I’ve been thinking lately. Maybe not always a good sign, but I’ve come up with some harebrained incredible ideas for solving or at least mitigating the foreclosure crisis in this country.

1. Have lenders agree to work with buyers who are behind on payments but are trying to still live in the home i.e. not flippers etc who put zero down and can just walk away. Work with them how? Cancel fees for a set period of time as they try to catch up on payments. Allow them to refinance to fixed rates with low or no closing costs. Offer interest only payments for a small period of time like 3 or 6 months and then go back to normal payments.

2. Offer subsidies/tax breaks to towns or commercial/philanthropic organizations to buy up property in low income areas, especially the hardest hit urban areas like Dorchester, some parts of JP, Haverhill, Lowell, etc., and work with residents who want to own a home but cannot afford more of a monthly payment that what their rent currently is. This would provide jobs to many - rehabbing that doesn’t require a permit could be done by potential owners to reduce their monthly payment for example. Offer lease to own options as well. If towns did not have enough money to buy up these properties, civic minded individuals or organizations could improve the areas while making money at the same time, especially with tax break incentives.

3. Public plea for help. Just like with Katrina, this is a crisis that is affecting many people and causing many to become homeless. People are generous, but if they don’t know how to help they won’t help. Bush’s HOPE NOW program is a start but as with most things is bureaucratic and not especially efficient. A well run nonprofit headed by a retired CEO or former president/governor etc. could collect donations and offers for assistance and distribute them equitably. Churches and social groups like Kiwanis/Rotary/Elks etc would surely respond if they were approached directly to help those in their own communities.

Do you have thoughts about this? Feel free to comment and tell me my ideas or worthless, great, or somewhere in between. Also, please give this some thought and maybe add a few of your own.

Home sales are way down, that much we know. Sales closing in March of 2008 were down almost a third from the same time frame a year earlier. How come? Without knowing all the facts, one would first point to the struggling economy. Recession fears are all over the news right now. Is that the problem? No. Boston’s economy continues to improve, and although there have been some layoffs in the financial services industry, job growth in our area remains steady. Popular sectors still hiring and growing in the Boston area are high tech and biotech firms. In fact, the economy has grown 3% in the first quarter.

So what’s the deal? Unfortunately, it’s the credit crisis. Lenders are continuing to restrict their loans. They are having a harder time finding money to lend to buyers, and if you don’t have at least 5% saved to put towards a down payment, you will find it very hard to get a loan. I have spoken to quite a few potential buyers who are not able to get preapproved, and in most cases it is because they are looking to buy with little to no money down. Until lenders can access money more readily, this trend is bound to continue.

The majority of owners with homes on the market right now will be looking to turn around and buy again as soon as their current home sells, but with fewer qualified buyers looking at their home, time on the market will not go down until this credit crisis eases.

If you are a buyer with less than a 5% down payment, there are alternatives out there. FHA loans are becoming increasingly popular and may be a good alternative to traditional lenders and brokers. If you are thinking about entering this buyer’s market, ask for help in obtaining preapproval for a loan. Many good agents know about current loan standards, and we at Buyer’s Choice are knowledgeable in this area and can point you to available resources.

Shouldn’t we blame REALTORS® for this mess that we currently find ourselves in? A recent study asking consumers how they felt about real estate agents came to some interesting conclusions. When asked about REALTORS® in general, people were mostly wishy-washy - some were in favor, some were not, most were unsure how they felt. But when asked about their particular REALTOR®, about 80% of respondents stated they would work with their agent again. What gives? The majority of business for most agents comes from repeat clients, referrals, and word-of-mouth. Agents should have a long-term interest in the area in which they work, since a few unhappy clients could potentially put them out of business.

I’m sure some agents were only seeing $$$ signs over the past decade, hoping and helping their clients and customers buy properties they could not afford. This is not true for the vast majority of agents, though.

I will place some blame on lenders, especially the big players. Their major concern is writing as many mortgages as possible so they can turn around and sell them. Nothing wrong with that in our capitalist economy, but lenders failed to think long-term and have reaped the seeds of their sowing.

Some blame must also go to global capital providers (those around the world with the big bucks like governments, megabusinesses, sovereign wealth funds, etc.) because all they were looking for was juicy returns on investment - a portfolio of risky loans returns a lot more than T-bills or any other ’safe’ investment. The bottom line for them is greed, and they must be taken to task for it. Will that happen? Their investment losses are probably their only punishment.

The biggest amount of blame must be put on the rating agencies. These companies, like Moody’s and Standard and Poor’s, are responsible for assigning a level of risk to a product. Because so many rely on their rating and only buy/sell AAA rated products, the ratings agencies are ultimately culpable for this mess. Instead of rating subprime loans at a level they should have, like BBB (much riskier than AAA), they decided en masse to rate these loans AAA. After all, the agencies make the most money by rating products AAA (many companies have risk policies that prohibit them from owning lower-rated investments) so that others may comfortably buy and sell the AAA products on the open market.

The ratings agencies are not non-profits, so clearly it is in their best interest to rate highly, as they make more money that way. There should have been more transparency, guidelines, and oversight regarding these companies. Since we cannot change the past, we must make an effort to make sure that this happens in the near future.

How can you help? Write your congressperson expressing your displeasure of the ratings agencies and suggest that they have more government oversight, stricter guidelines as to what really qualifies as AAA, and more clarity in reporting how and why each product receives the rating it does. If this happens, maybe we can prevent another mess like the subprime one from occurring in the future.

I recently attended a breakfast featuring Lawrence Yun, the chief economist for the National Association of Realtors, as keynote speaker. Dr. Yun recently received the honor of being named to the USA Today’s top 10 economic forecasters (NAR’s press release). As the release states, “The National Association of Realtors® Chief Economist Lawrence Yun has been named among the top 10 economic forecasters by USA Today. Yun is ranked fifth on the list and is responsible for NAR’s real estate statistics and economic forecasting. The annual list recognizes accuracy in forecasting.“

Yun spoke about the state of the current market and backed up his forecasts for the near term with statistical charts and graphs which were very helpful. He believes there will be a modest increase in home sales in the second half of 2008, but because of negative buyer psychology right now (i.e. prices are going down, have been going down, and might continue to keep going down, so why buy now?) the gains in home sales may not be very big. Yun essentially believes that the market is bottoming out right now and should stabilize by the end of this year and start gaining ground again in 2009, though not very rapidly.

It is interesting to note that prices fell nationally 1.5% in 2007. The NAR started keeping market statistics in 1967 and this had not happened in their entire time compiling this data. Dr. Yun believes, as do many others, that this is the first time prices have fallen year-over-year since the great depression in the late 1920s and early 1930s. I must caution you that we are nowhere near entering such a time this time around. The unemployment rate has risen, but nowhere near as drastically as back then. Inflation is steady. Many areas around the country are creating jobs, while the public has experienced the greatest amount of job loss in the midwest due to the struggling auto business and manufacturing/industrial decline in that area.

As stated in our previous post, there are new restrictions regarding who can actually get approved for a loan. I’d again like to thank Dawn Davis, president of Rate One Mortgage, for her explanation of this issue. As we wrote previously, this will mostly affect potential buyers who do not have a large amount to put down on their purchase. Here are the details, as provided by Ms. Davis.

For those looking for 100% or 97% financing, it will not be available. 100% financing will be reduced to 95%, and 97% financing will be reduced to 92%. In these cases, buyers will need to increase their down payment by 5%. For some, this may not be possible and they may be forced to wait until they are able to save some money. But, for many, there are some alternatives to obtaining the additional funds needed for down payment.

Buyers who are approved for 100% financing and will actually receive 95% financing can use their own funds or gift funds for their down payment. They are not permitted to borrow the money unless they make a loan against retirement funds such as a 401k account. Lenders document gift funds by obtaining a gift letter from the donor and evidence that the gift funds have been received by the buyer.
After closing, many buyers actually repay the gift money they received. Clients who are approved for 97% financing and will actually receive 92% financing must demonstrate that 3% of their down payment is coming from their own funds. Lenders document this by obtaining a copy of the buyers’ most recent asset statement. The remaining 5% of their down payment can come from their own funds, from a gift, or from a loan against a 401k.

Buyers who are approved for 95% financing and will actually receive 90% financing must demonstrate that 5% of their down payment is coming from their own funds. Lenders document this by obtaining a copy of the buyers’ most recent asset statement. The remaining 5% of their down payment can come from their own funds, from a gift, or from a loan against a 401k.

Maximum allowable seller contributions are as follows: If the buyers are receiving 95% financing, the seller can contribute up to 3% of the purchase price toward the buyers’ closing costs and prepaid items.If the buyers are receiving 90% financing or less, the seller can contribute up to 6% of the purchase price toward the buyers’ closing costs and prepaid items.

The Federal Reserve System voted to reduce the federal funds rate by 1/2% today, with the rate dropping from 5.25% to 4.75%. You can view the press release here. What does it all mean? The federal funds rate, in case you are unfamiliar, as defined by Wikipedia, is the rate at which banks charge other banks to lend money overnight to keep their reserves at the appropriate level. You can learn much more at the Fed’s website.

What is their hope in lowering this rate? Basically, banks will save money and pass the savings on to you in the form of lower interest rates on loans and mortgages. Will this actually happen? That depends on a variety of factors, which I will discuss in the coming days and weeks.