faire lending environment that allowed practices that federal regulators and lawmakers ultimately deemed unfair and deceptive, and toward a more regulated marketplace.
Advocates representing consumer groups and lenders both said the bipartisan success of the legislation, which will force credit card companies to revamp their business models, was a sign of the political moment.
They said the credit crisis, economic meltdown and bank bailouts made credit card lenders a politically juicy target and undercut the finance industry’s vaunted ability to get its way in Washington.
“There was a need for Congress and the president to appear tough on banks, and an easy and politically expedient way to do that was to crack down on card issuers,” said Mark J. Furletti, a credit card company attorney at Philadelphia’s Ballard, Spahr, Andrews & Ingersoll L.L.P. and a former researcher at the Philadelphia Federal Reserve Bank’s Payment Card Center.
To be sure, the industry has hardly lost its clout. Less than a month ago, Congress disappointed the same consumer groups that pushed for credit card reforms when it refused to allow bankruptcy judges to adjust, or “cram down,” the principal owed on primary residential mortgages.
Supporters said allowing judges to reduce mortgages to the level of a home’s actual market value-as they already can do with commercial properties, vacation homes and autos-was crucial to stemming the foreclosure crisis and the collapse of housing prices around the country. Bankers said it would reduce the availability of credit and raise its cost for everybody-the same arguments they made against the new credit card rules.
Why the difference? One reason is that the cramdown proposal was opposed by a broad group of lenders, including credit unions and community banks. Far fewer lenders remain in the credit card business, which became increasingly consolidated in the 1980s and ’90s as it turned to costly marketing and pricing models based on the now ubiquitous FICO score. But a bigger distinction was the difference between troubled homeowners and card users.
Rightly or wrongly, opponents of the cramdown proposal portrayed those who would benefit as irresponsible people willing to walk away from their debts. “They were able to paint them as deadbeats,” said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group. That did not work in the fight over credit card abuses, because such a wide swath of victims was affected.
Some were responsible citizens who got into trouble with credit card debt because of a personal crisis such as a job loss or medical problem-much like the profile of consumers who get in over their heads and eventually wind up in Bankruptcy Court.
Advocates such as Mierzwinski say the connection is not coincidental. As such borrowers struggled to stay afloat, their credit card lenders may have sounded sympathetic. But the lenders’ risk models showed they were more likely to default, so they were socked with rate increases even if they had managed to stay current on their cards. If treading water is tough at 12%, it is even tougher at 29%.
But it was another category of borrowers who surely became the industry’s worst nightmares. People like Larry Hrebiniak. A management professor at the University of Pennsylvania’s Wharton School, Hrebiniak was among tens of thousands of consumers who complained in recent years about sudden and unexplained changes in interest rates and other credit card traps.
Six years ago, Hrebiniak was a fairly typical “convenience user” of credit cards, like about 4 in 10 Americans, including a MasterCard from MBNA (now part of Bank of America Corp.). He paid off its balance every month, enjoyed an interest rate of 8%, and had a credit limit of $15,000.
His mistake? He decided to use of some of his MBNA credit to pay off some unusually large expenses over several months. His balance went as high as $10,000, and suddenly his rate jumped to 15.99%.
Hrebiniak complained to MBNA and bank regulators. Both reached the same conclusion: It was a contractual matter between Hrebiniak and his bank, and the terms of Hrebiniak’s card allowed MBNA to raise his rates at any time for any reason. All that mattered was whether it was properly disclosed.
But complaints like Hrebiniak’s kept coming, and two years ago key regulators decided it was time to act.
In new rules scheduled to take effect in July 2010, the Federal Reserve finally declared that disclosure was not enough and said it could bar practices such as “any-time, any-reason” rate increases under its authority to stop unfair and deceptive trade practices.
Now Congress and the president have gone further. The 33-page law that Obama signed mostly takes effect in nine months and bars a whole slew of traps that credit cards’ critics have identified over the years-including irritants such as vanishing grace periods, shifting due dates and the imposition of “over-limit” fees on customers who would rather just have a purchase declined.
To Travis Plunkett, who pushed for the new rules on behalf of a coalition of consumer groups, perhaps the most remarkable aspect of the turnaround was how it ended-with protections being added, not taken away.
Plunkett said congressional debate usually “gives industry lobbyists and special interests more time to work their magic” to weaken proposals. “But in this case the dynamic was the opposite. Public anger was so high, and concern in Congress was so broad, that the overall impact was to strengthen the bill.” Hrebiniak said he was happy lawmakers had acted, even if it took a crisis to push them.
“A lot of people have been yelling against the issuers of credit cards for years,” he said. “But I think it all resonated, it all came together, when the economy collapsed.”
Hrebiniak said he expected the market to adapt to the new rules. Despite card issuers’ recent dire warnings, he said he expected competition to keep offers flowing to creditworthy customers. At the same time, he said the new law would not be a panacea for financially stressed borrowers.
“Despite these protections, there are a lot of people who still can’t handle credit,” he said.
New credit card rules include:-Cardholders must be 60 days late before considered in default.-Except in cases of default, rate changes will generally apply only to new purchases, not existing balances.-Banks must send a bill at least 21 days before it’s due.-Payments received by 5 p.m. on the due date must be counted as on time.-Lenders must give 45 days’ notice before raising rates. (Consumers may opt out and pay under the old terms.)-Payments above the minimum must be applied first to highest-interest portion of the balance.-People under 21 must offer proof of income or have a co-signer to obtain a credit card.-”Over-limit” fees cannot be triggered by purchase unless cardholder agrees that lender should permit such a purchase.-Gift cards cannot expire in less than 5 years. Inactivity fees must be prominently disclosed.
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