Bob Rowe - Your Mortgage Banker Bob's Blog

Pitfalls of Tax Credit

Bob Rowe — Fri, 06 May 2011 08:25:55 GMT

LOS ANGELES (MarketWatch) -- The federal government is doling out as much as $8,000 to people who bought a home recently. Sounds simple, right? But collecting on that money isn't proving to be all that straightforward for some taxpayers.

You already know there are two different credits, right? They're both worth 10% of the purchase price of the home, up to $8,000 for first-time home buyers who have not owned a home for the last three years and up to $6,500 for people who've owned before, as long as they owned a home and lived in it for at least five years out eight, consecutively.

Here are some of the common problems cropping up.

A young couple doesn't qualify for a mortgage, or for a decent interest rate, because they're too young to have a credit history. So Mom and Dad qualify for the mortgage and buy the home. That's a dilemma encountered by some clients of Marlene DeBoisblanc, an enrolled agent in Westlake Village, Calif. The couple lives in the home and makes all the mortgage payments. Mom and Dad own a home and don't plan to move, so the parents don't qualify for either credit. Does the couple qualify? Yes. They may claim the full $8,000, according to Melvin Kreger, a tax attorney and enrolled agent in North Hollywood, Calif. The young couple is considered an equitable owner. Clearly, the intention has always been for this to be their home. This situation crops up all the time when someone has bad credit or no credit. How do you fix the problem with title and loan without committing fraud? Whatever you do, don't back-date documents. That's illegal. However, you can draw up current documents to memorialize the details of the original arrangement. Since you cannot add the young couple to the existing loan, consider drawing up loan documents between the parents and the children.

Home purchase, then wedding

A frequent question on TaxMama.com is about a home buyer who qualified for the first-time home-buyer credit when they were single and bought their home. Then, during the year they got married to someone who would not have qualified. When they file a joint return for the year, will the home buyer lose the credit? Should they postpone the wedding until next year?

Can landlords qualify as first-time buyers?

What if you used to own your home, but you moved out four years ago and have been renting it out ever since? Does that disqualify you from the credit if you buy a new home to live in?

Not at all, according to the IRS. You may own as much real estate as you like, as long as it has not been your primary residence for the last three years. In fact, you may even own a residence in a foreign country, and still qualify for the first-time home buyer credit. The only condition is that you did not own a personal residence in the U.S. during the last three years. You're entitled to the full $8,000 or 10% of the purchase price, whichever is less.

Are You Ready for “The Big One”?

Bob Rowe — Fri, 29 Apr 2011 03:13:47 GMT

The recent earthquake(s) in Japan and the devastation they caused may have reminded you of the need to have a plan in the case of a similar event happening in California.

We can just cross our fingers and hope that it won’t happen here anytime soon or we can prepare ourselves for the inevitability. The best thing to do is put together a home disaster kit and keep it in a place you can get to if the worst happens. At a minimum, here’s what your kit should contain:

A guide to locate and shut off the gas, electricity and water sources.

Gloves, safety glasses and an extra set of clothes, including heavy-duty shoes.

A radio with extra batteries (wind up portable radios are available that don’t need batteries).

A flashlight for every family member, with extra batteries.

Waterproof matches and candles. Make sure to check for any gas leaks before using.

A stash of cash. It’s likely banks won’t be open and ATM’s won’t be working, or out of money for awhile.

Important papers-legal and medical, copies kept in a plastic bag.

An up to code fire extinguisher.

A comprehensive first aid kit.

A supply of necessary medications (keep updated) and extra pair of eyeglasses if needed.

Water. As much as you can store-and replace every six months if stored in plastic.

Food with a long shelf life (health bars and beef jerky are good examples of easy portability and good calories).

You can also do things to minimize damage in the home. Make sure anything that can fall on you is secured. You never know where you’ll be when it happens.

Secure bookcases to wall studs with safety straps. The heaviest items should be on the bottom shelves. Use museum wax to secure freestanding delicates.

Wall hangings should be hung with closed hooks so they won't fall off your walls. Don’t hang anything heavy over the head of your bed. Wide screen TV’s should to be bolted to the wall.

Fans and lighting fixtures should be secured with ceiling studs.

Kitchen cabinets can be secured with childproof locks. Just like in airline baggage holders, be careful when you open them, as things will shift in the shaking.

The connections to gas stoves, water heaters, etc. need to be flexible and have a little give for when things start moving.

Lock or block off your refrigerator wheels.

Keep your bed in the center of the room and away from windows.

Clean and organize your garage so that if chemicals fall, they don’t mix and become caustic, or fall anywhere near electrical outlets.

For more information you can visit this website.

If you have any tips you don’t see here, you can suggest them through the comment section below.

Where are the affordable solar power solutions for homeowners?

Bob Rowe — Fri, 29 Apr 2011 03:11:46 GMT

If you drive through any neighborhood in Phoenix, Arizona you will see a few homes with solar panels on the roof. Your first thought may be “why doesn’t every home here have them?” After all, this is a place that averages over 330 days of sunshine per year. If any region could show the world how renewable solar energy can work it would be the American southwest.

This won’t shock you. It’s the cost. At least that’s what everybody thinks. A household could get all of its electricity from solar cell panels (photovoltaic panels), but the average homeowner is usually reluctant to pay for the initial outlay.

Another reason we are lagging behind in jumping on the bandwagon for solar energy solutions is that the solar market took a financial hit just like the rest of the economy in the recent downturn. Most companies and individuals watched their ability to invest in new solar initiatives dry up with the bad economy or the credit crunch. Innovation and implementation of the dream of cheap renewable energy has taken a hit in recent years.

But we may be getting to a place where the economic incentives can now meet the technology.

The Federal Government is giving back in tax credits to homeowners up to 30 percent of the cost of installing solar or geothermal energy in their homes. States also add incentives above and beyond the Federal breaks. You can find them here.

A tax credit for installing solar panels can save hundreds of dollars on energy costs. A $50,000 investment can be paid off in five years and can save $1,600 a year in electricity bills. The tax subsidies last through 2016 and are eligible for a tax credit equal to 30% of costs, with no cap. You will need to file IRS Form 5696 with your taxes, and keep receipts for the installment.

You can still go green without the cash by leasing panels. All it takes is a company willing to lease and install the panels with no money down (the solar leasing company gets the tax breaks and incentives). As an example, a company called SolarCity installed panels on a house that was used to paying an average of $269 per month for electricity and leased the panels generating 100% of the electricity to the homeowner for $107 per month. That’s a pretty good savings that also reduces the carbon footprint of the homeowner.

You may want to consider going with solar if you are selling a home or re-financing. It could help a sale since utilities are a big consideration when buying and it modernizes the property. If you match a lower rate and the tax incentives together by re-financing, you could lower your rate and your bills in one shot and it reduce the costs of the solar panels 30-50%. You could break even in just one year.

If you’re still not convinced that going solar is a good move, Google has just sealed a deal to invest $168 million in a Mojave Desert solar energy plant. How smart are they?

The Value of Word-of-Mouth Referrals for your Business

Bob - SU — Fri, 29 Apr 2011 03:06:50 GMT

The most cost effective way to market a business is by word-of-mouth referrals. People want to help others, and if they have received a great product or service, they will be more than happy to pass on their experience to their friends, family and sometimes complete strangers.

As a mortgage broker in California, Emery Financial found out almost by accident the power of social media, way before Facebook was even conceived. It came with simply understanding the needs of our clients. The referrals followed once they realized that our goals were more about building a loyal customer base than just making money.

Once you become known as an industry leader with the knowledge and skill to make the customer experience a special bond, something that sets you apart from all the big box competitors out there, you become more than a product or service. You become essential.

Here are some ways to make your company worthy of the highly coveted word-of-mouth referral:

1. Be honest. If you are up-front with your clients and let them know exactly what they can expect from you, and in turn what you expect from them, it will lead to a trust that builds the relationship.

2. Keep learning. You must think out of the box and stay one step ahead of industry trends. Knowledge is power, and profitable too.

3. Be self-aware. Know why the customer decided to go with you and what sets you apart from the competition. They chose you for a reason. Build on that.

4. Become a good listener. The value of someone who actually listens to the needs of the customer is passed on to others.

5. Ask. If you have had an exceptionally good relationship with a client, it doesn’t hurt to ask for a referral. In fact, it can often be flattering that you think that much of them.

6. Forge business relationships. Someone who works in a related field can spread the word like wildfire.

This alliance was built within the same client target base and is more valuable than any paid advertising could ever generate. Some experts say that word-of-mouth marketing is ten times greater than any other form of marketing.

The best sales team you could ever find is satisfied customers. You don’t have to pay them to spread the words of praise. When they become passionate about your reputation, it means you’ve earned it. They feel like they’ve become members of a special club, and will become advocates for your business to people who they think are special too.

Watch Out for Short Sale Fraud

Bob Rowe — Wed, 31 Mar 2010 04:22:23 GMT

(OC Register) Short sales, in which properties are legally sold for less than what’s owed on the mortgage as long as the lender agrees, have been on the upswing this year. The DRE says it’s also been alerted to fraud surrounding short sale transactions.

Some Examples:

Multiple lenders and lien holders, and payments outside of escrow:
“Where more than one Lender or lien holder is involved, the negotiations are complicated. Second and other subordinate lien holders often hold up the short sale transaction, and seek to extract the largest possible payment in consideration for releasing their lien. Often times there are monies secretly paid outside of escrow, without the knowledge of the senior lien holder. This is a sure sign of fraud. Such undisclosed payments are likely illegal. The economic substance of and all payments in the short sale transaction should be disclosed on the HUD 1 statement. There should never be dual or multiple contracts, only one of which shows the true purchase price.”

Short Sale flipping by unlicensed people using straw buyers: “In some cases, unlicensed short sale ‘facilitators’ hone in on homes that are on the verge of foreclosure and persuade the lenders to accept lowball purchase offers, often times by using straw buyers, questionable or self-interested broker price opinions or appraisals, and by failing to disclose that a sale at a higher price has previously been put on the table or negotiated.”

On its site, the DRE lays out a case showing how an unnamed company has violated California law by practicing real estate without a license, collecting advance fees in violation of the law and profiting through false pretenses at the expense of a federally insured institution by misrepresenting the value of the home to the lender. “This may constitute federal loan fraud, which is a serious felony offense which is punishable by imprisonment and fines.”

If you suspect fraud in a short sale, contact the DRE’s enforcement section, HERE.

New California Tax Credit

Bob Rowe — Wed, 31 Mar 2010 04:07:42 GMT

The bill the governor signed last week provides $100 million in credits for the purchase of existing homes and $100 million in credits for the purchase of new homes.

To make sure that credits are not left on the table, the bill lets the Franchise Tax Board award credits to at least 17,544 buyers of existing homes and at least 14,286 new-home buyers. If each of those buyers saved the full $10,000, the state would lose more than $300 million in tax revenues. Because they won't, the tax board estimates that the actual cost should be roughly $200 million - but it could be more or less.

To get the new credit, first-time buyers can purchase a new or existing home. A first-time buyer is defined as an individual, or an individual's spouse, who had no ownership interest in a principal residence for three years before the date of purchase.

People who are not first-time buyers can get the credit if they buy a newly built home, but not an existing one.

In both cases, the home must be a single-family residence, attached or unattached, and be used as the buyer's principal residence for at least two years.

The credit is equal to 5 percent of the purchase price or $10,000, whichever is less. It must be claimed in equal amounts over three years, beginning with the year of purchase.

Buyers of existing homes must close escrow between May 1 and Dec. 31.

Buyers of new homes can reserve a credit by entering into an enforceable contract between May 1 and Dec. 31, filing the proper paperwork with the tax board and closing escrow by Aug. 1, 2011.

Like last year, the credits will be awarded on a first-come, first-served basis. The tax board estimates that existing-home credits will run out by June 30. New-home credits will also "go quickly," says tax board spokeswoman Denise Azimi.

For existing homes, once credits are allocated, the program will end.

For new homes, once the credits have been reserved, the tax board will start a waiting list. Some people who reserve a credit will never actually buy a home. Their unused credits will be awarded to people on the waiting list. The tax board must tell everyone on the waiting list by Dec. 31, 2011, whether they will get a credit.

People who bought a home after last year's state tax credit ran out and before this one takes effect are out of luck.

OC Default Rate Up

Bob Rowe — Thu, 18 Mar 2010 07:39:56 GMT

(Source: OC Register) According to DataQuick’s monthly report for Orange County housing for February.

The number of defaults — first step to foreclosure — was 1,775 – that’s +13.8% vs. the previous month and -35.3% vs. a year ago.
Homeowners losing their homes through foreclosure numbered 600 – that’s -9.4% vs. the previous month and -22.1% vs. a year ago.

Other Orange County lending stats for last month, including the average down payment on homes financed, share of adjustable loans used to buy; and the estimated monthly mortgage payments for financed buyers — by month and year-to-date averages …

Slice	Last month	Vs. prev. mo.	Vs. year ago	YTD average	Vs. year ago
Defaults	1,775	13.8%	-35.3%	1,668	-32.5%
Foreclosures	600	-9.4%	-22.1%	631	-21.4%
Avg. down payment	19.3%	-0.2%	7.2%	19.4%	10.3%
Adjustable loan share	6.0%	-1.2%	106.9%	6.6%	127.6%
Monthly payment index	$2,195	-0.9%	1.3%	$2,205	0.1%

Demand for O.C. homes falls 6%

Bob Rowe — Thu, 11 Mar 2010 03:43:43 GMT

(OC Register) The latest O.C. home inventory report from Steve Thomas at Altera Real Estate says that demand for local homes — new escrows open past 30 days) has fallen 6% (190 homes) to 3,054 in the past two weeks.

Thomas remarks: “The storyline remains the same: there are not enough homes coming on the market in the lower ranges to satiate the ravenous appetite of current demand. If a home is priced well and is below $750,000, it will fly off the market and generate more than one offer.”

Thomas calculates a “market time” benchmark tracking how many months it theoretically takes to sell all the inventory in the local MLS for-sale listings at the current pace of pending deals being made. By this Thomas logic, it would take: 2.77 months for buyers to gobble up all homes for sale at the current pace vs. 2.51 months two weeks vs. 4.41 months a year ago vs. 8.14 two years ago.

Homes listed for under a million bucks have a market time of 2.29 months vs. 9.18 months for homes listed for more than $1 million.

Case-Shiller Home Index improved last month...

Bob Rowe — Wed, 03 Mar 2010 08:40:30 GMT

In a review of the latest S&P/Case-Shiller Home Price Indices (HPI). Keep in mind that all of the charts in this series of posts are based on the seasonally-adjusted data provided by S&P. For the full source data behind this post, plus non-seasonally adjusted data, hit the S&P/Case-Shiller website (requires free registration).

For an explanation of how the Case-Shiller data is calculated, check out their methodology pdf. Also remember that the data released on the last Tuesday of a given month is for the period two months prior (i.e. – December data is released in February).

Here are the basic Case-Shiller stats for the Los Angeles area (which Case-Shiller defines as LA and Orange Counties) as of December:

December 2009
Month to Month: Up 1.0% (raw)
Month to Month: Up 1.7% (seasonally adjusted)
Year to Year: flat
Prices last at this level in: November 2003 (& Dec.2008)
Peak month: September 2006
Change from Peak: Down 37.4% in 39 months

Which is Better: Foreclosure or Short Sale?

Bob Rowe — Wed, 03 Mar 2010 08:37:39 GMT

(Source: Realty Times) If only the President’s foreclosure-prevention plan worked as well as “cash for clunkers”. But it hasn’t. When the Administration announced the Making Homes Affordable plan in February of 2009, officials said they hoped it would help 4 million distressed homeowners to stay in their homes. As of this writing (8/2/09), the Administration has acknowledged that there are only 200,000 trial loan modifications under way.

Clearly, lenders have been reluctant to modify loans. (Moreover, there are good reasons for their reluctance according to a recent study by the Boston Federal Reserve.) Also, many borrowers have turned out to be ineligible for the programs or – because they are so far ‘under water’ – uninterested. Whatever the cause, the result is the same: a distressed borrower typically needs to choose between (1) a short sale (where the lender agrees to take less than the amount owed) in which, among other things, a commission (paid by the lender) is generated. (2) a foreclosure, or (3) a deed in lieu of foreclosure (where the borrower ‘gives back’ the property to the lender without a foreclosure proceeding). Which is better for the borrower?

Many real estate agents will say and advertise that a short sale is clearly preferable. In support of this view, two claims are usually asserted. (1) A short sale is less damaging to the borrower’s credit than a foreclosure. (2) A short sale provides the borrower with a shorter ‘waiting period’ until the borrower will be able to purchase a home again.

It is important to note that these are two different claims. For example, in a period of time a borrower could become eligible for a purchase loan under Fannie Mae/Freddie Mac guidelines, but he or she might still not have sufficient credit or income to qualify for the loan.

While many say that a short sale is less damaging to one’s credit than is a foreclosure, documenting that claim is another story. This writer has looked hard, but can’t find any verification from Fair Issac (the developer of the FICO scoring system) or any of the major credit providers. That is probably no surprise, because their systems are proprietary. Nonetheless, one wonders what might be the source of the claim.

On the other hand, people who apparently should know deny that there is any difference. Greta Guest of the Free Press (Freep.com) quotes John Ulzheimer, president of consumer education for Atlanta-based Credit.com. Ulzheimer spent seven years at Fair Issac. “The credit bureau sees those all as equal,” Ulzheimer said. “They are all essentially in the eyes of FICO a major delinquency.” Elizabeth Razzi wrote in the Washington Post (July 20, 2008), “A foreclosure and short sale inflict equal damage to your FICO score, according to Fair Issac…” though she provides no specific citation.

Moving on from the credit score issue, there is the question of being again eligible to buy. More precisely, it is a question of when, in the future, the defaulting borrower could get a loan that would be purchased by Fannie Mae or Freddie Mac. The issue is dealt with in Fannie Mae Announcement 08-16, released June 25, 2008.

When it comes to foreclosures and deeds in lieu of foreclosure, the policy distinguishes between events that were precipitated by extenuating circumstances (e.g. job loss, major illness) and those that were not (e.g. financial mismanagement). If you’ve had a foreclosure without extenuating circumstances, you can’t purchase with a Fannie Mae – backed loan for five years. However, if there were extenuating circumstances, it drops to three years. Suppose you chose the deed in lieu of foreclosure option. If there were no extenuating circumstances, the period would be four years, but with such circumstances, it drops to two. Fannie Mae doesn’t draw the distinction when it comes to short sales: the period is two years, the same as doing a deed in lieu with extenuating circumstances.

May 15, 2009, the Treasury Department issued an update to the Making Home Affordable plan. Among other things, it provides for financial incentives (e.g. a $1,500 moving allowance) to distressed borrowers who meet the general eligibility requirements for a loan modification and who will engage in an approved short sale or who will give a deed in lieu of foreclosure.

Distressed and underwater borrowers face a minefield of options for resolving their problems. Not the least of their problems is the vast amount of misinformation floating around. They need to step very carefully.