7 Simple Steps to a Dirt-Cheap Mortgage
by Luke Mullins, USNews.com
How to get today's lowest financing costs for home buying or mortgage refinancing
With the national housing bust still rippling through the economy, the battered real estate market is offering up tempting incentives for consumers to jump in. Home prices at the national level have plummeted more than 32 percent since 2006, presenting real estate shoppers with some outstanding bargains. What's more, President Barack Obama's stimulus package included a tax credit worth up to $8,000 for qualified first-time home buyers. Then there's the mortgage market. After the Fed announced plans beginning last fall to buy up Fannie Mae and Freddie Mac mortgage-backed securities and long-term treasury bonds, mortgage rates dropped to all-time lows. But consumers looking to take advantage of these attractive rates-through refinancing a mortgage or buying a home-are often left with puzzling questions: What direction are mortgage rates headed from here? Is now the best time to refinance? To answer those and other burning questions, U.S. News surveyed a handful of experts and compiled a list of seven simple steps to snag a dirt-cheap mortgage.
1. Know the trends: While 30-year fixed mortgage rates averaged a very attractive 5 percent for the week ending May 22, they spiked to 5.29 percent May 27, according to HSH.com. Keith Gumbinger, a vice president with the mortgage information publisher, expects rates to remain a little over 5 percent for the rest of the year. "The Fed has plenty of balance sheet space to go out and buy enough mortgages to keep rates at these levels," Gumbinger says. Could mortgage rates end up higher? Sure. The massive amount of government debt needed to finance the Obama administration's huge bailout and stimulus programs has already pushed yields on 10-year treasury notes-which fixed mortgage rates typically track-sharply higher. That, in turn, has triggered a surge in mortgage rates in recent days. Mike Larson, a real estate analyst for Weiss Research, believes this pressure will push mortgage rates even higher in the coming months. "I'm not expecting a huge move," he says. "A move to [about 5.5 percent] is very likely in the cards for the coming couple of months." But even rates of 5.5 percent are extremely low by historical standards.
At the same time, mortgage rates on "jumbo loans" have fallen sharply, from an average of 7.90 percent in the week ending Oct. 31, 2008, to 6.34 percent during the week of May 22. Jumbo mortgages-those that are too large to be purchased by Fannie and Freddie-have loan amounts greater than $417,000, although this limit can be higher in certain parts of the country. Gumbinger says rates on jumbo loans could get even more attractive by the end of the year.
2. Pull the trigger: Mortgage rates, of course, are not the only factor to consider when deciding whether or not to buy a home. For consumers who are confident about their employment prospects and plan to live in the property for at least three to five years, the current mortgage rates make home buying all the more attractive. "If near 50-year-low interest rates are not the proper inducement, what is?" Gumbinger says. And since calling the bottom of any market is nearly impossible, those looking to refinance are better off locking in today's rates, rather than hoping they head even lower. Larson calls pulling the trigger on current rates a "no brainer" for prospective mortgage refinancers. "Locking in makes sense," he says. Still, anyone looking to refinance should ensure that the new rate would be at least a full percentage point below the current rate. That should provide enough of a monthly payment differential for the borrower to recoup the fees associated with the transaction over a reasonable time.
3. Understand the criteria: In the face of higher delinquencies, bankers have tightened lending standards for borrowers of all sorts. So while current mortgage rates are certainly attractive, only those borrowers who fit today's tighter credit profile will be able to access the cheapest financing. For a home purchase, those standards include a FICO score of around 720, a down payment of at least 3.5 percent, manageable levels of debt, and documented income verification. People looking to refinance, meanwhile, will need to document their income and must typically have an equity position of at least 10 percent in their home, Gumbinger says.
4. Clean and polish: Don't panic if you don't meet these requirements; there are steps you can take to improve your credit profile. Reduce your debt load by paying down credit cards or student loans. Consider putting off your home purchase for a couple of months as you save up for a down payment. To boost your credit score, obtain your credit reports from each of the three main credit reporting bureaus: TransUnion, Equifax, and Experian. By law, consumers are entitled to one free credit report from each of these bureaus during any 12-month period, which can be obtained through annualcreditreport.com. Examine each report thoroughly to ensure that everything is accurate. "If you are a junior and your father is a senior who's got rotten credit habits, make sure that your report is distinguished from his," says Gail Cunningham of the National Foundation for Credit Counseling. If you discover any inaccurate material, contact the appropriate credit bureau about filing a dispute. Next, take care of any unpaid obligations and, in the future, make sure to pay all of your bills on time.
5. Shop around: Since rates and fees vary widely among lenders in today's market, consumers intent on getting the best mortgage deal will have to do some digging, says Rick Allen, director of strategic initiatives for Mortgage Marvel. "It comes down to shopping around," Allen says. "The market is pretty efficient, but different lenders are looking for different levels of profitability." Allen suggests consumers check out from three to 20 different mortgage providers and compare their mortgage rates, fees, and closing costs. "Those three factors together ... really go to determine whether or not you are getting the best deal," he says.
6. Be patient: Because the Fed-engineered drop in mortgage rates was so unexpected-and occurred just as the industry was slashing jobs-many lenders have been inundated with applications. "In the beginning of the year, it was hard to find a lender who would even answer the phone and take an application," says Guy Cecala, publisher of the trade publication Inside Mortgage Finance. And although lenders have recently been beefing up their staffs, an average mortgage refinancing can still take about six weeks to close, Cecala says. That means borrowers should be persistent but patient. There are, after all, only so many phone calls that a lender can return in a day.
7. Be prepared: One way consumers can help improve the efficiency of the mortgage application process is to have all of their paperwork in order before speaking with a lender. "There is no excuse for not being prepared," Gumbinger says. "Go ahead and get your paperwork, get your documentation in order, go through your credit reports, do all of your prep work [beforehand]."
Showing page 1 of 1
Wednesday, June 3, 2009
Friday, May 22, 2009
2 Students at Local High School Have Confirmed Cases of Swine Flu
LUSBY - 5/21/2009
The Calvert County Health Department today (May 21) notified Calvert County Public Schools that two students at Patuxent High School had confirmed cases of H1N1 influenza.
Both students have recovered but will not attend school for the remainder of the school year.
School officials are not closing Patuxent High School. This is in line with the current recommendation from the Centers for Disease Control and the Department of Health and Mental Hygiene.
"We are asking parents to remain alert to possible signs of the flu in their children," said Jack Smith, Superintendent. If students are sick, school officials ask that parents keep them home until they are cleared to return to school by a healthcare provider.
"Please be assured that we are doing everything possible to keep your child/children safe at school," Smith said.
Smith sent a letter to staff and parents today informing them of the situation.
Dear Parents,
Calvert County Public Schools received notification today from the Calvert County Health Department of two confirmed cases of H1N1 influenza involving students from Patuxent High School. While both students have recovered, they will not be in attendance at school for the remainder of this year.
We will continue to follow the recommendations from the U.S. Centers for Disease Control and Prevention, the Maryland Department of Health and Mental Hygiene and the Calvert County Health Department.
Specifically, CDC has recommended - and DHMH agrees - that it is no longer necessary to close schools because of H1N1 influenza.
This new recommendation does not mean the end of H1N1 influenza. DHMH continues to monitor cases of H1N1 flu and parents should remain alert to possible signs of the flu in their children. These signs include:
* Fever (a temperature more than 100° F or 37.8° C) AND cough, sore throat, runny nose, or nasal stuffiness
* Other symptoms can include body aches, headache, chills and fatigue, or, occasionally, vomiting and diarrhea
If your child has these symptoms, contact your doctor and the school. Parents are urged to keep sick children at home, unless your healthcare provider has requested to see the child. Make sure you call ahead to the doctor, so that your doctor can protect your child and others. Please do not send your child to school or daycare. If someone in your home is sick, keep him or her away from those who are not sick.
Children who may have the flu should be kept home for 7 days, even if they are feeling better. If they are not better by Day 7, they should be kept home until they have been well and fever-free for at least 24 hours.
The following are things you can do to reduce the chances of getting the H1N1 (swine) flu:
* Teach your children to wash their hands with soap and water for 20 seconds. Be sure to set a good example by doing this yourself.
* Teach your children to cough and sneeze into a tissue or into the inside of their elbow.
* Tissues should be discarded after a single use and hands washed.
* Children who are sick should stay home from school or daycare and stay away from other people until they are better.
* Check your children, and school faculty and staff should also self-monitor every morning for symptoms of influenza-like illness.
If your child is absent from school for any reason, please report the absence to your child's school. It is very important, while monitoring conditions such as these, for the school to have accurate information about absences.
Please be assured that we are doing everything possible to keep your child/children safe at school. If you have questions or concerns, please contact your school.
Sincerely,
Jack R. Smith, Ph.D.
Superintendent of Schools
The Calvert County Health Department today (May 21) notified Calvert County Public Schools that two students at Patuxent High School had confirmed cases of H1N1 influenza.
Both students have recovered but will not attend school for the remainder of the school year.
School officials are not closing Patuxent High School. This is in line with the current recommendation from the Centers for Disease Control and the Department of Health and Mental Hygiene.
"We are asking parents to remain alert to possible signs of the flu in their children," said Jack Smith, Superintendent. If students are sick, school officials ask that parents keep them home until they are cleared to return to school by a healthcare provider.
"Please be assured that we are doing everything possible to keep your child/children safe at school," Smith said.
Smith sent a letter to staff and parents today informing them of the situation.
Dear Parents,
Calvert County Public Schools received notification today from the Calvert County Health Department of two confirmed cases of H1N1 influenza involving students from Patuxent High School. While both students have recovered, they will not be in attendance at school for the remainder of this year.
We will continue to follow the recommendations from the U.S. Centers for Disease Control and Prevention, the Maryland Department of Health and Mental Hygiene and the Calvert County Health Department.
Specifically, CDC has recommended - and DHMH agrees - that it is no longer necessary to close schools because of H1N1 influenza.
This new recommendation does not mean the end of H1N1 influenza. DHMH continues to monitor cases of H1N1 flu and parents should remain alert to possible signs of the flu in their children. These signs include:
* Fever (a temperature more than 100° F or 37.8° C) AND cough, sore throat, runny nose, or nasal stuffiness
* Other symptoms can include body aches, headache, chills and fatigue, or, occasionally, vomiting and diarrhea
If your child has these symptoms, contact your doctor and the school. Parents are urged to keep sick children at home, unless your healthcare provider has requested to see the child. Make sure you call ahead to the doctor, so that your doctor can protect your child and others. Please do not send your child to school or daycare. If someone in your home is sick, keep him or her away from those who are not sick.
Children who may have the flu should be kept home for 7 days, even if they are feeling better. If they are not better by Day 7, they should be kept home until they have been well and fever-free for at least 24 hours.
The following are things you can do to reduce the chances of getting the H1N1 (swine) flu:
* Teach your children to wash their hands with soap and water for 20 seconds. Be sure to set a good example by doing this yourself.
* Teach your children to cough and sneeze into a tissue or into the inside of their elbow.
* Tissues should be discarded after a single use and hands washed.
* Children who are sick should stay home from school or daycare and stay away from other people until they are better.
* Check your children, and school faculty and staff should also self-monitor every morning for symptoms of influenza-like illness.
If your child is absent from school for any reason, please report the absence to your child's school. It is very important, while monitoring conditions such as these, for the school to have accurate information about absences.
Please be assured that we are doing everything possible to keep your child/children safe at school. If you have questions or concerns, please contact your school.
Sincerely,
Jack R. Smith, Ph.D.
Superintendent of Schools
Tuesday, May 19, 2009
Refinance, If You Can
Rates may be tantalizing, but be prepared to jump through many hoops.
Refinance your mortgage now and you may capture the lowest interest rate of your lifetime. But unlike a couple of years ago, when it seemed all you needed was a pay stub (if that) and an eager mortgage broker, today's process can be tedious. That's because the demand for refinancing is high, standards are stricter, and the number of people processing mortgages is down. Here's what you should know before you refinance.
What's the outlook for rates?
Expect the 30-year fixed rate to hover near 5% for the balance of this year or, if the economy improves a tad, to creep up to 5.25%, says Keith Gumbinger, of financial publisher HSH Associates. HSH's survey of lenders pegged the national average 30-year fixed rate at 4.97% the week ending May 1. The average 15-year fixed rate was 4.68% and the average 5/1 adjustable-rate mortgage (which has a rate that's fixed for five years, then changes every year after) was 4.91%.
Given that the spread is so narrow between a 30-year fixed-rate loan and a 5/1 ARM, and that rates are at historically low levels, it makes no sense to take out an ARM now.
Rates will rise when inflation heats up, but that's not an immediate risk. Kiplinger forecasts that the rate of inflation will stay steady for at least the next couple of months.
Who qualifies for the best rates?
You'll generally get the lowest rate on loans backed by Fannie Mae or Freddie Mac -- together they back about two-thirds of all mortgage loans -- if you're taking out a conforming loan, and if you have a credit score of at least 720 and equity of 20% or more. Other factors that will help: if the property you're refinancing is the single-family home you live in, if you don't take out some of your equity in cash when you refinance, and if you don't take out a home-equity loan or line of credit. Of course, you can reduce your rate by paying points at closing. A discount point is equivalent to 1% of your loan amount. Paying one point usually lowers your interest rate by 0.25 percentage point.
What documents will I need?
To get the most accurate estimate of the rate for which you'll qualify, provide a prospective lender with your FICO score ($8 with the Equifax report when you order free credit reports from www.annualcreditreport.com) and an estimate of your home's market value. You can get this from a real estate agent or from sources such as Zillow.com and Trulia.com, which will show you recent comparable sales in your area.
When you apply to refinance your mortgage, you must provide pay stubs from a recent month, two months of bank and other financial statements, two years of W-2s and, if you're self-employed, two years of tax returns showing self-sustaining income. The requirement for all these documents contrasts with the "no-doc" or "liar" loans available during the real estate boom that allowed borrowers merely to state their income without providing proof.
You can take additional measures to speed up the process. Phoenix mortgage broker Tracy Tolleson urges his clients to fill out an application and pay for an appraisal (about $350) ahead of time. That can be particularly helpful if you're delaying your application in order to lock in a lower rate. There is a brief lag in applications to lenders between the time rates drop and the point that lenders become swamped with new customers. With all your paperwork in order, you can beat the rush.
If you have a home-equity loan or line of credit, your current lender will have to document its willingness to "resubordinate" to your new first mortgage -- that is, stand behind the first lender for compensation if you default.
Where should I apply?
Guy Cecala, publisher of Inside Mortgage Finance, recommends calling at least several lenders, including credit unions in addition to the local branch offices of national, regional and local banks. Cecala says some banks' divisions that typically serve only a bank's more affluent customers (say, with $100,000 or more in deposits) now offer good deals to non-depositors.
Also, check with mortgage brokers. They may prove especially helpful if your needs or qualifications aren't straightforward, says Cecala. If your application is declined, good brokers, who represent multiple lenders, will appeal the decision or take the application to another lender that may approve it.
Should I lock in the offered rate?
Locking in a rate is a good idea for a couple of reasons. First, if the mortgage pushes the limits of what you can afford, you want ensure that rising rates won't torpedo the deal. Second, the risk that rates will change before the deal closes is higher these days because loans are taking so long to process. Because mergers and layoffs have decimated many lenders' staffs, refis are taking an average of 60 days to close. Locking in a rate will cost you, of course -- lenders usually add a quarter of a percentage point to your interest rate for every 30 days you lock in a rate, up to 90 days. Be sure to get it in writing.
Of course, rates may decline further. To take advantage of that, ask about a "float down" option. For example, if rates drop a minimum of 0.25%, you can capture the lower rate before you close on the loan. Lenders will usually charge you a $200 to $300 nonrefundable fee for the option, but it can save you thousands of dollars over the life of the loan if rates go down.
How much equity must I have?
Fannie and Freddie require just 5% equity in your home (more for a second home, investment property or a mortgage with secondary financing). However, you must get private mortgage insurance (PMI protects the lender if you default) if you have less than 20% equity.
In markets where home prices are declining, the mortgage insurers won't cover conventional loans with less than 10% equity or jumbo loans with less than 15%. But PMI can be expensive -- the less equity you have, the more costly it is -- and the added cost could disqualify you from refinancing.
During the boom years, homeowners avoided PMI by taking piggyback mortgages -- for example, a first mortgage for 80% of the home's price and a second mortgage for the balance. That tactic has almost disappeared.
The PMI problem is one reason the Federal Housing Administration, long a haven for the credit challenged, is doing land-office business these days. The week ending May 1, the average 30-year fixed rate on an FHA loan was 4.97%.
With FHA, you can refinance with only 2.25% equity. FHA provides its own mortgage insurance, for which you'll pay both an upfront and a monthly premium. FHA itself doesn't impose a credit-score threshold, but some FHA-approved lenders require a minimum credit score, from about 580 to 620.
You should know that Fannie and Freddie generally set the limit for mortgage-loan payments at 36% of your monthly pretax income, unless you can prove you can handle more.
I'm underwater on my mortgage and my payment is killing me. What can I do?
Small consolation, but you have a lot of company: One in five homeowners now owes more than their home is worth, according to First American Core Logic. The goal here isn't necessarily to lock in the lowest interest rate, but simply to qualify to refinance with a mortgage you can afford. You may have two options, presuming that you have a job and meet other qualifications.
The first is the Home Affordable program. Announced in March by the Obama administration, this helps homeowners who owe more than their home is worth and need a more affordable payment. The Home Affordable refi will feature a market rate of interest that's fixed for at least five years.
It's no panacea. You'll qualify only if Fannie Mae or Freddie Mac owns your current loan (to find out more, visit www.makinghomeaffordable.gov). The balance of your first mortgage can't exceed your home's value by more than 5%. That limit disqualifies plenty of homeowners in distressed markets in California, Arizona, Nevada and Florida, where home values have plummeted. The program ends in June 2010.
The second is the Hope for Homeowners program. This may help if you're at risk of default or already in foreclosure or bankruptcy. So far, these FHA-insured loans have had relatively few takers (recently only 51 of the loans had closed). That's because the cost is high for both lenders and borrowers -- although hopefully less onerous to both than the cost of foreclosure.
The Obama administration has proposed fixes to the program to make it more effective, including easing eligibility requirements for borrowers and reducing their costs. For more information about eligibility and where to apply, visit www.hud.gov/hopeforhomeowners.
What about jumbo loans?
As long as you can jump the hurdles to qualify and the loan you need falls within the limit for your metro area, conforming jumbos are readily available. The week ending May 1, the average 30-year fixed rate on a conforming jumbo was 5.28%, and the average 5/1 adjustable rate was 5.0%. The loan limit for conforming jumbos backed by Fannie, Freddie and the Federal Housing Administration is 125% of the median home price in your metro area -- up to a maximum of $729,750 in high-cost areas.
Refinance your mortgage now and you may capture the lowest interest rate of your lifetime. But unlike a couple of years ago, when it seemed all you needed was a pay stub (if that) and an eager mortgage broker, today's process can be tedious. That's because the demand for refinancing is high, standards are stricter, and the number of people processing mortgages is down. Here's what you should know before you refinance.
What's the outlook for rates?
Expect the 30-year fixed rate to hover near 5% for the balance of this year or, if the economy improves a tad, to creep up to 5.25%, says Keith Gumbinger, of financial publisher HSH Associates. HSH's survey of lenders pegged the national average 30-year fixed rate at 4.97% the week ending May 1. The average 15-year fixed rate was 4.68% and the average 5/1 adjustable-rate mortgage (which has a rate that's fixed for five years, then changes every year after) was 4.91%.
Given that the spread is so narrow between a 30-year fixed-rate loan and a 5/1 ARM, and that rates are at historically low levels, it makes no sense to take out an ARM now.
Rates will rise when inflation heats up, but that's not an immediate risk. Kiplinger forecasts that the rate of inflation will stay steady for at least the next couple of months.
Who qualifies for the best rates?
You'll generally get the lowest rate on loans backed by Fannie Mae or Freddie Mac -- together they back about two-thirds of all mortgage loans -- if you're taking out a conforming loan, and if you have a credit score of at least 720 and equity of 20% or more. Other factors that will help: if the property you're refinancing is the single-family home you live in, if you don't take out some of your equity in cash when you refinance, and if you don't take out a home-equity loan or line of credit. Of course, you can reduce your rate by paying points at closing. A discount point is equivalent to 1% of your loan amount. Paying one point usually lowers your interest rate by 0.25 percentage point.
What documents will I need?
To get the most accurate estimate of the rate for which you'll qualify, provide a prospective lender with your FICO score ($8 with the Equifax report when you order free credit reports from www.annualcreditreport.com) and an estimate of your home's market value. You can get this from a real estate agent or from sources such as Zillow.com and Trulia.com, which will show you recent comparable sales in your area.
When you apply to refinance your mortgage, you must provide pay stubs from a recent month, two months of bank and other financial statements, two years of W-2s and, if you're self-employed, two years of tax returns showing self-sustaining income. The requirement for all these documents contrasts with the "no-doc" or "liar" loans available during the real estate boom that allowed borrowers merely to state their income without providing proof.
You can take additional measures to speed up the process. Phoenix mortgage broker Tracy Tolleson urges his clients to fill out an application and pay for an appraisal (about $350) ahead of time. That can be particularly helpful if you're delaying your application in order to lock in a lower rate. There is a brief lag in applications to lenders between the time rates drop and the point that lenders become swamped with new customers. With all your paperwork in order, you can beat the rush.
If you have a home-equity loan or line of credit, your current lender will have to document its willingness to "resubordinate" to your new first mortgage -- that is, stand behind the first lender for compensation if you default.
Where should I apply?
Guy Cecala, publisher of Inside Mortgage Finance, recommends calling at least several lenders, including credit unions in addition to the local branch offices of national, regional and local banks. Cecala says some banks' divisions that typically serve only a bank's more affluent customers (say, with $100,000 or more in deposits) now offer good deals to non-depositors.
Also, check with mortgage brokers. They may prove especially helpful if your needs or qualifications aren't straightforward, says Cecala. If your application is declined, good brokers, who represent multiple lenders, will appeal the decision or take the application to another lender that may approve it.
Should I lock in the offered rate?
Locking in a rate is a good idea for a couple of reasons. First, if the mortgage pushes the limits of what you can afford, you want ensure that rising rates won't torpedo the deal. Second, the risk that rates will change before the deal closes is higher these days because loans are taking so long to process. Because mergers and layoffs have decimated many lenders' staffs, refis are taking an average of 60 days to close. Locking in a rate will cost you, of course -- lenders usually add a quarter of a percentage point to your interest rate for every 30 days you lock in a rate, up to 90 days. Be sure to get it in writing.
Of course, rates may decline further. To take advantage of that, ask about a "float down" option. For example, if rates drop a minimum of 0.25%, you can capture the lower rate before you close on the loan. Lenders will usually charge you a $200 to $300 nonrefundable fee for the option, but it can save you thousands of dollars over the life of the loan if rates go down.
How much equity must I have?
Fannie and Freddie require just 5% equity in your home (more for a second home, investment property or a mortgage with secondary financing). However, you must get private mortgage insurance (PMI protects the lender if you default) if you have less than 20% equity.
In markets where home prices are declining, the mortgage insurers won't cover conventional loans with less than 10% equity or jumbo loans with less than 15%. But PMI can be expensive -- the less equity you have, the more costly it is -- and the added cost could disqualify you from refinancing.
During the boom years, homeowners avoided PMI by taking piggyback mortgages -- for example, a first mortgage for 80% of the home's price and a second mortgage for the balance. That tactic has almost disappeared.
The PMI problem is one reason the Federal Housing Administration, long a haven for the credit challenged, is doing land-office business these days. The week ending May 1, the average 30-year fixed rate on an FHA loan was 4.97%.
With FHA, you can refinance with only 2.25% equity. FHA provides its own mortgage insurance, for which you'll pay both an upfront and a monthly premium. FHA itself doesn't impose a credit-score threshold, but some FHA-approved lenders require a minimum credit score, from about 580 to 620.
You should know that Fannie and Freddie generally set the limit for mortgage-loan payments at 36% of your monthly pretax income, unless you can prove you can handle more.
I'm underwater on my mortgage and my payment is killing me. What can I do?
Small consolation, but you have a lot of company: One in five homeowners now owes more than their home is worth, according to First American Core Logic. The goal here isn't necessarily to lock in the lowest interest rate, but simply to qualify to refinance with a mortgage you can afford. You may have two options, presuming that you have a job and meet other qualifications.
The first is the Home Affordable program. Announced in March by the Obama administration, this helps homeowners who owe more than their home is worth and need a more affordable payment. The Home Affordable refi will feature a market rate of interest that's fixed for at least five years.
It's no panacea. You'll qualify only if Fannie Mae or Freddie Mac owns your current loan (to find out more, visit www.makinghomeaffordable.gov). The balance of your first mortgage can't exceed your home's value by more than 5%. That limit disqualifies plenty of homeowners in distressed markets in California, Arizona, Nevada and Florida, where home values have plummeted. The program ends in June 2010.
The second is the Hope for Homeowners program. This may help if you're at risk of default or already in foreclosure or bankruptcy. So far, these FHA-insured loans have had relatively few takers (recently only 51 of the loans had closed). That's because the cost is high for both lenders and borrowers -- although hopefully less onerous to both than the cost of foreclosure.
The Obama administration has proposed fixes to the program to make it more effective, including easing eligibility requirements for borrowers and reducing their costs. For more information about eligibility and where to apply, visit www.hud.gov/hopeforhomeowners.
What about jumbo loans?
As long as you can jump the hurdles to qualify and the loan you need falls within the limit for your metro area, conforming jumbos are readily available. The week ending May 1, the average 30-year fixed rate on a conforming jumbo was 5.28%, and the average 5/1 adjustable rate was 5.0%. The loan limit for conforming jumbos backed by Fannie, Freddie and the Federal Housing Administration is 125% of the median home price in your metro area -- up to a maximum of $729,750 in high-cost areas.
Friday, May 15, 2009
America's Best Bargain Cities
Try these places if you want to get the most for your money
by Zack O'Malley Greenburg
Nearly a decade ago, after making a donation to a volunteer-run radio station in Austin, Texas, local librarian Red Wassenich was asked why he chose to support a broadcaster with a penchant for playing strange crooner music. "Because it keeps Austin weird," he said.
Since then, the phrase "Keep Austin Weird" has become the city's official rallying cry against the establishment of large chain stores near mom-and-pop shops--and, more generally, for maintaining the city's eccentric feel. The city may be weird, but perhaps more redeeming is that it's also a bargain to live there: Austin is the place where people pay the least to get the most.
"Austin has always been really different from the rest of Texas," says Wassenich, 59.
He's talking about the city's weirdness, but he might as well be talking about its affordability and profusion of job opportunities. Four other Texas cities make the list of America's Best Bargain Cities, but none come close to Austin, whose 5.5% unemployment is the best in the country and about half the national average.
Behind the Numbers
To determine which U.S. cities are the best bargains, Forbes looked at the country's 50 largest U.S. metropolitan statistical areas and metropolitan divisions--geographic entities defined by the U.S. Office of Management and Budget used by federal agencies in collecting, tabulating and publishing federal statistics.
We assigned points to metro regions across four data sets: Average salary for workers with a bachelor's degree or higher, from PayScale.com; annual unemployment statistics, from the Bureau of Labor Statistics; cost of living, from Moody's Economy.com; and the Housing Opportunity Index, from the National Association of Home Builders/Wells Fargo, which measures the amount of homes sold in a given area that would be affordable to a family earning the local median income based on standard mortgage underwriting criteria.
Austin earned high marks across the board.
"They have the triple-whammy of being a university town, a state capital and a technology center," says Al Lee, director of quantitative analysis at PayScale.com, a salary data aggregator based in Seattle. "It makes for a very robust economy and a great place for people to work."
Second on our list is Phoenix, Ariz., but what makes this city affordable isn't quite the same formula as in Austin. The real estate bust left the desert oasis as one of America's emptiest cities, which has also driven down home prices. As a result, Phoenix is one of the most affordable big cities in the nation.
Washington, D.C., rounds out the top three, thanks to an employment rate rivaled only by Austin. That comes as no surprise to Lee.
"Between defense spending under Bush and stimulus spending under Obama, it's been an incredibly strong time," he says.
Further on, the list includes a few places that may raise an eyebrow or two. Ritzy Cambridge, Mass., clocked in at No. 11 because of extremely high salary scores, while Detroit's rock-bottom housing costs earned the city a No. 15 rank--despite an astronomical 13% unemployment rate. That's roughly twice Austin's rate.
Lone Star Constellation
While the capital of Texas graced the top of our list, the rest of the state's large cities performed admirably too. All five of Texas' biggest burgs--Houston, San Antonio, Dallas and Ft. Worth--were among the top 10 best bargains. Not a single city in Texas ended up on our list of most overpriced places.
Part of the reason is that Texas offers some of the best incentives for entrepreneurs looking to start or move a business, according to Eduardo Martinez, a senior economist at Moody's Economy.com. Like Phoenix, Texan metros "have picked up a lot of California companies that have left because of high operating costs," he says.
Still, the state's future is far cloudier than its big blue skies. Martinez warns that Texas is vulnerable because of its exposure to America's foundering auto industry via manufacturing. The Lone Star State may also be aversely affected by the expected decrease in defense spending as contracts won in the Bush years begin to expire.
Back in Austin, though, residents are facing a different sort of challenge: To keep the city weird--and to themselves.
"Tell people not to move here!" says Wassenich.
In Depth: America's Best Bargain Cities
1. Austin, Texas
(Austin-Round Rock, Texas)
Cost of Living: 3 of 50
Housing Opportunity: 24 of 50
Unemployment Rate: 1 of 50
Average Salary: 20 of 50
2. Phoenix, Ariz.
(Phoenix-Mesa-Scottsdale, Ariz.)
Cost of Living: 13 of 50
Housing Opportunity: 14 of 50
Unemployment Rate: 6 of 50
Average Salary: 21 of 50
3. Washington, D.C.
(Washington-Arlington-Alexandria, D.C.-Va.-Md.-W.Va.)
Cost of Living: 38 of 50
Housing Opportunity: 21 of 50
Unemployment Rate: 2 of 50
Average Salary: 4 of 50
4. Fort Worth, Texas
(Fort Worth-Arlington, Texas)
Cost of Living: 16 of 50
Housing Opportunity: 10 of 50
Unemployment Rate: 8 of 50
Average Salary: 34 of 50
5. Cincinnati, Ohio (tie)
(Cincinnati-Middletown, Ohio-Ky.-Ind.)
Cost of Living: 9 of 50
Housing Opportunity: 7 of 50
Unemployment Rate: 23 of 50
Average Salary: 33 of 50
5. Indianapolis, Ind. (tie)
(Indianapolis-Carmel, Ind.)
Cost of Living: 13 of 50
Housing Opportunity: 1 of 50
Unemployment Rate: 17 of 50
Average Salary: 41 of 50
To determine which U.S. cities are the best bargain, Forbes looked at the country's 50 largest U.S. metropolitan statistical areas and metropolitan divisions--geographic entities defined by the U.S. Office of Management and Budget for use by federal agencies in collecting, tabulating and publishing federal statistics. We assigned points to metro regions across four data sets: Average salary for workers with a bachelor's degree or higher, from PayScale.com; annual unemployment statistics, from the Bureau of Labor Statistics; cost of living, from Moody's Economy.com; and the Housing Opportunity Index, from the National Association of Home Builders/Wells Fargo, which measures the amount of homes sold in a given area that would be affordable to a family earning the local median income based on standard mortgage underwriting crit
by Zack O'Malley Greenburg
Nearly a decade ago, after making a donation to a volunteer-run radio station in Austin, Texas, local librarian Red Wassenich was asked why he chose to support a broadcaster with a penchant for playing strange crooner music. "Because it keeps Austin weird," he said.
Since then, the phrase "Keep Austin Weird" has become the city's official rallying cry against the establishment of large chain stores near mom-and-pop shops--and, more generally, for maintaining the city's eccentric feel. The city may be weird, but perhaps more redeeming is that it's also a bargain to live there: Austin is the place where people pay the least to get the most.
"Austin has always been really different from the rest of Texas," says Wassenich, 59.
He's talking about the city's weirdness, but he might as well be talking about its affordability and profusion of job opportunities. Four other Texas cities make the list of America's Best Bargain Cities, but none come close to Austin, whose 5.5% unemployment is the best in the country and about half the national average.
Behind the Numbers
To determine which U.S. cities are the best bargains, Forbes looked at the country's 50 largest U.S. metropolitan statistical areas and metropolitan divisions--geographic entities defined by the U.S. Office of Management and Budget used by federal agencies in collecting, tabulating and publishing federal statistics.
We assigned points to metro regions across four data sets: Average salary for workers with a bachelor's degree or higher, from PayScale.com; annual unemployment statistics, from the Bureau of Labor Statistics; cost of living, from Moody's Economy.com; and the Housing Opportunity Index, from the National Association of Home Builders/Wells Fargo, which measures the amount of homes sold in a given area that would be affordable to a family earning the local median income based on standard mortgage underwriting criteria.
Austin earned high marks across the board.
"They have the triple-whammy of being a university town, a state capital and a technology center," says Al Lee, director of quantitative analysis at PayScale.com, a salary data aggregator based in Seattle. "It makes for a very robust economy and a great place for people to work."
Second on our list is Phoenix, Ariz., but what makes this city affordable isn't quite the same formula as in Austin. The real estate bust left the desert oasis as one of America's emptiest cities, which has also driven down home prices. As a result, Phoenix is one of the most affordable big cities in the nation.
Washington, D.C., rounds out the top three, thanks to an employment rate rivaled only by Austin. That comes as no surprise to Lee.
"Between defense spending under Bush and stimulus spending under Obama, it's been an incredibly strong time," he says.
Further on, the list includes a few places that may raise an eyebrow or two. Ritzy Cambridge, Mass., clocked in at No. 11 because of extremely high salary scores, while Detroit's rock-bottom housing costs earned the city a No. 15 rank--despite an astronomical 13% unemployment rate. That's roughly twice Austin's rate.
Lone Star Constellation
While the capital of Texas graced the top of our list, the rest of the state's large cities performed admirably too. All five of Texas' biggest burgs--Houston, San Antonio, Dallas and Ft. Worth--were among the top 10 best bargains. Not a single city in Texas ended up on our list of most overpriced places.
Part of the reason is that Texas offers some of the best incentives for entrepreneurs looking to start or move a business, according to Eduardo Martinez, a senior economist at Moody's Economy.com. Like Phoenix, Texan metros "have picked up a lot of California companies that have left because of high operating costs," he says.
Still, the state's future is far cloudier than its big blue skies. Martinez warns that Texas is vulnerable because of its exposure to America's foundering auto industry via manufacturing. The Lone Star State may also be aversely affected by the expected decrease in defense spending as contracts won in the Bush years begin to expire.
Back in Austin, though, residents are facing a different sort of challenge: To keep the city weird--and to themselves.
"Tell people not to move here!" says Wassenich.
In Depth: America's Best Bargain Cities
1. Austin, Texas
(Austin-Round Rock, Texas)
Cost of Living: 3 of 50
Housing Opportunity: 24 of 50
Unemployment Rate: 1 of 50
Average Salary: 20 of 50
2. Phoenix, Ariz.
(Phoenix-Mesa-Scottsdale, Ariz.)
Cost of Living: 13 of 50
Housing Opportunity: 14 of 50
Unemployment Rate: 6 of 50
Average Salary: 21 of 50
3. Washington, D.C.
(Washington-Arlington-Alexandria, D.C.-Va.-Md.-W.Va.)
Cost of Living: 38 of 50
Housing Opportunity: 21 of 50
Unemployment Rate: 2 of 50
Average Salary: 4 of 50
4. Fort Worth, Texas
(Fort Worth-Arlington, Texas)
Cost of Living: 16 of 50
Housing Opportunity: 10 of 50
Unemployment Rate: 8 of 50
Average Salary: 34 of 50
5. Cincinnati, Ohio (tie)
(Cincinnati-Middletown, Ohio-Ky.-Ind.)
Cost of Living: 9 of 50
Housing Opportunity: 7 of 50
Unemployment Rate: 23 of 50
Average Salary: 33 of 50
5. Indianapolis, Ind. (tie)
(Indianapolis-Carmel, Ind.)
Cost of Living: 13 of 50
Housing Opportunity: 1 of 50
Unemployment Rate: 17 of 50
Average Salary: 41 of 50
To determine which U.S. cities are the best bargain, Forbes looked at the country's 50 largest U.S. metropolitan statistical areas and metropolitan divisions--geographic entities defined by the U.S. Office of Management and Budget for use by federal agencies in collecting, tabulating and publishing federal statistics. We assigned points to metro regions across four data sets: Average salary for workers with a bachelor's degree or higher, from PayScale.com; annual unemployment statistics, from the Bureau of Labor Statistics; cost of living, from Moody's Economy.com; and the Housing Opportunity Index, from the National Association of Home Builders/Wells Fargo, which measures the amount of homes sold in a given area that would be affordable to a family earning the local median income based on standard mortgage underwriting crit
Thursday, May 14, 2009
Snag a great deal on a short sale
Short sales - where a lender agrees to take less than it's owed on a mortgage - are rising sharply. Here's how you can profit.
By Joe Light, Money Magazine staff reporter
(Money Magazine) -- When Brian Gavitt, a physician, and his wife Gayleen, a stay-at-home mom, started to eye homes in Sacramento last winter, they knew they were looking in the hardest-hit areas of the housing bust. So the couple, who were relocating from Lansing, figured they could land a fantastic bargain in no time at all.
The part about the bargain turned out to be true. The Gavitts bought a five-bedroom house in the upscale Natomas Park neighborhood ("Even now, you don't see FOR SALE signs up anywhere," says Gayleen.) And it was a steal at $300,000, a full $200,000 less than they would have paid just two years ago.
The amount of time it took to land the deal was another story. It was more than six months from when the Gavitts first saw their dream home to the moment they held the keys in their hands. The reason: The home they bought was a short sale.
Not along ago, few people had even heard of a short sale, which occurs when the bank agrees to discount the loan balance for a seller who owes more on his mortgage than the home is currently worth.
If you're in the market for a home today, you're almost guaranteed to be looking at some short sales. Nationwide, 14% of homeowners are currently underwater on their mortgages, calculates real estate website Zillow.com. And in many areas, it's far more: In the Gavitts' zip code, for example, over half of homeowners would owe more than their home is worth if they sold today, calculates Dee Schwindt, the Gavitts' realtor.
The good news is that short sellers are likely to still be living in the home and some may even be current on their payments. That means these aren't the run-down, distressed properties that you often find among foreclosures; in fact, there's a good chance that some of the most deluxe homes for sale in your market are underwater.
Before you get too excited about buying a short sale, know that they generally aren't, well, short. For the sale to go through, the seller's lender must approve the price and agree to take the shortfall as a loss. That extra step can cause the process to drag on three times as long as a normal home sale.
But as the Gavitts discovered, the hassles can be well worth it. Some buyers and realtors don't want to deal with short sales, leaving many choice homes with very few bidders. So if you're willing to brave the intricacies of the process, you'll be far more likely to land the home you always wanted. The key to snagging a good deal is knowing how to avoid the land mines.
Know what you're getting into. In a short sale, you are dealing with several parties: the sellers, their agent and the sellers' lender. That's why a short sale can take anywhere between two and six months to execute, compared with about 30 days for a typical sale. Though many banks are willing to take a loss on a mortgage in a short sale if it means avoiding an even bigger loss in a foreclosure, with so many owners trying to unload properties, the lender's negotiators are flooded with short-sale offers. So if you're moving or selling another property, keep in mind that you'll likely need to budget for a few months' worth of rental payments so you have somewhere to live in the interim.
Find the right pro. Lenders often make realtors who work on short sales take a hit on their commission, so some brokers may be loath to show you the listings. But don't even think about going solo. These deals take a lot of work and persistence, says Loni Parmelly, author of Success in Short Sales. Before you sign up with an agent, ask him how many short sales he's closed. If he hasn't done at least two, find someone more experienced.
Weed out candidates. In most cities, home listings will indicate in the description whether the property is a short sale. Ideally, you want to knock off ones that come with extra complexities. If possible, pass on any home that has more than one lien against it; having to negotiate loans with two lenders can greatly increase the amount of time it takes to complete the deal. Also avoid homes where the seller has other offers. That's because if another offer is pending, the seller's agent isn't likely to even submit yours for approval until the first one is rejected, meaning you'll have to wait for another negotiation to play out before you even get a chance.
Set the right price. The first step is to have your agent submit your offer to the seller. Don't just rely on the current list price to come up with your initial bid, says Bill Richardson, a district sales manager for the Keyes Co. Realtors in Boca Raton, Fla. The seller's agent may have far underpriced it in hopes of attracting buyers, but the bank likely won't accept a lowball offer. Ask your agent to determine the home's fair market value by searching comparable sales in the area, with an emphasis on other short sales and foreclosures (or get a rough estimate yourself at zillow.com). If the fair market value is lower than the list price, set your offer 10% lower than that.
At this point, you'll also want to get pre-approval for a mortgage; many banks won't even consider your offer if you don't have one, says Schwindt.
Protect yourself. Next, the seller's agent will submit your offer to the seller's lender. At this point, you'll be asked to sign a sales contract. See if the lender will agree to pick up all closing costs as part of the contract, says author Parmelly. Also ask your realtor to specify that you won't do an appraisal or inspection of the property until the offer is approved. That way you won't have to shell out hundreds of dollars until you know you realistically have a good chance of getting the home.
Finally, though most lenders will require you to make some kind of deposit along with the contract, don't put down more than $3,000 before your bid is accepted. That will give you room to put offers on other homes or even to pull out of the sale if it drags on for too long.
Be a pain in the neck. After your offer is submitted to the lender, you're likely to hear nothing for weeks, if not months. This is no time to relax. Call your agent at least once a week, and make sure the seller's agent is contacting the bank's negotiator nearly every day.
"These negotiators may have 400 files on their desk. They'll want to get rid of the squeaky wheels," says Parmelly, who worked as a loan negotiator for lenders for 16 years. To help the seller's realtor in her negotiations with the lender, it's a good idea to have your agent show her which comparable homes you used to arrive at your number.
If the clock keeps ticking and you're reaching the end of your rope, try playing hardball. After months, the lender the Gavitts negotiated with was still dragging its feet and their pre-approved loan rate was about to expire. "We said, 'We need an answer by Friday or we walk,' " Gayleen says. The bank responded by week's end.
Keep your eye on the market. When the bank finally sends its counter-offer, use it as a guideline rather than an ultimatum. Most of the time, the lender's number is based on its own research, that of a local realtor it hires and the outstanding loan balance. Usually its goal is to sell for at least 90% of the home's value, says Amy Bohutinsky, a spokes-person for Zillow.com.
The lender's offer may not be what you'd hoped for, but don't despair: You have a chance to counter. If the market has been flat since your initial bid, try for 5% to 10% less than the bank's number. If the market has been sinking rapidly, however, you may be able to prove that the home's value has shrunk further and offer even less. Once you have the lender's ear, the new offer should take less time to process.
Despite all the legwork and wait, the Gavitts are thrilled with their new home. "I'm glad people are turned off by short sales," says Brian. "It just means more choices for the rest of us."
By Joe Light, Money Magazine staff reporter
(Money Magazine) -- When Brian Gavitt, a physician, and his wife Gayleen, a stay-at-home mom, started to eye homes in Sacramento last winter, they knew they were looking in the hardest-hit areas of the housing bust. So the couple, who were relocating from Lansing, figured they could land a fantastic bargain in no time at all.
The part about the bargain turned out to be true. The Gavitts bought a five-bedroom house in the upscale Natomas Park neighborhood ("Even now, you don't see FOR SALE signs up anywhere," says Gayleen.) And it was a steal at $300,000, a full $200,000 less than they would have paid just two years ago.
The amount of time it took to land the deal was another story. It was more than six months from when the Gavitts first saw their dream home to the moment they held the keys in their hands. The reason: The home they bought was a short sale.
Not along ago, few people had even heard of a short sale, which occurs when the bank agrees to discount the loan balance for a seller who owes more on his mortgage than the home is currently worth.
If you're in the market for a home today, you're almost guaranteed to be looking at some short sales. Nationwide, 14% of homeowners are currently underwater on their mortgages, calculates real estate website Zillow.com. And in many areas, it's far more: In the Gavitts' zip code, for example, over half of homeowners would owe more than their home is worth if they sold today, calculates Dee Schwindt, the Gavitts' realtor.
The good news is that short sellers are likely to still be living in the home and some may even be current on their payments. That means these aren't the run-down, distressed properties that you often find among foreclosures; in fact, there's a good chance that some of the most deluxe homes for sale in your market are underwater.
Before you get too excited about buying a short sale, know that they generally aren't, well, short. For the sale to go through, the seller's lender must approve the price and agree to take the shortfall as a loss. That extra step can cause the process to drag on three times as long as a normal home sale.
But as the Gavitts discovered, the hassles can be well worth it. Some buyers and realtors don't want to deal with short sales, leaving many choice homes with very few bidders. So if you're willing to brave the intricacies of the process, you'll be far more likely to land the home you always wanted. The key to snagging a good deal is knowing how to avoid the land mines.
Know what you're getting into. In a short sale, you are dealing with several parties: the sellers, their agent and the sellers' lender. That's why a short sale can take anywhere between two and six months to execute, compared with about 30 days for a typical sale. Though many banks are willing to take a loss on a mortgage in a short sale if it means avoiding an even bigger loss in a foreclosure, with so many owners trying to unload properties, the lender's negotiators are flooded with short-sale offers. So if you're moving or selling another property, keep in mind that you'll likely need to budget for a few months' worth of rental payments so you have somewhere to live in the interim.
Find the right pro. Lenders often make realtors who work on short sales take a hit on their commission, so some brokers may be loath to show you the listings. But don't even think about going solo. These deals take a lot of work and persistence, says Loni Parmelly, author of Success in Short Sales. Before you sign up with an agent, ask him how many short sales he's closed. If he hasn't done at least two, find someone more experienced.
Weed out candidates. In most cities, home listings will indicate in the description whether the property is a short sale. Ideally, you want to knock off ones that come with extra complexities. If possible, pass on any home that has more than one lien against it; having to negotiate loans with two lenders can greatly increase the amount of time it takes to complete the deal. Also avoid homes where the seller has other offers. That's because if another offer is pending, the seller's agent isn't likely to even submit yours for approval until the first one is rejected, meaning you'll have to wait for another negotiation to play out before you even get a chance.
Set the right price. The first step is to have your agent submit your offer to the seller. Don't just rely on the current list price to come up with your initial bid, says Bill Richardson, a district sales manager for the Keyes Co. Realtors in Boca Raton, Fla. The seller's agent may have far underpriced it in hopes of attracting buyers, but the bank likely won't accept a lowball offer. Ask your agent to determine the home's fair market value by searching comparable sales in the area, with an emphasis on other short sales and foreclosures (or get a rough estimate yourself at zillow.com). If the fair market value is lower than the list price, set your offer 10% lower than that.
At this point, you'll also want to get pre-approval for a mortgage; many banks won't even consider your offer if you don't have one, says Schwindt.
Protect yourself. Next, the seller's agent will submit your offer to the seller's lender. At this point, you'll be asked to sign a sales contract. See if the lender will agree to pick up all closing costs as part of the contract, says author Parmelly. Also ask your realtor to specify that you won't do an appraisal or inspection of the property until the offer is approved. That way you won't have to shell out hundreds of dollars until you know you realistically have a good chance of getting the home.
Finally, though most lenders will require you to make some kind of deposit along with the contract, don't put down more than $3,000 before your bid is accepted. That will give you room to put offers on other homes or even to pull out of the sale if it drags on for too long.
Be a pain in the neck. After your offer is submitted to the lender, you're likely to hear nothing for weeks, if not months. This is no time to relax. Call your agent at least once a week, and make sure the seller's agent is contacting the bank's negotiator nearly every day.
"These negotiators may have 400 files on their desk. They'll want to get rid of the squeaky wheels," says Parmelly, who worked as a loan negotiator for lenders for 16 years. To help the seller's realtor in her negotiations with the lender, it's a good idea to have your agent show her which comparable homes you used to arrive at your number.
If the clock keeps ticking and you're reaching the end of your rope, try playing hardball. After months, the lender the Gavitts negotiated with was still dragging its feet and their pre-approved loan rate was about to expire. "We said, 'We need an answer by Friday or we walk,' " Gayleen says. The bank responded by week's end.
Keep your eye on the market. When the bank finally sends its counter-offer, use it as a guideline rather than an ultimatum. Most of the time, the lender's number is based on its own research, that of a local realtor it hires and the outstanding loan balance. Usually its goal is to sell for at least 90% of the home's value, says Amy Bohutinsky, a spokes-person for Zillow.com.
The lender's offer may not be what you'd hoped for, but don't despair: You have a chance to counter. If the market has been flat since your initial bid, try for 5% to 10% less than the bank's number. If the market has been sinking rapidly, however, you may be able to prove that the home's value has shrunk further and offer even less. Once you have the lender's ear, the new offer should take less time to process.
Despite all the legwork and wait, the Gavitts are thrilled with their new home. "I'm glad people are turned off by short sales," says Brian. "It just means more choices for the rest of us."
Wednesday, May 6, 2009
8 Signs of Hope for the Economy
by Beth Kowitt
provided byCNNMoney.com
Are we on the brink of a rebound, or is it a false spring? Fortune looks at the evidence for an imminent recovery.
Is the economy looking up, or at least bottoming out? Lately there has been much talk about "glimmers of hope," in President Obama's words, and "green shoots," a phrase du jour used by the likes of Fed Chairman Ben Bernanke.
Meanwhile, many economists have warned about a false spring, pointing to numbers that are still getting worse, like the unemployment rate. Fortune takes a closer look at the upbeat news to assess whether how strong a case they make for an imminent recovery.
1. Housing Starts
The government reported that the overall number of housing starts fell in March, but those for single-family homes during the month came in unchanged from the February figure of 358,000.
IHS Global Insight noted that this suggests single-family home construction may be stabilizing and is "testing the bottom."
2. The Stock Market
The S&P 500 was up 9.4% in April, its biggest monthly rally since March 2000. The Wilshire 5000 Total Market Index ended the month at 8,962.96, up 849.85, or 10.48%. This is the best monthly return since December 1991, when the index was up 10.72%.
"The initiatives of the federal government and some of the improvements in the credit markets are making investors more confident," said Thomas Cowhey, chief investment strategist at Hirtle Callaghan.
3. Consumer Confidence
Preliminary figures for the Conference Board's Consumer Confidence Index showed a jump of more than 12 points during April, to 39.2. The reading, which measures consumer views on the economy, beat analyst expectations and was the highest so far in 2009.
Lynn Franco, director of the organization's research center, attributed the rise in confidence to "significant improvement in the short-term outlook."
4. Single-Family Home Prices
The S&P/Case-Shiller Home Price Indices showed that while 20-city and 10-city Composite Home Price figures declined through February 2009 (down 18.6% and 18.8%, respectively, from a year ago), for the first time in 16 months the annual decline did not set a new record.
While it signals that the market may be showing some stabilization, or at least what Chairman of the Index Committee David Blitzer called "deceleration in the rate of decline," Blitzer warned that we "need a few more months of data before we can determine if home prices are finally turning around."
Meanwhile, the Pending Home Sales Index rose for the second straight month in March and was up more than 1% over the year-ago figure. The index from the National Association of Realtors (NAR) increased 3.2% during the month, to 84.6%.
"This increase could be the leading edge of first-time buyers responding to very favorable affordability conditions and an $8,000 tax credit," wrote Lawrence Yun, the NAR chief economist.
5. Earnings
The collapse in profits may be nearly played out. As of the last day in April, the 341 S&P 500 companies that had reported earnings for the first quarter were on average about 2% below estimates, according to Howard Silverblatt, senior index analyst at Standard & Poor's. Silverblatt says the results are overall "not good but definitely not bad" and show that "deterioration has slowed down."
Financial companies reported surprisingly strong numbers. But we can't count on an earnings turnaround for many months, says Silverblatt, who won't consider the numbers to show definitive proof of improvement until fourth-quarter results are in.
6. Jobless Benefit Claims
While unemployment figures are expected to rise still further, there was a signs of hope in the Unemployment Insurance Weekly Claims Report for the week ending April 25. The Department of Labor reported that seasonally adjusted initial claims for unemployment aid fell by 14,000 to 631,000.
"The past few weeks' claims data are beginning to look increasingly like a peak," wrote Ian Shepherdson of High Frequency Economics.
7. New Orders and Exports
Orders are starting to pick up. While reports from the Institute for Supply Management showed that the manufacturing sector failed to grow for the 15th straight month in April, its New Orders Index increased six percentage points to 47.2%, the highest level since August. The New Exports Orders Index increased 5 percentage points, to 44%.
"While this is a big step forward, there is still a large gap that must be closed before manufacturing begins to grow once again," said Norbert Ore, chair of the institute's survey committee, in a statement. "This is definitely a good start for the second quarter."
8. Credit Markets
Banks are starting to trust one another again. In May, the three-month London interbank offered rate (Libor), a benchmark for interbank loans, fell below 1% for the first time on record. That was down from 1.16% a month ago and 2.51% six months prior.
John Ewan, director of the British Bankers' Association, which sets the rate, told Fortune in an email that "the continued easing of the rates demonstrates that liquidity and confidence are returning to the wholesale markets."
provided byCNNMoney.com
Are we on the brink of a rebound, or is it a false spring? Fortune looks at the evidence for an imminent recovery.
Is the economy looking up, or at least bottoming out? Lately there has been much talk about "glimmers of hope," in President Obama's words, and "green shoots," a phrase du jour used by the likes of Fed Chairman Ben Bernanke.
Meanwhile, many economists have warned about a false spring, pointing to numbers that are still getting worse, like the unemployment rate. Fortune takes a closer look at the upbeat news to assess whether how strong a case they make for an imminent recovery.
1. Housing Starts
The government reported that the overall number of housing starts fell in March, but those for single-family homes during the month came in unchanged from the February figure of 358,000.
IHS Global Insight noted that this suggests single-family home construction may be stabilizing and is "testing the bottom."
2. The Stock Market
The S&P 500 was up 9.4% in April, its biggest monthly rally since March 2000. The Wilshire 5000 Total Market Index ended the month at 8,962.96, up 849.85, or 10.48%. This is the best monthly return since December 1991, when the index was up 10.72%.
"The initiatives of the federal government and some of the improvements in the credit markets are making investors more confident," said Thomas Cowhey, chief investment strategist at Hirtle Callaghan.
3. Consumer Confidence
Preliminary figures for the Conference Board's Consumer Confidence Index showed a jump of more than 12 points during April, to 39.2. The reading, which measures consumer views on the economy, beat analyst expectations and was the highest so far in 2009.
Lynn Franco, director of the organization's research center, attributed the rise in confidence to "significant improvement in the short-term outlook."
4. Single-Family Home Prices
The S&P/Case-Shiller Home Price Indices showed that while 20-city and 10-city Composite Home Price figures declined through February 2009 (down 18.6% and 18.8%, respectively, from a year ago), for the first time in 16 months the annual decline did not set a new record.
While it signals that the market may be showing some stabilization, or at least what Chairman of the Index Committee David Blitzer called "deceleration in the rate of decline," Blitzer warned that we "need a few more months of data before we can determine if home prices are finally turning around."
Meanwhile, the Pending Home Sales Index rose for the second straight month in March and was up more than 1% over the year-ago figure. The index from the National Association of Realtors (NAR) increased 3.2% during the month, to 84.6%.
"This increase could be the leading edge of first-time buyers responding to very favorable affordability conditions and an $8,000 tax credit," wrote Lawrence Yun, the NAR chief economist.
5. Earnings
The collapse in profits may be nearly played out. As of the last day in April, the 341 S&P 500 companies that had reported earnings for the first quarter were on average about 2% below estimates, according to Howard Silverblatt, senior index analyst at Standard & Poor's. Silverblatt says the results are overall "not good but definitely not bad" and show that "deterioration has slowed down."
Financial companies reported surprisingly strong numbers. But we can't count on an earnings turnaround for many months, says Silverblatt, who won't consider the numbers to show definitive proof of improvement until fourth-quarter results are in.
6. Jobless Benefit Claims
While unemployment figures are expected to rise still further, there was a signs of hope in the Unemployment Insurance Weekly Claims Report for the week ending April 25. The Department of Labor reported that seasonally adjusted initial claims for unemployment aid fell by 14,000 to 631,000.
"The past few weeks' claims data are beginning to look increasingly like a peak," wrote Ian Shepherdson of High Frequency Economics.
7. New Orders and Exports
Orders are starting to pick up. While reports from the Institute for Supply Management showed that the manufacturing sector failed to grow for the 15th straight month in April, its New Orders Index increased six percentage points to 47.2%, the highest level since August. The New Exports Orders Index increased 5 percentage points, to 44%.
"While this is a big step forward, there is still a large gap that must be closed before manufacturing begins to grow once again," said Norbert Ore, chair of the institute's survey committee, in a statement. "This is definitely a good start for the second quarter."
8. Credit Markets
Banks are starting to trust one another again. In May, the three-month London interbank offered rate (Libor), a benchmark for interbank loans, fell below 1% for the first time on record. That was down from 1.16% a month ago and 2.51% six months prior.
John Ewan, director of the British Bankers' Association, which sets the rate, told Fortune in an email that "the continued easing of the rates demonstrates that liquidity and confidence are returning to the wholesale markets."
Obama Outlines Spending Plans
Obama Outlines Spending Plans
AFFORDABLE HOUSING FINANCE
BY BARRY G. JACOBS
President Barack Obama holds a prime-time news conference March 24 to increase popular support for his $3.6 trillion budget and economic recovery plan. (Photo by Getty Images)
President Barack Obama has outlined a fiscal 2010 budget that provides more funding for federal housing programs, including $1 billion for the national Affordable Housing Trust Fund. Overall discretionary Department of Housing and Urban Development (HUD) funding would be up about $6 billion, to $47.5 billion.
The proposed appropriation for the trust fund would help fill the gap resulting from the suspension of assessments on Fannie Mae and Freddie Mac, which were supposed to be its primary funding source.
The budget outline also calls for increased funding for Sec. 8 tenant-based and project-based assistance, though it doesn’t specify amounts.
In addition, the administration plans to introduce legislative reforms to the voucher program to help fully utilize available funding and ease the administrative burdens on public housing authorities.
The administration will also request $4.5 billion to fully fund the Community Development Block Grant (CDBG) program in fiscal 2010, with legislation to revise the funding formula to better target assistance to distressed areas and promote sustainable and economically viable communities.
According to the outline, the budget will also provide funds to HUD to combat mortgage fraud and predatory lending and strengthen fair housing enforcement. In addition, a joint HUDEnergy Department innovation fund would support the creation of an energy- efficient housing market, including the retrofitting of older buildings.
Congress completes work on ’09 funding, approves stimulus bill
While preparing to deal with funding for the federal government in 2010, Congress also completed work on fiscal 2009 appropriations and approved a mammoth economic stimulus bill that includes billions of dollars for housing.
The omnibus 2009 appropriations measure (H.R. 1105) includes $41.5 billion in discretionary budget authority for HUD. The department had been operating on a continuing resolution.
The bill provides $16.8 billion for Sec. 8 tenant-based assistance, including $15 billion for renewals, and $7.1 billion for Sec. 8 project-based aid, with $6.9 billion for renewals.
For public housing, the bill includes $2.4 billion for the capital fund, $4.5 billion for the operating fund, and $120 million for the HOPE VI program for the revitalization of severely distressed housing. Other major HUD funding provisions include $3.9 billion for community development, with $3.6 billion allocated to formula CDBGs; $1.8 billion for HOME; $1.7 billion for homeless assistance; $765 million for Sec. 202 housing for the elderly; $250 million for Sec. 811 housing for the disabled; $645 million for Indian housing block grants; and $310 million for housing opportunities for persons with AIDS.
The bill sets commitment limits of $315 billion for the Federal Housing Administration Mutual Mortgage Insurance Fund; $45 billion for the General and Special Risk account, which insures multifamily mortgages; and $300 billion for Ginnie Mae mortgagebacked securities.
For rural housing, the funding bill provides $69.5 million for Sec. 515 rural rental housing loans, $129.1 million for Sec. 538 guaranteed multifamily loans, $902.5 million for rural rental assistance, $1.1 billion for Sec. 502 direct home loans, and $6.2 billion for Sec. 502 guaranteed loans.
The $787 billion economic stimulus bill (H.R. 1), the American Recovery and Reinvestment Act, includes two measures to address the sagging low-income housing tax credit equity market.
One provision allows state housing finance agencies to exchange a portion of their tax credit authority—up to 40 percent of their 2009 credits and 100 percent of their unused 2008 credits and returned credits—for Treasury Department grants equal to 85 percent of the 10-year credit amount. In effect, the swap would allow state agencies to provide the equivalent of an equity investment at a price of $0.85 per tax credit dollar. The grants can be used for projects with or without tax credits, but tax credit program rules will apply in either case.
The second provision gives HUD $2.25 billion in tax credit assistance funds to be allocated to state agencies through the HOME funding formula for aid to projects receiving tax credit allocations in 2007, 2008, and 2009. The stimulus bill also includes $2 billion for Sec. 8 project- based assistance to support 12-month contract renewals; $1.5 billion for homelessness prevention and re-housing efforts; $4 billion in public housing capital funds; $2 billion to be allocated through the Neighborhood Stabilization Program to redevelop foreclosed and abandoned homes; $1 billion for CDBGs; $510 million for Indian housing block grants; and $250 million for green investments and energy retrofitting of HUD-assisted housing.
Foreclosure crisis efforts continue
Outside of the budget and appropriations process, the home mortgage foreclosure crisis continues to dominate housing-related activity in Washington, with both the administration and Congress pushing relief measures.
The administration’s program includes the refinancing of mortgages held by Fannie and Freddie that don’t exceed 105 percent of the current property value and the modification of other loans where borrowers are facing potential foreclosure. The Treasury Department announced standardized guidelines for modifications, with eligibility limited to loans originated on or before Jan. 1, 2009, with principal balances up to the high-cost conforming loan limit, which is $729,750 for a one-family dwelling.
AFFORDABLE HOUSING FINANCE
BY BARRY G. JACOBS
President Barack Obama holds a prime-time news conference March 24 to increase popular support for his $3.6 trillion budget and economic recovery plan. (Photo by Getty Images)
President Barack Obama has outlined a fiscal 2010 budget that provides more funding for federal housing programs, including $1 billion for the national Affordable Housing Trust Fund. Overall discretionary Department of Housing and Urban Development (HUD) funding would be up about $6 billion, to $47.5 billion.
The proposed appropriation for the trust fund would help fill the gap resulting from the suspension of assessments on Fannie Mae and Freddie Mac, which were supposed to be its primary funding source.
The budget outline also calls for increased funding for Sec. 8 tenant-based and project-based assistance, though it doesn’t specify amounts.
In addition, the administration plans to introduce legislative reforms to the voucher program to help fully utilize available funding and ease the administrative burdens on public housing authorities.
The administration will also request $4.5 billion to fully fund the Community Development Block Grant (CDBG) program in fiscal 2010, with legislation to revise the funding formula to better target assistance to distressed areas and promote sustainable and economically viable communities.
According to the outline, the budget will also provide funds to HUD to combat mortgage fraud and predatory lending and strengthen fair housing enforcement. In addition, a joint HUDEnergy Department innovation fund would support the creation of an energy- efficient housing market, including the retrofitting of older buildings.
Congress completes work on ’09 funding, approves stimulus bill
While preparing to deal with funding for the federal government in 2010, Congress also completed work on fiscal 2009 appropriations and approved a mammoth economic stimulus bill that includes billions of dollars for housing.
The omnibus 2009 appropriations measure (H.R. 1105) includes $41.5 billion in discretionary budget authority for HUD. The department had been operating on a continuing resolution.
The bill provides $16.8 billion for Sec. 8 tenant-based assistance, including $15 billion for renewals, and $7.1 billion for Sec. 8 project-based aid, with $6.9 billion for renewals.
For public housing, the bill includes $2.4 billion for the capital fund, $4.5 billion for the operating fund, and $120 million for the HOPE VI program for the revitalization of severely distressed housing. Other major HUD funding provisions include $3.9 billion for community development, with $3.6 billion allocated to formula CDBGs; $1.8 billion for HOME; $1.7 billion for homeless assistance; $765 million for Sec. 202 housing for the elderly; $250 million for Sec. 811 housing for the disabled; $645 million for Indian housing block grants; and $310 million for housing opportunities for persons with AIDS.
The bill sets commitment limits of $315 billion for the Federal Housing Administration Mutual Mortgage Insurance Fund; $45 billion for the General and Special Risk account, which insures multifamily mortgages; and $300 billion for Ginnie Mae mortgagebacked securities.
For rural housing, the funding bill provides $69.5 million for Sec. 515 rural rental housing loans, $129.1 million for Sec. 538 guaranteed multifamily loans, $902.5 million for rural rental assistance, $1.1 billion for Sec. 502 direct home loans, and $6.2 billion for Sec. 502 guaranteed loans.
The $787 billion economic stimulus bill (H.R. 1), the American Recovery and Reinvestment Act, includes two measures to address the sagging low-income housing tax credit equity market.
One provision allows state housing finance agencies to exchange a portion of their tax credit authority—up to 40 percent of their 2009 credits and 100 percent of their unused 2008 credits and returned credits—for Treasury Department grants equal to 85 percent of the 10-year credit amount. In effect, the swap would allow state agencies to provide the equivalent of an equity investment at a price of $0.85 per tax credit dollar. The grants can be used for projects with or without tax credits, but tax credit program rules will apply in either case.
The second provision gives HUD $2.25 billion in tax credit assistance funds to be allocated to state agencies through the HOME funding formula for aid to projects receiving tax credit allocations in 2007, 2008, and 2009. The stimulus bill also includes $2 billion for Sec. 8 project- based assistance to support 12-month contract renewals; $1.5 billion for homelessness prevention and re-housing efforts; $4 billion in public housing capital funds; $2 billion to be allocated through the Neighborhood Stabilization Program to redevelop foreclosed and abandoned homes; $1 billion for CDBGs; $510 million for Indian housing block grants; and $250 million for green investments and energy retrofitting of HUD-assisted housing.
Foreclosure crisis efforts continue
Outside of the budget and appropriations process, the home mortgage foreclosure crisis continues to dominate housing-related activity in Washington, with both the administration and Congress pushing relief measures.
The administration’s program includes the refinancing of mortgages held by Fannie and Freddie that don’t exceed 105 percent of the current property value and the modification of other loans where borrowers are facing potential foreclosure. The Treasury Department announced standardized guidelines for modifications, with eligibility limited to loans originated on or before Jan. 1, 2009, with principal balances up to the high-cost conforming loan limit, which is $729,750 for a one-family dwelling.
Friday, May 1, 2009
Growing strong
By J.D. STETSON, News-Record Writer jstetson@gillettenewsrecord.net
Juan Peraltz is a family man, a small business owner and, starting this week, a risk-taker.
Peraltz opened Maria’s Mexican Restaurant in 2003 to help pay for his son’s college tuition, and every member of his family has worked there since.
The business has grown. It’s time to expand.
When the former Popeyes Chicken and Biscuits building came available after sitting vacant for more than a year, Peraltz jumped at the opportunity to open a second restaurant. He didn’t have the money to buy the building, but did have enough to lease it.
After much remodeling, his will be the first this week of several Gillette businesses that are completing some type of expansion plans.
Building and expanding
New small businesses created in the fires of the recession and the expansion of existing businesses amid a national credit crisis shows Gillette seems to be weathering the economic storm.
Commercial expansion is seeing growth rather than new development of commercial property, said Michael Surface, a senior planner with the City of Gillette.
New commercial construction has been down from previous quarters. Surface is now trying to determine how many businesses are expanding.
“If local business can expand, they’re actually adding more services to the community,” Surface said.
If existing businesses continue to grow and change during a credit crisis, Gillette is certainly in a better position than the rest of the country, said Katie Allen, community development director.
“It may not be the boom it was two years ago, but it’s still encouraging,” Allen said.
- Gillette had six new commercial permits issued in the first quarter of 2009, according to the city’s quarterly development summary.
- About 25 new projects were issued permits since the beginning of 2007.
Surface and Allen are optimistic that there will be a trend toward new commercial projects in the next year and that the existing trend for expansion likely will continue.
“Just in the last month, we had three different developers come to Gillette already just to feel out the economy. That’s very encouraging,” Allen said.
The city’s investment in infrastructure during the past few years, which includes the $16 million in state loans to begin the process to build a new 42-mile water pipeline, and the near completion of power plants near the city support the optimistic assertion that there will be more growth.
More infrastructure encourages businesses to continue to expand, Surface said.
House construction
While home building has slowed and some out-of-town contractors are pulling out, there still are many projects in the pipeline for completion.
- There were 148 housing permits issued in the first three months of 2009.
- The number is up from 98 permits during the first three months of 2008.
- There were 128 permits issued for the same period in 2007.
About 1,981 housing permits still are in the pipeline. Many are in the final plat stage. They are a result of the subdivision activity that took place at the end of 2005 through 2007, Surface said.
About 477 of the units are in the final plat review stage and include units for Iron Horse, Remington Estates, Bittercreek, Sawgrass and Legacy Ridge subdivisions.
The city still has a need for family housing based on the city’s very low vacancy rates for apartments and manufactured homes.
- The rate for apartments has gone up from .1 percent in the fourth quarter of 2008 to 1.4 percent at the end of March.
- Manufactured homes increased from 5.1 percent to 5.3 percent.
The city contends that a vacancy rate for apartments of 5 percent would create a good balance. When numbers are low, there’s a shortage.
It’s difficult to attract developers of multi-family dwellings to Gillette because of the high land cost. Developers also want to make sure the economy can sustain it.
The housing market is still going strong, said Jeff Riesland, Century 21 Real Estate Associates agent.
Many people who rented a home are now able to afford to buy a home after a price correction took place earlier in the year.
Loans still are being made for many of the buyers who qualify for rural development loans. They also are taking advantage of the low-interest rates.
The real estate forecast looks good going into the spring and the summer, Riesland said. He added that his office has had numerous calls on commercial property in the past few months.
Economic development
Bringing new business to Gillette is Campbell County Economic Development Corp.’s goal.
The agency conducted a retail market analysis in 2005 that identified the characteristics of the city that are meaningful to retail businesses.
Gillette has a lot of “bleed out” of people who spend money in other communities such as Rapid City, S.D., and Casper.
The study gave a snapshot of what the retail picture was like and also a few items that needed work. It didn’t give a long-term strategy.
The agency will now send representatives to meet with various commercial developers with the International Council of Shopping Centers to introduce them to Gillette.
“We’re meeting with them and letting them know that the whole country is not in a recession,” said Susan Jerke, interim executive director.
The agency also has applied for a United States Department of Agriculture grant to help them revamp the original study and produce marketing plans and contacts.
Most businesses are skeptical of Gillette because of its low population numbers and its mineral-based economy that doesn’t have a lot of diversity.
The draw to Gillette from surrounding communities in Crook and Johnson counties and the rest of Campbell County places the city on the threshold needed for most businesses to move in — roughly 50,000 people.
Work force also is an issue that is improving in the county. More people come to Gillette each day who are drawn to different fields of work or the latest education opportunities.
The agency also is working with the Campbell County Chamber of Commerce and the city to help retain and expand existing businesses.
While the agency works to build Gillette’s retail, there are others like the Prime Rib, Subway, Smith’s and Maria’s that continue to take risks and continue to expand.
“That’s just another example of businesses who are here committing their financial resources to expand, showing faith in the economic climate that is here in Campbell County,” Surface said.
Ready to open
As for Peraltz, he’s nervous and he’s cautious.
Seeing what happened to the former chicken business that once was housed in his new restaurant has taught him that even with a new building he must be prepared for what’s to come.
For the past several weeks, he’s been working to re-create the former fast-food place as a sit-down lunch and dinner restaurant. He’s remodeled the kitchen, installed a smoker to cook prime rib and rotisserie chicken and he’s applied for a liquor license.
At 10 a.m. Wednesday, the doors to Chicos Restaurant will open on Boxelder Road near Home Depot, and he’ll be put to the test.
“It’s ready or not, we must, we have to go,” Peraltz said.
Juan Peraltz is a family man, a small business owner and, starting this week, a risk-taker.
Peraltz opened Maria’s Mexican Restaurant in 2003 to help pay for his son’s college tuition, and every member of his family has worked there since.
The business has grown. It’s time to expand.
When the former Popeyes Chicken and Biscuits building came available after sitting vacant for more than a year, Peraltz jumped at the opportunity to open a second restaurant. He didn’t have the money to buy the building, but did have enough to lease it.
After much remodeling, his will be the first this week of several Gillette businesses that are completing some type of expansion plans.
Building and expanding
New small businesses created in the fires of the recession and the expansion of existing businesses amid a national credit crisis shows Gillette seems to be weathering the economic storm.
Commercial expansion is seeing growth rather than new development of commercial property, said Michael Surface, a senior planner with the City of Gillette.
New commercial construction has been down from previous quarters. Surface is now trying to determine how many businesses are expanding.
“If local business can expand, they’re actually adding more services to the community,” Surface said.
If existing businesses continue to grow and change during a credit crisis, Gillette is certainly in a better position than the rest of the country, said Katie Allen, community development director.
“It may not be the boom it was two years ago, but it’s still encouraging,” Allen said.
- Gillette had six new commercial permits issued in the first quarter of 2009, according to the city’s quarterly development summary.
- About 25 new projects were issued permits since the beginning of 2007.
Surface and Allen are optimistic that there will be a trend toward new commercial projects in the next year and that the existing trend for expansion likely will continue.
“Just in the last month, we had three different developers come to Gillette already just to feel out the economy. That’s very encouraging,” Allen said.
The city’s investment in infrastructure during the past few years, which includes the $16 million in state loans to begin the process to build a new 42-mile water pipeline, and the near completion of power plants near the city support the optimistic assertion that there will be more growth.
More infrastructure encourages businesses to continue to expand, Surface said.
House construction
While home building has slowed and some out-of-town contractors are pulling out, there still are many projects in the pipeline for completion.
- There were 148 housing permits issued in the first three months of 2009.
- The number is up from 98 permits during the first three months of 2008.
- There were 128 permits issued for the same period in 2007.
About 1,981 housing permits still are in the pipeline. Many are in the final plat stage. They are a result of the subdivision activity that took place at the end of 2005 through 2007, Surface said.
About 477 of the units are in the final plat review stage and include units for Iron Horse, Remington Estates, Bittercreek, Sawgrass and Legacy Ridge subdivisions.
The city still has a need for family housing based on the city’s very low vacancy rates for apartments and manufactured homes.
- The rate for apartments has gone up from .1 percent in the fourth quarter of 2008 to 1.4 percent at the end of March.
- Manufactured homes increased from 5.1 percent to 5.3 percent.
The city contends that a vacancy rate for apartments of 5 percent would create a good balance. When numbers are low, there’s a shortage.
It’s difficult to attract developers of multi-family dwellings to Gillette because of the high land cost. Developers also want to make sure the economy can sustain it.
The housing market is still going strong, said Jeff Riesland, Century 21 Real Estate Associates agent.
Many people who rented a home are now able to afford to buy a home after a price correction took place earlier in the year.
Loans still are being made for many of the buyers who qualify for rural development loans. They also are taking advantage of the low-interest rates.
The real estate forecast looks good going into the spring and the summer, Riesland said. He added that his office has had numerous calls on commercial property in the past few months.
Economic development
Bringing new business to Gillette is Campbell County Economic Development Corp.’s goal.
The agency conducted a retail market analysis in 2005 that identified the characteristics of the city that are meaningful to retail businesses.
Gillette has a lot of “bleed out” of people who spend money in other communities such as Rapid City, S.D., and Casper.
The study gave a snapshot of what the retail picture was like and also a few items that needed work. It didn’t give a long-term strategy.
The agency will now send representatives to meet with various commercial developers with the International Council of Shopping Centers to introduce them to Gillette.
“We’re meeting with them and letting them know that the whole country is not in a recession,” said Susan Jerke, interim executive director.
The agency also has applied for a United States Department of Agriculture grant to help them revamp the original study and produce marketing plans and contacts.
Most businesses are skeptical of Gillette because of its low population numbers and its mineral-based economy that doesn’t have a lot of diversity.
The draw to Gillette from surrounding communities in Crook and Johnson counties and the rest of Campbell County places the city on the threshold needed for most businesses to move in — roughly 50,000 people.
Work force also is an issue that is improving in the county. More people come to Gillette each day who are drawn to different fields of work or the latest education opportunities.
The agency also is working with the Campbell County Chamber of Commerce and the city to help retain and expand existing businesses.
While the agency works to build Gillette’s retail, there are others like the Prime Rib, Subway, Smith’s and Maria’s that continue to take risks and continue to expand.
“That’s just another example of businesses who are here committing their financial resources to expand, showing faith in the economic climate that is here in Campbell County,” Surface said.
Ready to open
As for Peraltz, he’s nervous and he’s cautious.
Seeing what happened to the former chicken business that once was housed in his new restaurant has taught him that even with a new building he must be prepared for what’s to come.
For the past several weeks, he’s been working to re-create the former fast-food place as a sit-down lunch and dinner restaurant. He’s remodeled the kitchen, installed a smoker to cook prime rib and rotisserie chicken and he’s applied for a liquor license.
At 10 a.m. Wednesday, the doors to Chicos Restaurant will open on Boxelder Road near Home Depot, and he’ll be put to the test.
“It’s ready or not, we must, we have to go,” Peraltz said.
Thursday, April 30, 2009
First-time buyers find deals, help perk up house sales
By Stephanie Armour, USA TODAY
Kelly Butler just got a bargain.
Sure, her new three-bedroom home came with fake barn wood nailed to the bathroom walls, carpet that had to be ripped up, broken closet doors and a need for plumbing and tile work.
EXAMPLES: How buyers saved on 2 homes
No matter. Butler, 27, and her husband, Jim, 28, represent the new face of today's home buyers: first-timers who are snapping up distressed homes and fixer-uppers that are being sold at bargain prices.
Up to 45% of homes being purchased today are in that category, according to an April report by the National Association of Realtors (NAR) — and that's a major force driving existing home sales. First-time buyers accounted for more than half of all home sales in March, with activity concentrated in lower price ranges. But there is a troublesome side, because sales of foreclosed and other distressed homes tend to drag down overall home prices across the USA. These properties typically sell for 20% less than traditional homes.
Economists tracking the beleaguered housing market say these first-time home buyers represent a critical demographic that could help lead the industry out of its doldrums by buying up much of the excess inventory of homes that is drawing down home values nationwide. And in one promising sign, the inventory of unsold homes is starting to shrink. Total housing inventory at the end of March fell 1.6% to 3.74 million existing homes for sale, which represents a 9.8-month supply at the current sales pace, compared with a 9.7-month supply in February.
The Butlers have been fixing up their home since they moved in on Jan. 31. They plan to paint the brown exterior a cheerier white, with blue shutters. For 3% down, they got the foreclosed home in Stratford, Conn., with three bedrooms and two baths for $213,000 and a fixed loan at a 5.5% interest rate. The price was about 35% less than the previous owners paid a few years ago.
"Yeah, it's a little scary from the outside," says Kelly, an operations manager at The Regus Group, which rents office space. "But these fixer-uppers are really selling. There were even bidding wars. All these people were fighting for these houses."
The hope among housing experts is that interest in millions of such properties across the nation will rise because of low interest rates, a tax credit for first-time home buyers of up to $8,000, and home prices that have sunk in some markets by more than 20%. Distressed homes are moving fast because they often sell below market value.
"In the open houses, many first-time home buyers are walking through," says Lawrence Yun, chief economist at NAR. "It's a very good sign that first-time home buyers are responding to tax incentives and historically low interest rates. I'm hopeful. This all points toward improving market conditions."
An unwanted side effect
Signs that buyers are jumping off the sidelines to purchase distressed properties is a welcome indication that sales overall could pick up. But sales at these low prices are having the unwanted side effect of drawing down home prices across the board.
Although prices rose from February to March, the national median existing-home prices for all housing types was $175,200, down 12.4% from March 2008, according to NAR, which attributes much of the downward pressure on prices to the sale of distressed homes.
And there are potential risks to home buyers, who may leap at the good prices on distressed properties only to find they lose any cost savings because the homes need so much work. The national average cost of a bathroom remodel in 2008-09 is nearly $16,000; a major kitchen remodel runs more than $56,000, and replacing a roof is $18,825, according to Hanley Wood, which analyzes the housing industry.
"It can become like that movie The Money Pit," says Leif Thomsen at Mortgage Master, a provider of mortgage services. "These first-time home buyers getting distressed properties can easily get in over their heads if they don't know what they're doing. We strongly recommend against buying any home at auction, because you can't inspect the property first and have an inspection. There are real risks."
The shift toward buying distressed properties does have an upside: In areas hard hit by foreclosures such as Florida, California and Nevada, some neighborhoods peppered with boarded-up homes with overgrown lawns now are showing signs of revitalization.
Florida was among the 10 states with the highest foreclosure rates, according to an April report by RealtyTrac. Despite a 12% decrease from the previous quarter, Florida's first-quarter total of foreclosures was still the second highest in the nation.
Foreclosure filings were reported on 119,220 Florida properties, a 36% increase from the first quarter of 2008. The state posted the nation's fourth-highest state foreclosure rate during the quarter, with one in every 73 housing units receiving a foreclosure filing.
Some houses that were in foreclosure had previous owners who took everything that wasn't nailed down, so the homes have had sinks ripped out, baseboards missing and wires dangling where light fixtures used to be; some banks that own the homes have gone in first and done some fix-up work, such as installing sinks, to spur sales.
Those distressed properties and low prices are boosting sales, with NAR reporting home sales higher than a year ago in Florida.
"What I'm seeing is incredible. At ground zero in Florida, my business has tripled overnight," says Suzanne White, an agent at ZipRealty in Tampa. "There isn't grass overgrown and mosquitoes all around in these neighborhoods anymore. First-time home buyers are saying rates are so low they can pay less than rent. The bank-owned properties are getting multiple offers and selling higher than asking price."
Sacrifices for fixer-uppers
Financing isn't as easy to get as it was during 2006, the peak of the housing boom. Buyers need good credit and a solid income that can be documented, and they need to be prepared to put money down.
The median down payment by first-time buyers was 4% in 2008, up from 2% in 2007, according to NAR. Many are turning to Federal Housing Administration (FHA) loans, which can require as little as 3.5% down.
The volume of single-family FHA-insured loans originated has tripled from $59 billion in fiscal year 2007 to more than $180 billion in 2008.
Buying a fixer-upper also can mean sacrifices: Buyers may have to wait before they can move in because the homes need work, and first-time buyers often have to look past a home's problems to see the potential. For those buying foreclosed homes, dealing with a bank instead of a private owner can sometimes mean lengthy delays.
The sale of distressed properties could have a trickle-down effect that may help boost remodeling businesses, which have seen business slump as homeowners halt renovation plans.
And first-time home buyers are showing more interest. More than three-quarters of first-time home buyers say now is a good time to buy a home despite concern about the economy, according to a March survey by Century 21 Real Estate of 1,000 prospective first-time buyers. More than 80% say prices are affordable, and 68% say now is a better time to buy than six months ago.
Kimberly Miles, 26, is one of them. In February, she got an FHA-insured mortgage on a three-bedroom house with a two-car garage, overlooking a lake in Myrtle Beach, S.C.
The flooring, which smelled because of the previous owner's pets and smoking habit, was ripped up. The drywall needed caulking, and the previous owner had taken the fridge.
The home, which had been in foreclosure, was listed at $142,000 in November and dropped to $122,000 in January. With the FHA-loan, she had to put down only 3.5%, and the $8,000 federal tax credit will pay for a lot of the renovations.
"It smelled awful. You couldn't breathe in there, but I saw the potential," says Miles, who works for the Myrtle Beach Area Chamber of Commerce and Convention and Visitors Bureau. "During the housing boom, I could never have gotten it."
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FIRST-TIME HOMEBUYERS FIND DEALS | Story
house
House
Buyers: Brian McGee, Chelsea Johnson
* Where: East Atlanta neighborhood in Georgia.
* What did they get? The new home, which stood empty 1 1/2 years, has four bedrooms, 3 1/2 baths, hardwood floors, large deck and is eight minutes from downtown Atlanta. The original asking price was $400,000; the purchase price was $280,000 (seller pays closing costs).
William Kincaid
* Where: Mason City, Iowa.
* What did he get? The home is new construction in a new cul-de-sac carved out of an Iowa corn field. It was on the market a year or more, and the homebuilder has since gone bankrupt. Kincaid said he saved maybe $30,000 to $40,0000 and only looked a few months.
Kelly Butler just got a bargain.
Sure, her new three-bedroom home came with fake barn wood nailed to the bathroom walls, carpet that had to be ripped up, broken closet doors and a need for plumbing and tile work.
EXAMPLES: How buyers saved on 2 homes
No matter. Butler, 27, and her husband, Jim, 28, represent the new face of today's home buyers: first-timers who are snapping up distressed homes and fixer-uppers that are being sold at bargain prices.
Up to 45% of homes being purchased today are in that category, according to an April report by the National Association of Realtors (NAR) — and that's a major force driving existing home sales. First-time buyers accounted for more than half of all home sales in March, with activity concentrated in lower price ranges. But there is a troublesome side, because sales of foreclosed and other distressed homes tend to drag down overall home prices across the USA. These properties typically sell for 20% less than traditional homes.
Economists tracking the beleaguered housing market say these first-time home buyers represent a critical demographic that could help lead the industry out of its doldrums by buying up much of the excess inventory of homes that is drawing down home values nationwide. And in one promising sign, the inventory of unsold homes is starting to shrink. Total housing inventory at the end of March fell 1.6% to 3.74 million existing homes for sale, which represents a 9.8-month supply at the current sales pace, compared with a 9.7-month supply in February.
The Butlers have been fixing up their home since they moved in on Jan. 31. They plan to paint the brown exterior a cheerier white, with blue shutters. For 3% down, they got the foreclosed home in Stratford, Conn., with three bedrooms and two baths for $213,000 and a fixed loan at a 5.5% interest rate. The price was about 35% less than the previous owners paid a few years ago.
"Yeah, it's a little scary from the outside," says Kelly, an operations manager at The Regus Group, which rents office space. "But these fixer-uppers are really selling. There were even bidding wars. All these people were fighting for these houses."
The hope among housing experts is that interest in millions of such properties across the nation will rise because of low interest rates, a tax credit for first-time home buyers of up to $8,000, and home prices that have sunk in some markets by more than 20%. Distressed homes are moving fast because they often sell below market value.
"In the open houses, many first-time home buyers are walking through," says Lawrence Yun, chief economist at NAR. "It's a very good sign that first-time home buyers are responding to tax incentives and historically low interest rates. I'm hopeful. This all points toward improving market conditions."
An unwanted side effect
Signs that buyers are jumping off the sidelines to purchase distressed properties is a welcome indication that sales overall could pick up. But sales at these low prices are having the unwanted side effect of drawing down home prices across the board.
Although prices rose from February to March, the national median existing-home prices for all housing types was $175,200, down 12.4% from March 2008, according to NAR, which attributes much of the downward pressure on prices to the sale of distressed homes.
And there are potential risks to home buyers, who may leap at the good prices on distressed properties only to find they lose any cost savings because the homes need so much work. The national average cost of a bathroom remodel in 2008-09 is nearly $16,000; a major kitchen remodel runs more than $56,000, and replacing a roof is $18,825, according to Hanley Wood, which analyzes the housing industry.
"It can become like that movie The Money Pit," says Leif Thomsen at Mortgage Master, a provider of mortgage services. "These first-time home buyers getting distressed properties can easily get in over their heads if they don't know what they're doing. We strongly recommend against buying any home at auction, because you can't inspect the property first and have an inspection. There are real risks."
The shift toward buying distressed properties does have an upside: In areas hard hit by foreclosures such as Florida, California and Nevada, some neighborhoods peppered with boarded-up homes with overgrown lawns now are showing signs of revitalization.
Florida was among the 10 states with the highest foreclosure rates, according to an April report by RealtyTrac. Despite a 12% decrease from the previous quarter, Florida's first-quarter total of foreclosures was still the second highest in the nation.
Foreclosure filings were reported on 119,220 Florida properties, a 36% increase from the first quarter of 2008. The state posted the nation's fourth-highest state foreclosure rate during the quarter, with one in every 73 housing units receiving a foreclosure filing.
Some houses that were in foreclosure had previous owners who took everything that wasn't nailed down, so the homes have had sinks ripped out, baseboards missing and wires dangling where light fixtures used to be; some banks that own the homes have gone in first and done some fix-up work, such as installing sinks, to spur sales.
Those distressed properties and low prices are boosting sales, with NAR reporting home sales higher than a year ago in Florida.
"What I'm seeing is incredible. At ground zero in Florida, my business has tripled overnight," says Suzanne White, an agent at ZipRealty in Tampa. "There isn't grass overgrown and mosquitoes all around in these neighborhoods anymore. First-time home buyers are saying rates are so low they can pay less than rent. The bank-owned properties are getting multiple offers and selling higher than asking price."
Sacrifices for fixer-uppers
Financing isn't as easy to get as it was during 2006, the peak of the housing boom. Buyers need good credit and a solid income that can be documented, and they need to be prepared to put money down.
The median down payment by first-time buyers was 4% in 2008, up from 2% in 2007, according to NAR. Many are turning to Federal Housing Administration (FHA) loans, which can require as little as 3.5% down.
The volume of single-family FHA-insured loans originated has tripled from $59 billion in fiscal year 2007 to more than $180 billion in 2008.
Buying a fixer-upper also can mean sacrifices: Buyers may have to wait before they can move in because the homes need work, and first-time buyers often have to look past a home's problems to see the potential. For those buying foreclosed homes, dealing with a bank instead of a private owner can sometimes mean lengthy delays.
The sale of distressed properties could have a trickle-down effect that may help boost remodeling businesses, which have seen business slump as homeowners halt renovation plans.
And first-time home buyers are showing more interest. More than three-quarters of first-time home buyers say now is a good time to buy a home despite concern about the economy, according to a March survey by Century 21 Real Estate of 1,000 prospective first-time buyers. More than 80% say prices are affordable, and 68% say now is a better time to buy than six months ago.
Kimberly Miles, 26, is one of them. In February, she got an FHA-insured mortgage on a three-bedroom house with a two-car garage, overlooking a lake in Myrtle Beach, S.C.
The flooring, which smelled because of the previous owner's pets and smoking habit, was ripped up. The drywall needed caulking, and the previous owner had taken the fridge.
The home, which had been in foreclosure, was listed at $142,000 in November and dropped to $122,000 in January. With the FHA-loan, she had to put down only 3.5%, and the $8,000 federal tax credit will pay for a lot of the renovations.
"It smelled awful. You couldn't breathe in there, but I saw the potential," says Miles, who works for the Myrtle Beach Area Chamber of Commerce and Convention and Visitors Bureau. "During the housing boom, I could never have gotten it."
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FIRST-TIME HOMEBUYERS FIND DEALS | Story
house
House
Buyers: Brian McGee, Chelsea Johnson
* Where: East Atlanta neighborhood in Georgia.
* What did they get? The new home, which stood empty 1 1/2 years, has four bedrooms, 3 1/2 baths, hardwood floors, large deck and is eight minutes from downtown Atlanta. The original asking price was $400,000; the purchase price was $280,000 (seller pays closing costs).
William Kincaid
* Where: Mason City, Iowa.
* What did he get? The home is new construction in a new cul-de-sac carved out of an Iowa corn field. It was on the market a year or more, and the homebuilder has since gone bankrupt. Kincaid said he saved maybe $30,000 to $40,0000 and only looked a few months.
Wednesday, April 29, 2009
Obama expands foreclosure fix
Two steps: Second liens now covered by modification program; servicers must offer eligible borrowers principal reduction under Hope for Homeowners.
By Tami Luhby, CNNMoney.com senior writer
NEW YORK (CNNMoney.com) -- The Obama administration said Tuesday it is expanding its foreclosure prevention program to cover second mortgages and to direct more troubled borrowers to the Hope for Homeowners program.
Announced with great fanfare in mid-February, the president's $75 billion program has gotten off to a slow start. Loan servicers only recently started taking applications and many delinquent borrowers have complained about being left in the cold because their home values have dropped or they've lost their jobs.
The administration is seeking to address some of the concerns by tweaking the original modification plan, which calls for adjusting eligible borrowers' loans so monthly payments are no more than 31% of pre-tax income.
Servicers covering 75% of the nation's mortgages are now participating in the program, which also allows some homeowners with little or no equity to refinance their mortgages, a senior administration official said Tuesday. Together, the plans are expected to help up to 9 million avoid foreclosure.
Second mortgage roadblock
During the housing frenzy, many borrowers obtained second mortgages to allow them to put little or nothing down when buying a home. Up to half of at-risk borrowers have second liens, according to the administration.
These loans have complicated the modification process. For one thing, they add to troubled homeowners' debt levels. Also, mortgage investors have balked at reducing payments on first mortgages when the second loan was left intact.
Under the administration's new program, the interest rate on second mortgages will be reduced to 1% on loans where payments cover interest and principal and to 2% for interest-only loans. The government will subsidize the rate reduction, with the money going to the mortgage investor.
Servicers will be paid $500 for each modification and an additional $250 annually for three years if the borrower stays current. Borrowers can receive up to $250 per year for five years to pay down their first mortgage.
Investors can also receive a payment in exchange for extinguishing the second lien. They would receive 3 cents on the dollar for loans more than 180 days delinquent and between 4 cents and 12 cents for less delinquent loans, depending on the borrowers' debt levels.
Servicers who join the new program must modify secondloans when a borrower's first mortgage is adjusted. It will likely take a month to implement, but it should not slow down the modifications of primary mortgages, the administration said.
"By bringing both the first lien and second lien program together, we can reduce monthly payments for borrowers and make it much more likely that they can stay in their homes," a senior administration official said.
Hope for Homeowners option
Also Tuesday, the administration said it is now requiring servicers to offer troubled borrowers access to Hope for Homeowners as a modification option if they qualify.
Expanding Hope for Homeowners would address one of the major holes in the original Obama foreclosure prevention plan. It helps homeowners whose homes are now worth far less than their mortgages.
Servicers had balked at participating in the Hope program because it required they reduce the mortgage principal balance to 90% of a home's current value.
Hope for Homeowners, which began in October, is being revamped in Congress. Servicers would have to reduce the principal to 93% of the home's value. The change would also reduce the program's high fees, which turned off many troubled borrowers.
As an incentive to participate, servicers will be paid $2,500 for each refinancing, while lenders who originate the new loans will receive up to $1,000 a year for three years, as long as the loan remains current.
Separately, however, another pillar of the president's plan appears to be headed for defeat this week. The Senate is not expected to pass legislation allowing bankruptcy judges to modify mortgages. The administration had sought this change to pressure servicers to modify loans before borrowers declare bankruptcy.
By Tami Luhby, CNNMoney.com senior writer
NEW YORK (CNNMoney.com) -- The Obama administration said Tuesday it is expanding its foreclosure prevention program to cover second mortgages and to direct more troubled borrowers to the Hope for Homeowners program.
Announced with great fanfare in mid-February, the president's $75 billion program has gotten off to a slow start. Loan servicers only recently started taking applications and many delinquent borrowers have complained about being left in the cold because their home values have dropped or they've lost their jobs.
The administration is seeking to address some of the concerns by tweaking the original modification plan, which calls for adjusting eligible borrowers' loans so monthly payments are no more than 31% of pre-tax income.
Servicers covering 75% of the nation's mortgages are now participating in the program, which also allows some homeowners with little or no equity to refinance their mortgages, a senior administration official said Tuesday. Together, the plans are expected to help up to 9 million avoid foreclosure.
Second mortgage roadblock
During the housing frenzy, many borrowers obtained second mortgages to allow them to put little or nothing down when buying a home. Up to half of at-risk borrowers have second liens, according to the administration.
These loans have complicated the modification process. For one thing, they add to troubled homeowners' debt levels. Also, mortgage investors have balked at reducing payments on first mortgages when the second loan was left intact.
Under the administration's new program, the interest rate on second mortgages will be reduced to 1% on loans where payments cover interest and principal and to 2% for interest-only loans. The government will subsidize the rate reduction, with the money going to the mortgage investor.
Servicers will be paid $500 for each modification and an additional $250 annually for three years if the borrower stays current. Borrowers can receive up to $250 per year for five years to pay down their first mortgage.
Investors can also receive a payment in exchange for extinguishing the second lien. They would receive 3 cents on the dollar for loans more than 180 days delinquent and between 4 cents and 12 cents for less delinquent loans, depending on the borrowers' debt levels.
Servicers who join the new program must modify secondloans when a borrower's first mortgage is adjusted. It will likely take a month to implement, but it should not slow down the modifications of primary mortgages, the administration said.
"By bringing both the first lien and second lien program together, we can reduce monthly payments for borrowers and make it much more likely that they can stay in their homes," a senior administration official said.
Hope for Homeowners option
Also Tuesday, the administration said it is now requiring servicers to offer troubled borrowers access to Hope for Homeowners as a modification option if they qualify.
Expanding Hope for Homeowners would address one of the major holes in the original Obama foreclosure prevention plan. It helps homeowners whose homes are now worth far less than their mortgages.
Servicers had balked at participating in the Hope program because it required they reduce the mortgage principal balance to 90% of a home's current value.
Hope for Homeowners, which began in October, is being revamped in Congress. Servicers would have to reduce the principal to 93% of the home's value. The change would also reduce the program's high fees, which turned off many troubled borrowers.
As an incentive to participate, servicers will be paid $2,500 for each refinancing, while lenders who originate the new loans will receive up to $1,000 a year for three years, as long as the loan remains current.
Separately, however, another pillar of the president's plan appears to be headed for defeat this week. The Senate is not expected to pass legislation allowing bankruptcy judges to modify mortgages. The administration had sought this change to pressure servicers to modify loans before borrowers declare bankruptcy.
Tuesday, April 28, 2009
A wave of homebuilder consolidation?
With an industry on the ropes, analysts say more companies will join forces - some to grow, some just to survive.
By Janet Morrissey, contributing writer
NEW YORK (Fortune) -- When Richard Dugas, the president and CEO of Pulte Homes Inc. recently talked about his company's $3.1 billion purchase of rival Centex Corp., he added fuel to the fire for a possible wave of consolidation in the battered homebuilding sector.
"This is the right combination at the right time," Dugas told analysts when the deal was announced earlier this month. "As the industry prepares for further consolidation, we believe acting first gives us an advantage."
Now analysts and investors are placing bets on which marquee names might be next for a hook-up - and which ones will close their doors.
Large, well-capitalized homebuilders with low debt, such as D.R. Horton Inc., (DHI, Fortune 500) KB Home (KBH), and Pulte (PHM, Fortune 500) - as well as cash-flush private equity firms - will likely be shopping around, while highly leveraged builders with significant chunks of debt coming due in the next three years are likely targets, industry experts say.
Like companies in just about every other industry, homebuilders are having a tough time refinancing in the frozen credit markets. As a result, distressed builders, unable to meet debt calls, could be forced to sell assets or the entire company at bargain-basement prices.
Builders with debt-to-market cap ratios above 75% include Beazer Homes USA Inc. (BZH), Hovnanian Enterprises Inc. (HOV), and Standard Pacific Corp. (SPF), according to Bob Curran, managing director at Fitch Ratings. Their high debt makes them vulnerable to takeouts if the credit markets don't improve in the next two years, experts say.
Builders on the hunt may also be looking for strategic targets. Toll Brothers Inc. (TOL) has a robust balance sheet, but its strong brand name and leadership in high-end housing could make it an attractive buy for a company wanting to expand into the luxury sector, says Stephen Kim, senior real estate analyst AT Alpine Woods Capital Investors LLC, which holds shares in homebuilding stocks including Toll Brothers.
KB Home could fit well with Ryland Group Inc. (RYL) which shares a similar market cap and business strategy, says UBS analyst David Goldberg. But, he notes, "Who knows if KB wants to be acquisitive?"
Then there's D.R. Horton, which could acquire another company to regain its position as the country's largest builder. "There is a certain empire-building nature to this industry, and people want to be the biggest, and you can't be the biggest picking up pieces of raw land or buying private builders - you can't get scale fast enough. So that might push people to do deals" says Goldberg.
Too much too soon?
Most industry experts believe consolidation will accelerate, but many wonder if Pulte might have jumped in prematurely and overpaid for Centex (CTX, Fortune 500).
"We have always felt that there would be additional consolidation in the industry - just not right yet," said Joe Snider, vice president and senior credit officer at Moody's Investors Service in New York. "We're in the middle - we're not at the end yet - of a very deep and long-lasting downturn."
Based on Pulte's closing price on April 7 just before the deal was unveiled, the transaction valued Centex at $10.50 a share, which represented a 38% premium to its closing price of $7.62.
"My gut would tell me that what Pulte paid was a little bit high," says Goldberg. If the market rebounds and prices go up, "Pulte will look like geniuses for buying a big land position at the bottom of the market," he says. But if the market tanks for two or three more years, he believes the merger will be viewed as ill-timed.
Although traffic and sales have improved for homebuilders since February, it's not clear if the Pulte/Centex union is a blip or the beginning of a trend, says Carl Reichardt, an analyst with Wachovia Capital Markets LLC.
Indeed, plunging home prices, rising inventory, surging foreclosures and the frozen credit markets have decimated the housing sector. Home prices are off about 30% on average from their peak in 2005, with once-hot markets such as Las Vegas, Phoenix, and parts of Florida and California tumbling 50% or more, says Kim. "And we're looking for another roughly 10% decline in home prices" this year, he says.
As a result, the nation's publicly-traded homebuilders have slashed prices, boosted incentives and taken roughly $30 billion in writedowns during this period, says Snider. Homebuilding stocks have plummeted 88% from their peak in 2005 until their trough in November 2008, according to Kim. Although they've rallied 6.5% so far in 2009, they're still off about 79% from their peak, he says.
Casualties of the housing bust
Analysts expect a number of distressed builders to exit the market through bankruptcy filings, mergers or fire-sales in the next year or two.
So far, about 17 of the country's top 100 homebuilders - including three publicly-traded builders - Levitt & Sons LLC, WCI Communities Inc., and Tousa Inc. - have filed for Chapter 11 bankruptcy protection over the past two years, says Reichardt. More recently, Comstock Homebuilding Cos. Inc. indicated it may seek bankruptcy protection
Publicly-traded builders, in general, are better capitalized than their rivals in the private sector. Many learned tough lessons from the crippling downturn almost 20 years ago where high debt and inventory levels pushed a flurry of builders into bankruptcy.
Some of the names that survived this rocky period, such as NVR Inc. and M.D.C. Holdings Inc., have among the lowest debt levels and land holdings today. "They learned a bitter, but very wonderful, lesson," says Snider. "They're the best positioned homebuilders today."
Still, many companies are at risk. "Some of the weaker public builders have already gone, and there may be more to go," says Kim. And that's where the well-capitalized players can step in, but they may be best suited to hold off a while longer.
"This is the arguably the worst downturn since the end of World War II and more severe than the late '80s and early '90s," says Curran. "Most parties will probably tend to wait until it's clear that a bottom has been established, and into the early stages of the upside," said Curran.
"I don't think anybody should feel rushed here," said Kim. "But I think they will look and they are looking."
By Janet Morrissey, contributing writer
NEW YORK (Fortune) -- When Richard Dugas, the president and CEO of Pulte Homes Inc. recently talked about his company's $3.1 billion purchase of rival Centex Corp., he added fuel to the fire for a possible wave of consolidation in the battered homebuilding sector.
"This is the right combination at the right time," Dugas told analysts when the deal was announced earlier this month. "As the industry prepares for further consolidation, we believe acting first gives us an advantage."
Now analysts and investors are placing bets on which marquee names might be next for a hook-up - and which ones will close their doors.
Large, well-capitalized homebuilders with low debt, such as D.R. Horton Inc., (DHI, Fortune 500) KB Home (KBH), and Pulte (PHM, Fortune 500) - as well as cash-flush private equity firms - will likely be shopping around, while highly leveraged builders with significant chunks of debt coming due in the next three years are likely targets, industry experts say.
Like companies in just about every other industry, homebuilders are having a tough time refinancing in the frozen credit markets. As a result, distressed builders, unable to meet debt calls, could be forced to sell assets or the entire company at bargain-basement prices.
Builders with debt-to-market cap ratios above 75% include Beazer Homes USA Inc. (BZH), Hovnanian Enterprises Inc. (HOV), and Standard Pacific Corp. (SPF), according to Bob Curran, managing director at Fitch Ratings. Their high debt makes them vulnerable to takeouts if the credit markets don't improve in the next two years, experts say.
Builders on the hunt may also be looking for strategic targets. Toll Brothers Inc. (TOL) has a robust balance sheet, but its strong brand name and leadership in high-end housing could make it an attractive buy for a company wanting to expand into the luxury sector, says Stephen Kim, senior real estate analyst AT Alpine Woods Capital Investors LLC, which holds shares in homebuilding stocks including Toll Brothers.
KB Home could fit well with Ryland Group Inc. (RYL) which shares a similar market cap and business strategy, says UBS analyst David Goldberg. But, he notes, "Who knows if KB wants to be acquisitive?"
Then there's D.R. Horton, which could acquire another company to regain its position as the country's largest builder. "There is a certain empire-building nature to this industry, and people want to be the biggest, and you can't be the biggest picking up pieces of raw land or buying private builders - you can't get scale fast enough. So that might push people to do deals" says Goldberg.
Too much too soon?
Most industry experts believe consolidation will accelerate, but many wonder if Pulte might have jumped in prematurely and overpaid for Centex (CTX, Fortune 500).
"We have always felt that there would be additional consolidation in the industry - just not right yet," said Joe Snider, vice president and senior credit officer at Moody's Investors Service in New York. "We're in the middle - we're not at the end yet - of a very deep and long-lasting downturn."
Based on Pulte's closing price on April 7 just before the deal was unveiled, the transaction valued Centex at $10.50 a share, which represented a 38% premium to its closing price of $7.62.
"My gut would tell me that what Pulte paid was a little bit high," says Goldberg. If the market rebounds and prices go up, "Pulte will look like geniuses for buying a big land position at the bottom of the market," he says. But if the market tanks for two or three more years, he believes the merger will be viewed as ill-timed.
Although traffic and sales have improved for homebuilders since February, it's not clear if the Pulte/Centex union is a blip or the beginning of a trend, says Carl Reichardt, an analyst with Wachovia Capital Markets LLC.
Indeed, plunging home prices, rising inventory, surging foreclosures and the frozen credit markets have decimated the housing sector. Home prices are off about 30% on average from their peak in 2005, with once-hot markets such as Las Vegas, Phoenix, and parts of Florida and California tumbling 50% or more, says Kim. "And we're looking for another roughly 10% decline in home prices" this year, he says.
As a result, the nation's publicly-traded homebuilders have slashed prices, boosted incentives and taken roughly $30 billion in writedowns during this period, says Snider. Homebuilding stocks have plummeted 88% from their peak in 2005 until their trough in November 2008, according to Kim. Although they've rallied 6.5% so far in 2009, they're still off about 79% from their peak, he says.
Casualties of the housing bust
Analysts expect a number of distressed builders to exit the market through bankruptcy filings, mergers or fire-sales in the next year or two.
So far, about 17 of the country's top 100 homebuilders - including three publicly-traded builders - Levitt & Sons LLC, WCI Communities Inc., and Tousa Inc. - have filed for Chapter 11 bankruptcy protection over the past two years, says Reichardt. More recently, Comstock Homebuilding Cos. Inc. indicated it may seek bankruptcy protection
Publicly-traded builders, in general, are better capitalized than their rivals in the private sector. Many learned tough lessons from the crippling downturn almost 20 years ago where high debt and inventory levels pushed a flurry of builders into bankruptcy.
Some of the names that survived this rocky period, such as NVR Inc. and M.D.C. Holdings Inc., have among the lowest debt levels and land holdings today. "They learned a bitter, but very wonderful, lesson," says Snider. "They're the best positioned homebuilders today."
Still, many companies are at risk. "Some of the weaker public builders have already gone, and there may be more to go," says Kim. And that's where the well-capitalized players can step in, but they may be best suited to hold off a while longer.
"This is the arguably the worst downturn since the end of World War II and more severe than the late '80s and early '90s," says Curran. "Most parties will probably tend to wait until it's clear that a bottom has been established, and into the early stages of the upside," said Curran.
"I don't think anybody should feel rushed here," said Kim. "But I think they will look and they are looking."
Thursday, April 23, 2009
Signs of Life From the Real Estate Market
n ZIP codes across the country, as once-inflated property prices bottom out housing sales are increasing dramatically
Earlier this year Herson and Liz Enerio put in a $400,000 bid on a four-bedroom house on a private street in Fairfield, Calif., with three pine trees and a backyard that opens onto a hiking trail.
One would think that the 30-year-old police officer and his wife, who works as a nurse, were well positioned to negotiate, especially in a market like Fairfield, a town about 40 miles from both San Francisco and Sacramento where more than 80% of homes for sale are owned by banks or by homeowners facing foreclosure. For one thing, the people selling the home are under water on their mortgage and are trying for a so-called short sale, where the lender agrees to take less than what's owed to prevent a foreclosure. But the Enerios decided to play it safe, bidding $1,000 above the asking price and offering to cover some of the closing costs, because Fairfield—like many of the most battered areas of California, Florida, Nevada, and Arizona—is suddenly hot again.
Prices have dropped so low that cash-ready investors and first-time buyers are making multiple offers on distressed properties. Fairfield sales jumped 226% in the fourth quarter of last year compared to the same quarter in 2007 and home prices during that period fell 19% to $179,500, according to mortgage and housing data analytics company First American CoreLogic.
The Enerios bid on another house in November but lost out to a buyer who agreed to pay $5,000 more. They're hoping that their current offer is accepted, but they aren't necessarily in a rush to buy. Homes in this Bay Area market are once again affordable for people in their income bracket.
"I tried looking for a home when I was living in Orange County four years ago, but homes there were ridiculously expensive," said Herson Enerio, a first-time buyer. "The only thing I was able to handle down there was a three-bedroom condo… Now we're looking at a house for sure."
Not All Sun Belt Cities
The Fairfield ZIP code had the biggest annual increase in sales in the fourth quarter of last year, according to a ranking of the 25 U.S. ZIP codes with the most improved sales compiled for BusinessWeek.com by Santa Ana (Calif.)-based First American CoreLogic. California, Florida, Arizona, and Nevada ZIPs dominated the list, as we expected, but Howell, Mich., near Detroit; Woodbury, Minn.; Rio Rancho, N.M.; Humble, Tex., outside Houston; Duluth, Ga., in the Atlanta metro area; and the Chicago suburb of Des Plaines, Ill., also showed strong or at least stable sales at the end of last year. We limited the ranking to ZIPs with at least 10,000 households and selected only one ZIP for any given metro area. (If we hadn't done this, California would have taken almost all of the top 25 slots).
Of course, even though sales are strong in these places, the pace is increasing from anemic levels. In many markets, foreclosure sales are driving down prices, which are only making things worse. At the same time, the accelerating sales pace appears to be finally cutting into inventories of unsold homes.
In Fairfield, for example, about 1,900 homes were listed for sale in January compared to 3,000 listings in January 2008, according to Christine Wiley, a Fairfield-based agent who works with her Realtor mother Katherine Wiley. But Christine Wiley, who has studied the pre-foreclosure data, said she expects another wave of foreclosures in Fairfield. Many of the homes built in Fairfield during the boom have been taken back by the banks, but even more are likely to be foreclosed on, she said.
Across the country in Prince William County, Va., outside Washington D.C., buyers are out in force. The market, where subprime loans and boom-time construction were rampant, was badly damaged in the downturn. Making matters worse, a controversial law in Prince William County that allowed police officers to enforce immigration laws helped drive out many of the Central American immigrants who came in to work on building the new homes during the boom. Many of those immigrants who moved to neighboring Fairfax County allowed their Prince William County homes to go into foreclosure, said John McClain, senior fellow at George Mason University's Center for Regional Analysis.
Proximity to D.C. Helps
The good news now is that inventories of unsold homes are shrinking because of the accelerating sales, though homeowners who could afford to have also likely taken their properties off the market, McClain said. In January, 3,346 homes were on the market compared to 5,355 in January, 2007, McClain said. In January, 647 homes sold in Prince William County compared to 312 a year earlier. Home prices, however, fell 34%.
One factor that could help Prince William County toward recovery is its proximity to Washington D.C., one of the few local economies with relatively good prospects thanks to its federal government and defense contractor jobs. Woodbridge, Va., in Prince William County, came in at No. 14 in our ranking. Woodbridge sales jumped 32% in the fourth quarter while median home prices dropped 18% to $215,500, according to First American CoreLogic.
The drop in inventory and the rise in sales are "good signs" for Prince William County, McClain said.
"We are at that point with that trend [in Prince William County] where the economics have to kick in," McClain said. "Prices have to stabilize and then start up again."
Erick Blackwelder, associate broker with Exit Realty in Woodbridge, said buyers have flocked to the market and have already bought many of the foreclosed homes that were in good shape. The remaining foreclosures are largely "junk," he said.
"It started in April 2008," Blackwelder said. "It was like all of a sudden, somebody flicked on a light switch and there were buyers galore."
ZIP Codes With the Most Improved Home Sales
No. 1
Fairfield, Calif.
ZIP: 94533
Metro area: Vallejo-Fairfield
Annual home sale increase: 226%
Fourth-quarter sales: 342
Median home price: $179,500
Median home price change: -19.0%
Nondistressed sales percentage: 17%*
No. 2
Rialto, Calif.
ZIP: 92376
Metro area: Riverside-San Bernardino-Ontario
Annual home sale increase: 170%
Fourth-quarter sales: 243
Median home price: $148,000
Median home price change: -19.1%
Nondistressed sales percentage: 10%
No. 3
Sylmar, Calif.
ZIP: 91342
Metro area: Los Angeles-Long Beach-Santa Ana
Annual home sale increase: 149%
Fourth-quarter sales: 254
Median home price: $295,000
Median home price change: -19.2%
Nondistressed sales percentage: 31%
No. 4
San Diego (Mira Mesa community)
ZIP: 92126
Metro area: San Diego-Carlsbad-San Marcos, Calif.
Annual home sale increase: 119%
Fourth-quarter sales: 195
Median home price: $337,500
Median home price change: -13.2%
Nondistressed sales percentage: 48%
No. 5
Cape Coral, Fla.
ZIP: 33914
Metro area: Coral-Fort Myers
Annual home sale increase: 103%
Fourth-quarter sales: 274
Median home price: $137,450
Median home price change: -14.5%
Nondistressed sales percentage: 30%
Earlier this year Herson and Liz Enerio put in a $400,000 bid on a four-bedroom house on a private street in Fairfield, Calif., with three pine trees and a backyard that opens onto a hiking trail.
One would think that the 30-year-old police officer and his wife, who works as a nurse, were well positioned to negotiate, especially in a market like Fairfield, a town about 40 miles from both San Francisco and Sacramento where more than 80% of homes for sale are owned by banks or by homeowners facing foreclosure. For one thing, the people selling the home are under water on their mortgage and are trying for a so-called short sale, where the lender agrees to take less than what's owed to prevent a foreclosure. But the Enerios decided to play it safe, bidding $1,000 above the asking price and offering to cover some of the closing costs, because Fairfield—like many of the most battered areas of California, Florida, Nevada, and Arizona—is suddenly hot again.
Prices have dropped so low that cash-ready investors and first-time buyers are making multiple offers on distressed properties. Fairfield sales jumped 226% in the fourth quarter of last year compared to the same quarter in 2007 and home prices during that period fell 19% to $179,500, according to mortgage and housing data analytics company First American CoreLogic.
The Enerios bid on another house in November but lost out to a buyer who agreed to pay $5,000 more. They're hoping that their current offer is accepted, but they aren't necessarily in a rush to buy. Homes in this Bay Area market are once again affordable for people in their income bracket.
"I tried looking for a home when I was living in Orange County four years ago, but homes there were ridiculously expensive," said Herson Enerio, a first-time buyer. "The only thing I was able to handle down there was a three-bedroom condo… Now we're looking at a house for sure."
Not All Sun Belt Cities
The Fairfield ZIP code had the biggest annual increase in sales in the fourth quarter of last year, according to a ranking of the 25 U.S. ZIP codes with the most improved sales compiled for BusinessWeek.com by Santa Ana (Calif.)-based First American CoreLogic. California, Florida, Arizona, and Nevada ZIPs dominated the list, as we expected, but Howell, Mich., near Detroit; Woodbury, Minn.; Rio Rancho, N.M.; Humble, Tex., outside Houston; Duluth, Ga., in the Atlanta metro area; and the Chicago suburb of Des Plaines, Ill., also showed strong or at least stable sales at the end of last year. We limited the ranking to ZIPs with at least 10,000 households and selected only one ZIP for any given metro area. (If we hadn't done this, California would have taken almost all of the top 25 slots).
Of course, even though sales are strong in these places, the pace is increasing from anemic levels. In many markets, foreclosure sales are driving down prices, which are only making things worse. At the same time, the accelerating sales pace appears to be finally cutting into inventories of unsold homes.
In Fairfield, for example, about 1,900 homes were listed for sale in January compared to 3,000 listings in January 2008, according to Christine Wiley, a Fairfield-based agent who works with her Realtor mother Katherine Wiley. But Christine Wiley, who has studied the pre-foreclosure data, said she expects another wave of foreclosures in Fairfield. Many of the homes built in Fairfield during the boom have been taken back by the banks, but even more are likely to be foreclosed on, she said.
Across the country in Prince William County, Va., outside Washington D.C., buyers are out in force. The market, where subprime loans and boom-time construction were rampant, was badly damaged in the downturn. Making matters worse, a controversial law in Prince William County that allowed police officers to enforce immigration laws helped drive out many of the Central American immigrants who came in to work on building the new homes during the boom. Many of those immigrants who moved to neighboring Fairfax County allowed their Prince William County homes to go into foreclosure, said John McClain, senior fellow at George Mason University's Center for Regional Analysis.
Proximity to D.C. Helps
The good news now is that inventories of unsold homes are shrinking because of the accelerating sales, though homeowners who could afford to have also likely taken their properties off the market, McClain said. In January, 3,346 homes were on the market compared to 5,355 in January, 2007, McClain said. In January, 647 homes sold in Prince William County compared to 312 a year earlier. Home prices, however, fell 34%.
One factor that could help Prince William County toward recovery is its proximity to Washington D.C., one of the few local economies with relatively good prospects thanks to its federal government and defense contractor jobs. Woodbridge, Va., in Prince William County, came in at No. 14 in our ranking. Woodbridge sales jumped 32% in the fourth quarter while median home prices dropped 18% to $215,500, according to First American CoreLogic.
The drop in inventory and the rise in sales are "good signs" for Prince William County, McClain said.
"We are at that point with that trend [in Prince William County] where the economics have to kick in," McClain said. "Prices have to stabilize and then start up again."
Erick Blackwelder, associate broker with Exit Realty in Woodbridge, said buyers have flocked to the market and have already bought many of the foreclosed homes that were in good shape. The remaining foreclosures are largely "junk," he said.
"It started in April 2008," Blackwelder said. "It was like all of a sudden, somebody flicked on a light switch and there were buyers galore."
ZIP Codes With the Most Improved Home Sales
No. 1
Fairfield, Calif.
ZIP: 94533
Metro area: Vallejo-Fairfield
Annual home sale increase: 226%
Fourth-quarter sales: 342
Median home price: $179,500
Median home price change: -19.0%
Nondistressed sales percentage: 17%*
No. 2
Rialto, Calif.
ZIP: 92376
Metro area: Riverside-San Bernardino-Ontario
Annual home sale increase: 170%
Fourth-quarter sales: 243
Median home price: $148,000
Median home price change: -19.1%
Nondistressed sales percentage: 10%
No. 3
Sylmar, Calif.
ZIP: 91342
Metro area: Los Angeles-Long Beach-Santa Ana
Annual home sale increase: 149%
Fourth-quarter sales: 254
Median home price: $295,000
Median home price change: -19.2%
Nondistressed sales percentage: 31%
No. 4
San Diego (Mira Mesa community)
ZIP: 92126
Metro area: San Diego-Carlsbad-San Marcos, Calif.
Annual home sale increase: 119%
Fourth-quarter sales: 195
Median home price: $337,500
Median home price change: -13.2%
Nondistressed sales percentage: 48%
No. 5
Cape Coral, Fla.
ZIP: 33914
Metro area: Coral-Fort Myers
Annual home sale increase: 103%
Fourth-quarter sales: 274
Median home price: $137,450
Median home price change: -14.5%
Nondistressed sales percentage: 30%
Wednesday, April 22, 2009
Surviving a layoff
After being laid off, Carl Clay was lucky enough to find a new position. Just one problem: It ends in 10 months.
By Paul Keegan, Money Magazine contributing writer
(Money Magazine) -- Last fall Carl and Brenda Clay thought they had their financial life under control. After years of struggling to support themselves while Carl got a Ph.D. in molecular medicine, they were finally earning enough to start paying down student loans and credit card debt and saving in earnest for retirement.
Carl, 36, made $135,000 a year, plus bonuses, as medical director for a pharmaceutical communications firm. Brenda, 37, chipped in another $14,000 as a teacher's aide. And the couple had more than they'd hoped for: three beautiful kids; a lovely split-level home in Wilmington, Del., with a recently renovated kitchen; two new cars; and three cats, a dog, and a turtle named Snickers.
But a few days after Christmas, Carl was called in by human resources: His company was downsizing. He was being laid off. "I was stunned," he says. Despite the economy, the firm had seemed to be doing well.
When he told Brenda, she tried to be optimistic. And when he gathered Eric, 11, Hannah, 9, and Mark, 8, the next morning to explain why he was still home in his slippers, Mark hugged him. "It's okay, Daddy," he said. "You'll find another job."
Two months later, however, Carl had few leads and no offers. The pharmaceutical industry was suffering - and so was he. With no emergency savings, the Clays had burned through Carl's two weeks of severance. His unemployment benefits and Brenda's salary were hardly enough to get by on; they were buying groceries on credit.
Just as Carl felt at his personal nadir, the phone rang. It was a temp firm calling about a résumé he'd sent to pharmaceutical giant Astra-Zeneca: Would Carl be interested in a 10-month contract job directing clinical trial publications for close to his old salary of $135,000 a year?
"I was thrilled," he says.
Then he read the fine print: He'd technically be an employee of a temp firm, Yoh Staffing, which offers no 401(k) plan, no bonuses, and no vacation (besides six paid holidays). He'd have to pay for his own health insurance. And, of course, if his contract wasn't renewed, he'd be back in the same boat in 10 months.
Still, Carl felt he had no other choice. He took the job.
In this economy he's probably not the only one who's been forced into temporary work: The number of un employed people who've accepted short-term assignments is up 73% over the past year, reports the Bureau of Labor Statistics.
Trading full-time staff for freelancers and contractors lets businesses cut the cost of benefits and payroll taxes. It also gives companies the flexibility to adjust headcount according to economic demands, says James Ziegler of Solo W-2, which provides services for independent professionals.
A few months into his new job, Carl likes the work he's doing. But he can't help feeling unsettled. He's full of questions: How can I get hired? How do I budget knowing my salary might again disappear? What about saving for retirement? The following answers should help him - and you, if you end up in the same predicament.
Network on the job
Carl has long wanted to work for AstraZeneca; now he has a golden opportunity to make an impression from the inside. He'll need to show his bosses he's not just a gun for hire focused on a single project but someone who can advance the mission of the company, says New York career coach Win Sheffield. He should offer to take on tough projects, pipe up at meetings with smart ideas, suggest solutions, and get friendly with office "influencers."
Sheffield also recommends networking in the office to find out if hiring temps is an experiment or the norm. If it's the former, full-time positions may come back when the economy does. He should ask for a quarterly review to make sure he's on track and let those in a position to hire know he's interested. If it's the norm, he should find out which jobs in which divisions are salaried, then make contacts in those areas who can notify him of open spots.
One thing Carl should be aware of as he pursues a permanent post: Per his contract, he can't come on staff at AstraZeneca for 90 days after his completion date without written consent from Yoh. (Staffing firms use such breaks to renew contracts year after year and protect themselves from losing talent to client companies.) This clause means that if Carl were lucky enough to get a real job with AstraZeneca, he could lose a paycheck for three months. That's a possibility he'll need to plan for.
Budget for a new reality
On paper, the Clays' income will be roughly the same as it was before Carl was laid off. But that doesn't mean they can just resume their old lifestyle. That paycheck comes with an expiration date, after which there may not be another equally well-paying job to be found.
Also, they now have new expenses, such as Carl's health insurance. Fortunately taxes are taken out of Carl's check; some contractors, known as 1099 employees (for the tax form), need to save for Uncle Sam as well.
"Temporary employees really need to scrub their budgets to find places to save," says McLean, Va., financial planner Everette Orr. The Clays might use a free budgeting site such as Mint.com or Quicken-Online.com to see where their money is going and how they can reduce expenses.
A top priority will be finding ways to build emergency savings. Contract workers need 12 months of living expenses banked, says Orr. Even if Carl gets a job with AstraZeneca, he'd need three months' expenses by January to cover that 90-day furlough.
The Clays' $4,000-a-month debt obligations - from their mortgage, kitchen reno, school loans, cars, and credit cards - eat up half their take-home pay, so they won't be able to build that kind of safety net quickly. But refinancing (see "Three Fast Fixes") may free up a chunk of cash.
Replace lost benefits
As a salaried worker, Carl had a lot of perks he'll miss out on as a contractor. Chief among them: subsidized health insurance and a 401(k) with employer match.
Brenda and the kids currently get insurance via her teaching job, but Carl can't join the plan, as he's been offered group coverage by the staffing agency. Luckily, those plans are a decent option: Though the firm doesn't help pay, the rates are good - $100 to $450 a month.
As for retirement, the options depend on how your income is reported to the IRS. W-2 workers such as Carl are technically considered employees. Thus, for tax-advantaged savings, they have merely the choice of a Roth IRA (which phases out at $166,000 in modified adjusted gross income for couples) or a traditional IRA (no income limit if neither you nor your spouse has a retirement plan at work). In either, you can save only $5,000 yearly, or $6,000 if you're 50 or older.
Because he has to focus on his emergency fund, it's unlikely that Carl will be able to save for retirement this year. But if he renews his contract next year and has sufficient emergency savings by then, he should open a Roth at that time, says Reston, Va., financial planner Frank Boucher. "He can take the payout tax-free when he retires, and since he's only 36, the money has a long time to grow."
Workers receiving 1099 income are considered self-employed and can therefore stash away a lot more. They can choose between an individual 401(k), with a $49,000 yearly contribution limit, and a SEPIRA, which allows contributions up to 18.6% of net profits, also maxing out at $49,000.
Keep up the hunt
Carl has called off his job search to focus on his new gig. But since his contract allows either side to terminate for any reason, he should keep looking for a position that pays as well but includes benefits, says Sheffield.
Benefits are worth a lot in terms of compensation - plus his family may need them, since Brenda isn't guaranteed a teaching job in the fall. And since Carl isn't guaranteed work at AstraZeneca either, he needs an all-fronts attack.
In the meantime, however, Carl is starting to appreciate the advantages of contract work. No more late nights at the office, for example. For now, that means extra time with his kids, but he may begin looking for freelance medical writing to help build that emergency fund.
"I'm still ambitious - I'd like to be president of a company someday," he says. "But right now it feels pretty great to go bike riding with my daughter and play Guitar Hero with my son."
By Paul Keegan, Money Magazine contributing writer
(Money Magazine) -- Last fall Carl and Brenda Clay thought they had their financial life under control. After years of struggling to support themselves while Carl got a Ph.D. in molecular medicine, they were finally earning enough to start paying down student loans and credit card debt and saving in earnest for retirement.
Carl, 36, made $135,000 a year, plus bonuses, as medical director for a pharmaceutical communications firm. Brenda, 37, chipped in another $14,000 as a teacher's aide. And the couple had more than they'd hoped for: three beautiful kids; a lovely split-level home in Wilmington, Del., with a recently renovated kitchen; two new cars; and three cats, a dog, and a turtle named Snickers.
But a few days after Christmas, Carl was called in by human resources: His company was downsizing. He was being laid off. "I was stunned," he says. Despite the economy, the firm had seemed to be doing well.
When he told Brenda, she tried to be optimistic. And when he gathered Eric, 11, Hannah, 9, and Mark, 8, the next morning to explain why he was still home in his slippers, Mark hugged him. "It's okay, Daddy," he said. "You'll find another job."
Two months later, however, Carl had few leads and no offers. The pharmaceutical industry was suffering - and so was he. With no emergency savings, the Clays had burned through Carl's two weeks of severance. His unemployment benefits and Brenda's salary were hardly enough to get by on; they were buying groceries on credit.
Just as Carl felt at his personal nadir, the phone rang. It was a temp firm calling about a résumé he'd sent to pharmaceutical giant Astra-Zeneca: Would Carl be interested in a 10-month contract job directing clinical trial publications for close to his old salary of $135,000 a year?
"I was thrilled," he says.
Then he read the fine print: He'd technically be an employee of a temp firm, Yoh Staffing, which offers no 401(k) plan, no bonuses, and no vacation (besides six paid holidays). He'd have to pay for his own health insurance. And, of course, if his contract wasn't renewed, he'd be back in the same boat in 10 months.
Still, Carl felt he had no other choice. He took the job.
In this economy he's probably not the only one who's been forced into temporary work: The number of un employed people who've accepted short-term assignments is up 73% over the past year, reports the Bureau of Labor Statistics.
Trading full-time staff for freelancers and contractors lets businesses cut the cost of benefits and payroll taxes. It also gives companies the flexibility to adjust headcount according to economic demands, says James Ziegler of Solo W-2, which provides services for independent professionals.
A few months into his new job, Carl likes the work he's doing. But he can't help feeling unsettled. He's full of questions: How can I get hired? How do I budget knowing my salary might again disappear? What about saving for retirement? The following answers should help him - and you, if you end up in the same predicament.
Network on the job
Carl has long wanted to work for AstraZeneca; now he has a golden opportunity to make an impression from the inside. He'll need to show his bosses he's not just a gun for hire focused on a single project but someone who can advance the mission of the company, says New York career coach Win Sheffield. He should offer to take on tough projects, pipe up at meetings with smart ideas, suggest solutions, and get friendly with office "influencers."
Sheffield also recommends networking in the office to find out if hiring temps is an experiment or the norm. If it's the former, full-time positions may come back when the economy does. He should ask for a quarterly review to make sure he's on track and let those in a position to hire know he's interested. If it's the norm, he should find out which jobs in which divisions are salaried, then make contacts in those areas who can notify him of open spots.
One thing Carl should be aware of as he pursues a permanent post: Per his contract, he can't come on staff at AstraZeneca for 90 days after his completion date without written consent from Yoh. (Staffing firms use such breaks to renew contracts year after year and protect themselves from losing talent to client companies.) This clause means that if Carl were lucky enough to get a real job with AstraZeneca, he could lose a paycheck for three months. That's a possibility he'll need to plan for.
Budget for a new reality
On paper, the Clays' income will be roughly the same as it was before Carl was laid off. But that doesn't mean they can just resume their old lifestyle. That paycheck comes with an expiration date, after which there may not be another equally well-paying job to be found.
Also, they now have new expenses, such as Carl's health insurance. Fortunately taxes are taken out of Carl's check; some contractors, known as 1099 employees (for the tax form), need to save for Uncle Sam as well.
"Temporary employees really need to scrub their budgets to find places to save," says McLean, Va., financial planner Everette Orr. The Clays might use a free budgeting site such as Mint.com or Quicken-Online.com to see where their money is going and how they can reduce expenses.
A top priority will be finding ways to build emergency savings. Contract workers need 12 months of living expenses banked, says Orr. Even if Carl gets a job with AstraZeneca, he'd need three months' expenses by January to cover that 90-day furlough.
The Clays' $4,000-a-month debt obligations - from their mortgage, kitchen reno, school loans, cars, and credit cards - eat up half their take-home pay, so they won't be able to build that kind of safety net quickly. But refinancing (see "Three Fast Fixes") may free up a chunk of cash.
Replace lost benefits
As a salaried worker, Carl had a lot of perks he'll miss out on as a contractor. Chief among them: subsidized health insurance and a 401(k) with employer match.
Brenda and the kids currently get insurance via her teaching job, but Carl can't join the plan, as he's been offered group coverage by the staffing agency. Luckily, those plans are a decent option: Though the firm doesn't help pay, the rates are good - $100 to $450 a month.
As for retirement, the options depend on how your income is reported to the IRS. W-2 workers such as Carl are technically considered employees. Thus, for tax-advantaged savings, they have merely the choice of a Roth IRA (which phases out at $166,000 in modified adjusted gross income for couples) or a traditional IRA (no income limit if neither you nor your spouse has a retirement plan at work). In either, you can save only $5,000 yearly, or $6,000 if you're 50 or older.
Because he has to focus on his emergency fund, it's unlikely that Carl will be able to save for retirement this year. But if he renews his contract next year and has sufficient emergency savings by then, he should open a Roth at that time, says Reston, Va., financial planner Frank Boucher. "He can take the payout tax-free when he retires, and since he's only 36, the money has a long time to grow."
Workers receiving 1099 income are considered self-employed and can therefore stash away a lot more. They can choose between an individual 401(k), with a $49,000 yearly contribution limit, and a SEPIRA, which allows contributions up to 18.6% of net profits, also maxing out at $49,000.
Keep up the hunt
Carl has called off his job search to focus on his new gig. But since his contract allows either side to terminate for any reason, he should keep looking for a position that pays as well but includes benefits, says Sheffield.
Benefits are worth a lot in terms of compensation - plus his family may need them, since Brenda isn't guaranteed a teaching job in the fall. And since Carl isn't guaranteed work at AstraZeneca either, he needs an all-fronts attack.
In the meantime, however, Carl is starting to appreciate the advantages of contract work. No more late nights at the office, for example. For now, that means extra time with his kids, but he may begin looking for freelance medical writing to help build that emergency fund.
"I'm still ambitious - I'd like to be president of a company someday," he says. "But right now it feels pretty great to go bike riding with my daughter and play Guitar Hero with my son."
Tuesday, April 21, 2009
How to nab a low-rate home loan
Getting a new loan can save you a bundle, but cautious lenders will make you jump through hoops. These strategies can help.
Carla Fried, Money Magazine
April 17, 2009: 11:52 AM ET
(Money Magazine) -- On paper it seems like the perfect time to refinance. The average rate on a 30-year fixed mortgage recently hit a 20-year low when it fell below 5% in mid-March. And the Fed has said that it will spend $300 billion to buy back government-backed Treasury bonds; that will probably keep loan rates low for months to come.
But wade into the mortgage market, and you may quickly feel as if you're trying to grab a dollar in a game-show booth where the money is blowing around: Those ultralow rates are right in front of you, yet maddeningly elusive.
Lenders, grappling with deadbeat homeowners and shifting regulations, have pared back on mortgage products and upped credit requirements. Still, you have a good incentive to try: If you took out a mortgage two years ago, when rates were in the mid-sixes, you stand to drop your rate nearly two percentage points, saving almost $300 a month on a $300,000 loan. Here's how to navigate the roadblocks.
Figure out if you qualify. Nowadays, credit score and equity are king. To land the best rates, you'll probably need a credit score of at least 740, and 20% equity. "Banks are looking for reasons not to lend you money," says Mark Miskiel of Lighthouse Mortgage in Sedona, Ariz.
If you don't have 20% equity, a refi isn't out of the question - President Obama's housing package allows homeowners who owe as much as 105% to receive government-backed loans. To qualify for that program, however, your original mortgage must be held by one of the government-sponsored entities, Freddie Mac or Fannie Mae; you must prove that you can keep up with payments; and you'll get stuck with fees that tack 0.25% to 3% onto your rate.
Get rid of the HELOC. Home-equity loans and lines have become the enemy of would-be refinancers. Before you can close on a new loan, your home-equity lender must agree to "subordinate" the secondary loan (meaning that your primary lender will get repaid first in the event you run into financial trouble). That can take at least a month, says Bob Moulton of the Americana Mortgage Group in Manhasset, N.Y.
One way to speed up the process is to do a consolidation refi through your home-equity lender. If that's not possible, aim to submit the subordination paperwork as you start shopping for a primary mortgage. And know that other lenders may add up to 0.25% to your rate to cash out the secondary loan.
Know where to look. No matter how stellar your credit, you won't get a great rate without doing some serious shopping. That's because every bank is using different standards for underwriting loans, so while you may look like a risky borrower to one, another may welcome you with open arms. In general, says Keith Gumbinger of mortgage data firm HSH Associates, you're likely to get the best rates from small local banks and credit unions.
Unfortunately, if you need a jumbo loan (typically $417,000, but it can go up to $729,750 in high-cost areas), you can kiss those super-low rates goodbye. While jumbos normally run about half a percentage point higher than smaller ones, today the spread is a point and a half.
Pay a point upfront. A point, which equals 1% of your mortgage amount, typically buys you an eighth to a quarter of a percentage point drop in your rate. Today some overloaded lenders are knocking half a percentage point off for those who pay a point, hoping this extra initial cost will deter serial refinancers.
If you're planning to stay put for about five years, it may be worth it. Conversely, consider adding an eighth of a percentage point to your rate to lock it in for 45 days. Banks and lenders are putting a lot more effort into vetting applications, so it can take up to two months to close a loan, vs. about 30 days in the past; you don't want to risk rates' moving against you while you wait. The payoff for patience: a loan you can live with, for a very long time.
Not so long ago, having a pulse qualified you to take out a mortgage. These days lenders are vetting applicants with the ardor of a Senate committee grilling an AIG executive. Here's a summary of what's changed.
Carla Fried, Money Magazine
April 17, 2009: 11:52 AM ET
(Money Magazine) -- On paper it seems like the perfect time to refinance. The average rate on a 30-year fixed mortgage recently hit a 20-year low when it fell below 5% in mid-March. And the Fed has said that it will spend $300 billion to buy back government-backed Treasury bonds; that will probably keep loan rates low for months to come.
But wade into the mortgage market, and you may quickly feel as if you're trying to grab a dollar in a game-show booth where the money is blowing around: Those ultralow rates are right in front of you, yet maddeningly elusive.
Lenders, grappling with deadbeat homeowners and shifting regulations, have pared back on mortgage products and upped credit requirements. Still, you have a good incentive to try: If you took out a mortgage two years ago, when rates were in the mid-sixes, you stand to drop your rate nearly two percentage points, saving almost $300 a month on a $300,000 loan. Here's how to navigate the roadblocks.
Figure out if you qualify. Nowadays, credit score and equity are king. To land the best rates, you'll probably need a credit score of at least 740, and 20% equity. "Banks are looking for reasons not to lend you money," says Mark Miskiel of Lighthouse Mortgage in Sedona, Ariz.
If you don't have 20% equity, a refi isn't out of the question - President Obama's housing package allows homeowners who owe as much as 105% to receive government-backed loans. To qualify for that program, however, your original mortgage must be held by one of the government-sponsored entities, Freddie Mac or Fannie Mae; you must prove that you can keep up with payments; and you'll get stuck with fees that tack 0.25% to 3% onto your rate.
Get rid of the HELOC. Home-equity loans and lines have become the enemy of would-be refinancers. Before you can close on a new loan, your home-equity lender must agree to "subordinate" the secondary loan (meaning that your primary lender will get repaid first in the event you run into financial trouble). That can take at least a month, says Bob Moulton of the Americana Mortgage Group in Manhasset, N.Y.
One way to speed up the process is to do a consolidation refi through your home-equity lender. If that's not possible, aim to submit the subordination paperwork as you start shopping for a primary mortgage. And know that other lenders may add up to 0.25% to your rate to cash out the secondary loan.
Know where to look. No matter how stellar your credit, you won't get a great rate without doing some serious shopping. That's because every bank is using different standards for underwriting loans, so while you may look like a risky borrower to one, another may welcome you with open arms. In general, says Keith Gumbinger of mortgage data firm HSH Associates, you're likely to get the best rates from small local banks and credit unions.
Unfortunately, if you need a jumbo loan (typically $417,000, but it can go up to $729,750 in high-cost areas), you can kiss those super-low rates goodbye. While jumbos normally run about half a percentage point higher than smaller ones, today the spread is a point and a half.
Pay a point upfront. A point, which equals 1% of your mortgage amount, typically buys you an eighth to a quarter of a percentage point drop in your rate. Today some overloaded lenders are knocking half a percentage point off for those who pay a point, hoping this extra initial cost will deter serial refinancers.
If you're planning to stay put for about five years, it may be worth it. Conversely, consider adding an eighth of a percentage point to your rate to lock it in for 45 days. Banks and lenders are putting a lot more effort into vetting applications, so it can take up to two months to close a loan, vs. about 30 days in the past; you don't want to risk rates' moving against you while you wait. The payoff for patience: a loan you can live with, for a very long time.
Not so long ago, having a pulse qualified you to take out a mortgage. These days lenders are vetting applicants with the ardor of a Senate committee grilling an AIG executive. Here's a summary of what's changed.
Friday, April 17, 2009
Mortgage rates ease
Bankrate says the average 30-year fixed rate home loan now stands at its second lowest level on record.
By Ben Rooney, CNNMoney.com staff writer
NEW YORK (CNNMoney.com) -- Mortgage rates fell slightly this week and appear to be settling into a range near historically low levels, according to a national survey released Thursday.
Bankrate.com, an online aggregator of various types of interest rates, said 30-year fixed mortgages averaged 5.18% this week, down from 5.2% the week before. Rates on 15-year fixed mortgages fell to 4.72% from 4.75%.
The average jumbo 30-year fixed rate fell to 6.69%. Adjustable rate mortgages were mixed. The average 1-year ARM rose to 5.28%, while 5/1 ARMs sank to 5.12%.
Mortgage rates remain at historic lows. In the nearly 24-year history of Bankrate's weekly rate survey, the 30-year fixed has been lower just once -- two weeks ago, when it averaged 5.13%.
Still, rates have held relatively steady over the past few weeks as lenders respond to a surge in mortgage applications, particularly refinancing activity. That has helped offset ongoing sings of weakness in the economy, which would normally push rates lower, according to Bankrate.
"The ailing economy and inundated lenders are the two factors that will likely keep mortgage rates rangebound in the weeks to come," Bankrate said in a report.
Bankrate's national weekly mortgage survey is based on data provided by the top 10 banks and thrifts in the top 10 markets. To top of page
By Ben Rooney, CNNMoney.com staff writer
NEW YORK (CNNMoney.com) -- Mortgage rates fell slightly this week and appear to be settling into a range near historically low levels, according to a national survey released Thursday.
Bankrate.com, an online aggregator of various types of interest rates, said 30-year fixed mortgages averaged 5.18% this week, down from 5.2% the week before. Rates on 15-year fixed mortgages fell to 4.72% from 4.75%.
The average jumbo 30-year fixed rate fell to 6.69%. Adjustable rate mortgages were mixed. The average 1-year ARM rose to 5.28%, while 5/1 ARMs sank to 5.12%.
Mortgage rates remain at historic lows. In the nearly 24-year history of Bankrate's weekly rate survey, the 30-year fixed has been lower just once -- two weeks ago, when it averaged 5.13%.
Still, rates have held relatively steady over the past few weeks as lenders respond to a surge in mortgage applications, particularly refinancing activity. That has helped offset ongoing sings of weakness in the economy, which would normally push rates lower, according to Bankrate.
"The ailing economy and inundated lenders are the two factors that will likely keep mortgage rates rangebound in the weeks to come," Bankrate said in a report.
Bankrate's national weekly mortgage survey is based on data provided by the top 10 banks and thrifts in the top 10 markets. To top of page
Thursday, April 16, 2009
Obama launches mortgage rescue plan
First participants in the Treasury Department's program to help homeowners avoid foreclosure include some of the nation's largest banks.
By Tami Luhby, CNNMoney.com senior writer
NEW YORK (CNNMoney.com) -- The Obama administration's loan modification program is finally underway.
The Treasury Department announced Wednesday the first six participants to sign up for President Obama's plan. They include three of the nation's largest banks: JPMorgan Chase (JPM, Fortune 500), which will get up to $3.6 billion in subsidy and incentive payments; Wells Fargo (WFC, Fortune 500), $2.9 billion; and Citigroup (C, Fortune 500), $2 billion. The others are GMAC Mortgage, $633 million; Saxon Mortgage Services, $407 million; and Select Portfolio Servicing, $376 million.
Additional loan servicers will be added to the list over time, a Treasury spokesman said.
Several major servicers, including JPMorgan Chase and Wells Fargo, said they began modifying loans under the government initiative earlier this month. CitiMortgage signed up for the program on Monday and will start processing applications soon.
"We view this modification program as yet another incremental opportunity for thousands of homeowners to preserve and maintain the dream of homeownership," Wells Fargo said in a statement.
Distressed homeowners and housing counselors have been eagerly awaiting the program's launch since Obama first announced it on Feb. 18. However, it took weeks for the government to clarify the terms and for the financial institutions to update their systems and start accepting applications, frustrating many of those in trouble.
Billed as helping up to 9 million borrowers stay in their homes, the two-part plan calls for servicers to reduce monthly payments to no more than 31% of eligible borrowers' pre-tax income or to refinance eligible mortgages even if the homeowner has little or no equity. The government is allocating $75 billion to subsidize part of payment reduction, as well as provide thousands of dollars in incentives for servicers and borrowers to participate.
The Treasury Department said Wednesday it is capping the payments to servicers to allow more companies to participate. It is allocating $50 billion to the program, with Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and the Department of Housing and Urban Development providing the rest.
The modification plan calls for the servicer to reduce interest rates so that the monthly obligation is no more than 38% of a borrower's pre-tax income, and then the government would kick in money to bring payments down to 31% of income. Servicers can also reduce the loan balance to achieve these affordability levels. The government will share in the cost, up to the amount the servicer would have received if it had reduced the interest rates.
Only loans where the cost of the foreclosure would be higher than the cost of modification would qualify. Also, Treasury will not provide subsidies to reduce rates to levels below 2%.
It was not immediately clear whether the servicers must pay the incentives to homeowners and investors out of their funding share.
In addition to subsidizing the interest rates, servicers will use the Treasury funding to pay for incentives for themselves, homeowners and investors. The program gives servicers $1,000 for each modification and another $1,000 a year for three years if the borrower stays current. It will also give $500 to servicers and $1,500 to mortgage holders if they modify at-risk loans before the borrower falls behind.
Homeowners, meanwhile, will get up to $1,000 a year for five years if they keep up with payments. The funds will be used to reduce their loan principals.
The Treasury Department set the caps based on public data about the mortgages the servicers handle. Though the program mandates that servicers modify all loans that meet the requirements, the department feels the servicers will have sufficient funds to cover all troubled borrowers' applications.
"We're confident we'll have enough money," said Treasury spokesman Andrew Williams.
Separately, major servicers also recently started accepting applications under the refinance portion of the program.
By Tami Luhby, CNNMoney.com senior writer
NEW YORK (CNNMoney.com) -- The Obama administration's loan modification program is finally underway.
The Treasury Department announced Wednesday the first six participants to sign up for President Obama's plan. They include three of the nation's largest banks: JPMorgan Chase (JPM, Fortune 500), which will get up to $3.6 billion in subsidy and incentive payments; Wells Fargo (WFC, Fortune 500), $2.9 billion; and Citigroup (C, Fortune 500), $2 billion. The others are GMAC Mortgage, $633 million; Saxon Mortgage Services, $407 million; and Select Portfolio Servicing, $376 million.
Additional loan servicers will be added to the list over time, a Treasury spokesman said.
Several major servicers, including JPMorgan Chase and Wells Fargo, said they began modifying loans under the government initiative earlier this month. CitiMortgage signed up for the program on Monday and will start processing applications soon.
"We view this modification program as yet another incremental opportunity for thousands of homeowners to preserve and maintain the dream of homeownership," Wells Fargo said in a statement.
Distressed homeowners and housing counselors have been eagerly awaiting the program's launch since Obama first announced it on Feb. 18. However, it took weeks for the government to clarify the terms and for the financial institutions to update their systems and start accepting applications, frustrating many of those in trouble.
Billed as helping up to 9 million borrowers stay in their homes, the two-part plan calls for servicers to reduce monthly payments to no more than 31% of eligible borrowers' pre-tax income or to refinance eligible mortgages even if the homeowner has little or no equity. The government is allocating $75 billion to subsidize part of payment reduction, as well as provide thousands of dollars in incentives for servicers and borrowers to participate.
The Treasury Department said Wednesday it is capping the payments to servicers to allow more companies to participate. It is allocating $50 billion to the program, with Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and the Department of Housing and Urban Development providing the rest.
The modification plan calls for the servicer to reduce interest rates so that the monthly obligation is no more than 38% of a borrower's pre-tax income, and then the government would kick in money to bring payments down to 31% of income. Servicers can also reduce the loan balance to achieve these affordability levels. The government will share in the cost, up to the amount the servicer would have received if it had reduced the interest rates.
Only loans where the cost of the foreclosure would be higher than the cost of modification would qualify. Also, Treasury will not provide subsidies to reduce rates to levels below 2%.
It was not immediately clear whether the servicers must pay the incentives to homeowners and investors out of their funding share.
In addition to subsidizing the interest rates, servicers will use the Treasury funding to pay for incentives for themselves, homeowners and investors. The program gives servicers $1,000 for each modification and another $1,000 a year for three years if the borrower stays current. It will also give $500 to servicers and $1,500 to mortgage holders if they modify at-risk loans before the borrower falls behind.
Homeowners, meanwhile, will get up to $1,000 a year for five years if they keep up with payments. The funds will be used to reduce their loan principals.
The Treasury Department set the caps based on public data about the mortgages the servicers handle. Though the program mandates that servicers modify all loans that meet the requirements, the department feels the servicers will have sufficient funds to cover all troubled borrowers' applications.
"We're confident we'll have enough money," said Treasury spokesman Andrew Williams.
Separately, major servicers also recently started accepting applications under the refinance portion of the program.
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