Big National Banks: Open up the Wholesale Lending Channel.

March 3, 2016
Closing wholesale mortgage channel by big banks is like killing the messenger because they did not like the message. The mortgage bust of 2008 was not created by wholesale mortgage brokers, but as elegantly depicted in the movie, The Big Short, everyone but the brokers. Brokers did not have their own money to lend. They were just a channel by which money was pumped in the housing market by unscrupulous bankers and secondary mortgage backed securities markets and the rating agencies.

Safeguards put in place to monitor the individual brokers since the crises, including vigorous testing and licensing and extensive back ground checks including criminal and most importantly credit checks to make sure those peddling credit can at least manage their own credit, have weeded out the dishonest and incompetent brokers out of the business. Only 6% of those brokers in business in 2008 remain in business today. This is the cream of the crop that consists of knowledgeable, caring, informed, honest and hard-working professionals who understand their clients’ needs on a personal basis and can suggest better options. Moreover, compensation caps instituted by Dodd-Frank limit what the brokers make, thus dis-incentivizing hard sell pitches.

Therefore, besides opening the alt-a loans, as discussed in my post of a few days ago, the big banks need to re-open the wholesale channel. This a win-win situation for all. Banks will save the massive overhead expenses they incur in opening and managing big facilities and brokers who have a more direct relationship with the consumer can provide better service and a menu of options. With the new safeguards in place, this channel is critical to providing credit to a large swath of borrowers. This is good for the consumer, the housing market and the overall economy.

Lenders need to add Atl-A programs so that everyone can participate in housing recovery

March 1, 2016

Over the past 8 years, the lending pendulum has swung towards extremely conservative underwriting. The benefits of low interest rates have primarily accrued to those with the highest credit scores and people with secure jobs and enough cash in the banks to meet the full documentation requirements on loans that are then sold to Fannie and Freddie. With all the fines and penalties paid by both small and big banks after the hangover of the last mortgage boom, almost all the major lenders have become risk averse and have left the same people who suffered the most in the last boom and bust on the sidelines, as those with pristine credits have continued to take advantage of ever lower interest rates.
It is time to provide credit to those on the second rung of the credit ladder. Between the A paper and sub-prime resides Alt-A lending. A lot of borrowers used Alt-A from banks like Greenpoint in 1990s, when they did not have either sufficient income, assets or credit history to qualify. This program is perfect for those who don’t have two years’ full incomes, or sufficient cash reserves or W-2 salaried jobs, or in other words those other than mostly well off with stable incomes and credits. Alt-A serves people with at least a minimum fico of 680, who may be lacking one or the other requirements of prime lending. Alt-A can be a common sense alternative if used wisely, i.e., verify self employment income, limit loan to values to no more than 75 percent, use one year’s income if possibility of continued employment is high and limit to owner occupied properties. There are a few banks out there offering this at sub-prime rates. However, It is time the pendulum starts swinging back towards the middle and banks need to start offering this product and the secondary market needs to open up. It will be good for the middle tier borrowers, the housing market and the overall economy.

Are Home Improvements Tax Deductible

Feb 26, 2016—Tax season is lurking right around the corner. As April approaches, many homeowners are wondering if their 2015 home improvements are tax deductible. The answer, however, is not so easy.

“Major home improvements are tax deductible,” says Balram Kakkar, a New York attorney and Real Estate Professional of , “but only after you have sold your home.” So while you may not be able to claim these deductions this year, Kakkar suggests you keep track of all improvements for the day you decide to sell.

But are you able to deduct all home improvements? According to the IRS, a tax-acceptable improvement is defined as one that adds value to your home, "considerably" prolongs your home's useful life, or adapts your house to new uses.

What improvements fall into this category? Examples, according to Kakkar, include new plumbing or wiring, or adding a bathroom. So while you can write off that first floor half bath, your new patio and swimming pool set-up likely won't count.

“If the work done on the home is purely for maintenance, the cost cannot be deducted and generally cannot be added to the basis, or value, of your home,” explains Kakkar.

Home Price Index continues to rise, though only at 3.3% in New York City

According to the latest results for the S&P/Case-Shiller National Home Price Index, home prices continued to rise across the country during the last 12 months. The Index, which covers all nine U.S. census divisions, showed a 5.4% annual increase in December 2015 as compared to a 5.2% increase in November 2015.
The 20-City Composite, which measures the value of residential real estate in 20 major U.S. metropolitan areas, recorded a year-over-year gain of 5.7% in December 2015. Portland, San Francisco and Denver reported the highest year-over-year gains among the 20 cities measured, at 11.4%, 10.3% and 10.2%, respectively. In comparison to those increases, New York City saw a year-over-year gain of 3.3%, among the lowest of the 20 cities measured in the index. In total, thirteen cities reported greater home price increases in the year ending December 2015 versus the year ending November 2015.
The general takeaway from these indices is that while home prices have continued to rise, the pace has slowed. Nonetheless, home prices in all but one city measured by the 20-City Composite are rising faster than the rate of inflation.

Investing Retirement Funds In Real Estate

Investing wisely in investment real estate is a fantastic way to boost returns in your retirement accounts. If your investment adviser is simply buying index funds and charging you management fees, you accounts will be stagnant and you will be working through retirement. Instead consider investing your retirement assets into a “self-directed” IRA and see your savings grow long-term, tax-deferred or tax-free. You must however follow strict rules so as not run afoul of IRS regulations.
Eligible properties
You must invest in a business property, not a personal residence, second home or occasional rental. Also, you cannot use your IRA to buy a property you already own; it has to be a new purchase directly into the IRA or other retirement account vehicle. To invest in a rental property, you can open an IRA custodial account, transfer cash from an existing IRA account — or possibly 401(k) — into the custodial account and then purchase real estate under the IRA account name. You must pay attention to very specific IRS rules in what you can and cannot do in funding and managing the investment. You can also buy and sell real estate in a self-directed IRA if you are in the flipping business, but there are limits on how many you can do per year. The profits on any transaction would be tax-deferred or tax-free and allow your IRA to continue to grow with those tax advantages.
IRA investing concerns
The negative side of investing through your retirement funds is your inability to leverage. You can’t get a traditional mortgage loan in an IRA, so you must have sufficient funds in your IRA to permit you to complete the purchase. In the alternative, you could purchase part of the property as Tenants in common with another person or your-self in an Entity or your individual name. This further complicates the tax and deduction part of the investment as all income and expenses must be calculated and accounted for meticulously.
There are also costs to administering the IRA/retirement account, so factor those into your calculations. Furthermore, as this is a tax free vehicle, you cannot write off losses or depreciation from any investment property in an IRA, so there won’t be the traditional tax savings you would get on rental properties. Most importantly, if you fail to comply with any of the rules, it may kill your IRA and expose you to fines and penalties. So tread carefully and get good advice. There are several reputable self-directed IRA custodians on your finger(google)-tips who can advise and guide you through this oft-overlooked investment vehicle.

Strategies for buying and financing Investment Properties

As it has become harder to get qualified for conventional loans, it may be worthwhile for investors to consider buying properties that are not classified as one-family. A lot of small commercial banks will underwrite properties that are 2 family and higher and/or mixed use apartment buildings more easily than conventional banks. 

While underwriting a conventional loan, that then gets sold Fannie Mae or Freddie Mac, most banks look beyond the cash flow of the property being purchased.  They also scrutinize the full income and expenses of the individual owner.  If you are an investor, it is highly likely that you have multiple properties and conventional underwriting gives you credit only for 75% of the investment rental income, before they deduct expenses related to that property.  In addition, they look for a Schedule E or other proof of actual rental income for the past several years. They also look at the borrower’s other sources of income such as salary, self-employment, interest and dividend income and qualify based on all the income and expenses.  They will deny the loan if your housing expenses are above a certain percent of your income, generally, about 28% all your expenses, called the “front ratio” and all your liabilities, including housing expenses are in excess of 33% of all you income,  called the “back ratio.”  For investors this process can sometimes stretch to several months as the banks come back for more and more paperwork and letters of explanation.

A commercial bank, on the hand, will keep the loan on it own books and not sell it Fannie Mae or Freddie Mac or the secondary market. It will review credit and income; however, it will underwrite the investment on a Debt Service Ratio (“DSR”) basis.  Your credit score is still relevant, but the cash flow for the property being financed is more relevant.  As an example, it your annual rental income on a property is $12,500 and your annual expenses, including taxes, insurance, upkeep, etc., plus the payments on the loan are $10,000 per month, your DSR is 1.25.  Most commercial banks will calculate the repayment on a 25 year amortization schedule and approve only a 5 year fixed loan, which will balloon in 5 years, there are banks, that will use a DSR as low as 1.15, go as high as a 30 year amortization with a five year initial term, with a five year renewal, based on an pre-determined index and margin.  They will generally also have a pre-payment penalty built into the loan.

This is a great way to qualify for investors in multi-family residential and commercial loans.

Pan Am Mortgage works with numerous lenders in both residential and commercial mortgage space and we will re-qualify you before you take the time to look for the right property.

Single-family starts tumbled 14.1 percent in Northeast

U.S. housing starts unexpectedly fell in January likely as bad weather disrupted building projects in some parts of the country, in what could be a temporary setback for the housing market.

Groundbreaking fell 3.8 percent to a seasonally adjusted annual pace of 1.099 million units, the Commerce Department said on Wednesday. Part of the decline in starts could be attributed to the snowstorms, which blanketed the Northeast last month.

December's starts were revised down to a 1.143 million-unit rate from the previously reported 1.15 million-unit pace. Economists polled had forecast housing starts rising to a 1.17 million-unit pace last month.

The report comes on the heels of a survey on Tuesday showing confidence among homebuilders fell in February amid concerns over "the high cost and lack of availability of lots and labor."

Builders were less optimistic about current sales. Still, the housing market fundamentals remain strong, with a tightening labor market starting to push up wage growth.

Though residential construction accounts for a small fraction of gross domestic product, the decline in starts at the beginning of the year suggests that an anticipated rebound in economic growth will be modest. The economy grew at a 0.7 percent annual pace in the fourth quarter after consumer spending moderated and a strong dollar hurt exports. Gross domestic product growth was also restrained by efforts by businesses to sell inventory and cuts in capital goods spending by energy firms.

GDP growth estimates for the first quarter are currently around a 2 percent rate.  In January, single-family housing starts, the largest segment of the market, fell 3.9 percent to a 731,000-unit pace.

Single-family starts tumbled 14.1 percent in Northeast and fell 3.8 percent in Midwest. Groundbreaking on single-family projects was unchanged in the South, where most home building takes place. Single-family starts in the West slipped 0.4 percent. Housing starts for the volatile multi-family segment dropped 3.7 percent to a 368,000-unit pace.

Building permits dipped 0.2 percent to a 1.202 million-unit rate last month. Permits for the construction of single-family homes fell 1.6 percent last month. Multi-family building permits increased 2.1 percent.

Applications for New Home Purchases Increased in January

WASHINGTON, D.C. (February 11, 2016) - The Mortgage Bankers Association (MBA) Builder Application Survey (BAS) data for January 2016 shows mortgage applications for new home purchases increased by 14 percent relative to the previous month. This change does not include any adjustment for typical seasonal patterns.

By product type, conventional loans composed 67.4 percent of loan applications, FHA loans composed 19.5 percent, RHS/USDA loans composed 0.7 percent and VA loans composed 12.4 percent. The average loan size of new homes decreased from $333,182 in December to $325,806 in January.

The MBA estimates new single-family home sales were running at a seasonally adjusted annual rate of 499,000 units in January 2016, based on data from the BAS. The new home sales estimate is derived using mortgage application information from the BAS, as well as assumptions regarding market coverage and other factors. 

The seasonally adjusted estimate for January is an increase of 4.0 percent from the December pace of 480,000 units.  On an unadjusted basis, the MBA estimates that there were 38,000 new home sales in January 2016, an increase of 11.8 percent from 34,000 new home sales in December. 

MBA's Builder Application Survey tracks application volume from mortgage subsidiaries of home builders across the country.  Utilizing this data, as well as data from other sources, MBA is able to provide an early estimate of new home sales volumes at the national, state, and metro level.  This data also provides information regarding the types of loans used by new home buyers.  Official new home sales estimates are conducted by the Census Bureau on a monthly basis.  In that data, new home sales are recorded at contract signing, which is typically coincident with the mortgage application.