Renee Medema’s Blog

According to Reuters and RISMedia, Fannie Mae and Freddie Mac said they would suspend foreclosures of occupied homes as well as the completion of evictions beginning November 26, 2008 through  January 9, 2009.  Regulators and lawmakers have worked vigorously to help stabilize the U.S. housing market and help Fannie Mae and Freddie Mac in particular, since they own or control about half of residential mortgages outstanding.

The move by the two government-sponsored enterprises comes a week after their regulator unveiled a plan that could cut payments for hundreds of thousands of borrowers by easing terms on their loans.  Homeowners facing foreclosure who are spending more than 38 percent of their income on mortgage payments could have payments reduced by the companies, under the program.

Fannie’s streamlined modification program is aimed at the highest risk borrower who has missed three payments or more, owns and occupies the primary residence, and has not filed for bankruptcy.  The program creates a fast-track method for getting troubled borrowers into an affordable monthly payment through a mix of reducing the mortgage interest rate, extending the life of the loan or even deferring payments on part of the principal.

 “By working closely with FHFA and our servicers, Freddie Mac is on track to help three out of every five troubled borrowers with Freddie Mac-owned loans avoid foreclosure this year,” said Freddie Mac Chief Executive Officer David M. Moffett.

 This year, Freddie Mac expects to approve 84,000 workouts for the estimated 140,000 who are delinquent on Freddie Mac-owned mortgages.

Interest = Interest Rate * Principal * Time

If a homebuyer purchases a $200,000 house at 6% over 30 years, calculation would be:
Interest = 6% * 200,000 * 30
Interest = $360,000
Interest + Mortgage = $560,000

Monthly Payment = $560,000 / 360 months = $1,555.00 (not including tax or insurance)

If the purchaser puts 10% down, then the bank assumes 90% of the loan.

10% - Owned by Buyer               10% of Mortgage
$20,000                                    $56,000

90% - Owned by Bank                90% of Mortgage
$180,000                                  $504,000  

Typically the first mortgage payment is 99% interest and the last mortgage payment is 99% principal.  All payments in between are percentages between the two. 

If home values decrease and the value of the home loan becomes less than $180,000 (let’s say $170,000), the banks begin to lose money on the “interest” portion of the loan ($360,000 paid over the course of 30 years) and the interest now becomes $342,000 because of the loss in the value of the home. 

If the bank wanted to sell the loan because it was losing money, the bank had difficulty because the market was not interested in purchasing a loan that was not worth its own value.  This in turn “froze” the mortgage industry because a lot of homes were experiencing a loss in value at the same time. 

Although most people continued to make payments, the banks were worried that they would eventually take a loss because they would not be able to sell the bad debt or loans that weren’t worth their value.  This led to the mortgage bailout plan that the government set in place to buy the loans that weren’t worth their value and let the people pay the money back with their tax dollars over the next 30-50 years.  The bailout plan prevented the banks from losing a portion of the money they were making on the interest. 

Another option rather than putting the government and the people into another $700 billion of debt could have been to adjust the principal to the current value of the house ($170,000 instead of $180,000) so that banks continue to make a substantial amount of money from the interest, the loan would be worth its value so other banks would be willing to buy the loan AND the homeowners would benefit because they would acquire a higher percentage of the pay off on the principal.  This is what that might look like:

15% - Owned by Buyer               15% of Mortgage
$30,000                                    $84,000

85% - Owned by Bank                85% of Mortgage
$170,000                                  $476,000

The difference between the original mortgage $504,000 and the revised mortgage $476,000 is $28,000 over the course of 30 years.  If banks had to take that much of a loss on each home loan they serviced, they would have lost quite a bit of money.  However, consider the fact that banks are making almost 2.5 times the amount of money that the houses are worth and then the $28,000 looks like a very small amount in comparison.  Knowing that the bailout plan passed is a little bit more frustrating now given a better understanding of the reasons it was passed.

The Federal Housing Administration (FHA) is federally funded and insures mortgages for homebuyers that meet certain criteria.  Typically FHA loans help average people with mid-low credit scores and could use some improvement on their overall credit rating. 

In the past, FHA loans may have been viewed as a less appealing option because some consumers might have been uncomfortable leaning on the government for assistance to fund their mortgage loans.  However, since the recent consistent decline in the economy more and more consumers are willing to accept assistance regardless of the source.  The truth is that FHA loans should have always been a more appealing option because loans are insured, generally a lower initial down payment is required, qualification requirements are less restrictive and a greater variety of loan options are available to consumers. 

FHA loans for residential properties allow for the purchase or refinance of new or existing homes that have one to four units and must be owner-occupied.  Recent changes have been made in the way that FHA loans are processed and they now can be secured in about the same time that conventional loans take to secure.   

According to Judith Heaney, Supervisory Operations Officer for the Chicago Regional Office of the U.S. Department of Housing and Urban Development says that “FHA insured loan applications in Illinois are up about 375% from over a year ago.  This spring, Congress temporarily raised FHA loan limits through the end of the year to 125 percent of the local median home price. The follow-up Housing and Economic Recovery Act of 2008, signed into law July 30, permanently raises FHA limits starting January 1, 2009, but at 115 percent of the local median”.

Commercial development has been booming in the South Loop.  Whole Foods, DSW, Office Depot, Linens ‘N Things, PetSmart, Cost Plus World Market, LA Fitness, Panera Bread, Starbucks, Home Depot, Best Buy, Dominick’s, Staples and Target all occupy the vicinity near Roosevelt and Canal.  In the near future, ground will break on a new condominium development that will be welcomed into the area late 2009 or early 2010.  The development will include retails stores such as movie theaters, gourmet grocery stores, a variety of restaurants and other favorites.  The half-mile sprawl running along the east bank of the Chicago River will boast a river walk, along with parks and vegetation, as required by the city.

The South Loop development craze is catching on and moving further South into China Town.  According to David Roeder and Fran Spielman, entrepreneurs promise a new landmark building in China Town at the corner of Cermak and Archer.  The Grand Imperial, estimated at 15-stories, is scheduled for delivery Fall 2010.  According to Maureen Wilkey, condominiums will be priced from $268,000 to $500,000 and the building will feature pagoda-style architecture.  See Wong and business partner Peter Siu hope that the Asian influence will be apparent through the ancient Chinese dynasties and principles of feng shui that are planned to be incorporated into the development.

 Wong and Sui are hopeful that the development will do well because of its proximity to McCormick Place and the draw for repeat customers that attend conventions and do not want to pay the high costs associated with the downtown area.  Wong said “The Chinese economy is booming, and most of the businessmen do a lot of overseas travel for conventions. Chicago is one of the most popular destinations.”

On July 30, 2008 President Bush signed a major housing bill (H.R. 3221) into law.  As part of the housing bill, Congress has created a new temporary tax credit to provide an incentive for first-time homebuyers.  The $7,500 credit will be available for the purchase of a principal residence on or after April 9, 2008 and before July 1, 2009. (http://www.realtor.org/press_room/news_releases/2008/president_signing_housing_bill)   

The tax credit works in conjunction with annual tax filings.  Tax payers that receive a refund will be given a $7,500 tax credit in addition to their refund ($1,000 credit plus $7,500 tax credit equals $8,500 credit).  Tax payers that owe additional taxes will be given a $7,500 credit that will counter balance the amount of money owed ($1,000 owed plus $7,500 tax credit equals $6,500 credit).  Individuals will be eligible for the $7,500 credit if they meet the following requirements: 

• First time homebuyer (individual has not owned primary residence in the past 3 years)
• Purchase of property has to be a principal residence in the U.S.
• Single tax filers have income level up to $75,000
• Joint tax filers have income level up to $150,000

The first-time homebuyer tax credit has a limit of $7,500 and is calculated based on 10 percent of the purchase price of the property.  Home buyers purchasing a principal residence with a sales price of $58,000 will receive a $5,800 tax credit.  Any principal residences that are purchased for a sales price of $75,000 or higher will receive the full tax credit.   

The tax credit must be paid back in full prorated over the course of 15 years.  Payments will be made annually at 6.67% of the total credit amount.

On January 19, 2007 Governor Blagojevich issued an immediate suspension on HB 4050 predatory lending pilot program.  The program was not effective because it was negatively impacting the communities it was designed to protect.  The link below lists further details regarding the suspension.http://www.idfpr.com/newsrls/011907govidfpr4050susp.asp 

On November 2, 2007 Governor Blagojevich signed a lending law that would toughen standards that mortgage brokers must meet before completing loans for their customers. The link below lists further details regarding the law.http://www.ihda.org/admin/Upload/Files//5f95c2fa-5427-423d-9361-1cc77ba7e831.pdf  

On May 15, 2008 the Office of Banks and Real Estate (OBRE) issued memos to Illinois Housing Counselors and Illinois Title Companies regarding the Anti Predatory Lending Database to be implemented on July 1, 2008.   The link below lists further details regarding the memos. http://www.obre.state.il.us/RESFIN/NEWS/SB1167RegistrationCounselors.pdf  

Beginning July 1, 2008 mortgage brokers and loan originators licensed by the Division of Banking, Housing Counselors (must be HUD-certified agencies) and closing agents will be required to get approval prior to real estate closings through the website address www.ilapld.com (live on July 1, 2008).  The link below lists further details regarding the Illinois Anti-Predatory Lending Database and an overview of the program.http://www.obre.state.il.us/RESFIN/NEWS/SB1167FactSheet.pdf  

The OBRE has also provided a list of credit counselors that are available to buyers and sellers, some of the services are free of charge and some counseling programs require a fee.  Interested parties are highly encouraged to research companies offering these services prior to signing any contracts or paying any fees.  The link below provides a list of service providers that offer these types of services. http://www.obre.state.il.us/consumer/credit%20counseling.htm 

Although state and local legislators might not hit the mark perfectly the first time, they are researching and trying to implement processes and programs that will assist in the mortgage crisis to prevent further problems in the future.  The current real estate market is a direct result of sub-prime mortgages and buyers who bought homes that were beyond their budgets.  It is true that if the real estate market had continued to escalate, these problems may have come at a later time but at some point the adjustable interest rates were bound to increase and cause a ripple effect for the majority of mortgages obtained in the sub-prime market that were not realistic for certain buyers.  Hopefully, the changes being made by our legislators will bring positive change to the real estate market and mortgage lenders in the near future.

Some people are not aware that Realtors provide services and offer expertise to buyers FREE of charge.  Professional real estate services are typically paid by sellers and the commission is then split between the seller’s agent and buyer’s agent.  If you are a prospective buyer and would like the assistance of a Realtor, you have the option of obtaining real estate expertise at no cost to you. 

Realtors offer a wide range of services to potential buyers: 

*      Provide current market statistics
*      Provide price comparisons in selected & surrounding areas
*      Provide information and statistics about schools
*      Provide information about potential changes in selected and surrounding areas
*      Provide details about properties (taxes, assessments, square footage, photos)
*      Provide negotiating expertise related to price, presenting offers & contract legalities
*      Provide recommendations for inspectors, lawyers, appraisers, mortgage lenders
*      Provide assistance with real estate contracts and property disclosures
*      Provide check lists that are vital to finalizing closings
*      Lessen the stress of real estate transactions 

Purchasing a property is an extremely large investment and it makes sense to have an expert standing by your side with your best interests in mind throughout the entire process.  The next time you consider making an investment in real estate, reach out to a Realtor and allow them to provide expertise regarding your investment FREE of charge.

In a recent article “Is It Time to Buy Real Estate?” written by Vicki Gerson at Bankrate.com, Vicki provides statistics from Standard & Poor tracking that shows prices down 7.7 percent nationally in November 2007.  She also provides statistics from the National Association of Realtors that reports sales of single-family homes down by 13 percent in 2007.

If the average home price is down and sales are down as well, should a buyer automatically assume that it’s the right time to buy?  Buyers markets and sellers markets have varied drastically over the years based on financial advisors opinions.  Some stages in the economy offer higher promise for an upswing and other stages are more difficult to predict.  When we make decisions related to real estate, do we base our decisions on our opinions of what is best for us or do we base decisions on other people’s opinions of what is best for us?  If you haven’t asked yourself the question before, now is the time to ask this question.

People’s opinions vary greatly when it comes to financial and investment markets.  A good piece of advice worth noting is to take everyone’s opinions and then form your own based on your individual circumstances.  When buying your home, buy a property that you want to come home to so to speak.  You should feel comfortable and proud of your home and there should be plenty of room for you, your family and an extended family if planned in the near future.  When buying an investment property, buy a property that will yield a profit.  The larger the profit, the better the investment as long as it is within your budget.  The proposed idea seems simple enough, but often times people try to do too much at the same time and purchase a home (primary residence) and then attempt to yield a profit from it similar to an investment property.

Today’s market does not provide an easy-to-determine swing and because of that, a good recommend would be to purchase property only if you are purchasing investment property.  Whether you are buying a second home or a property that you plan to rent, this is the perfect market to add to your real estate investment portfolio.  On the other hand, if you are planning to upgrade your primary residence and are hoping to buy a larger reduced price home that will require a contingency to sell your current property, today’s market is not going to be friendly.  The time to upgrade your home would be when you have a large amount of equity built up and it is a seller’s market.  The substantial equity in your current home in addition to the top dollar that you will get from the sale of your home will put you in a great position to negotiate a larger home of your dreams.

An effective way to “spring clean” your home is to start by removing anything that you have not used within the last year.  Additional helpful tips are listed below for specific areas of your home. 

Yard/Landscaping - Remove excess items in your yard that clutter the area surrounding your home.  A yard and the landscaping within it should bring an added eye appeal to your home.  Most people notice the yard or landscaping before they notice the home itself.  Spruce up your yard or landscaping by adding a few low-maintenance items if you are not a gardener by nature.  Small additions can make a big difference.  If you have extra time and enjoy yard work, put your best effort into it.  It is true that small additions can make a big difference, but it is also true that a beautifully landscaped home is much easier to sell.  Put as much effort into the outside of your home as you do the inside of your home and the value of your property will rise to its highest potential. 

Garage - It’s time to clean out that “extra space” in the garage meant for your car.  Try to consolidate as much as possible by getting organized.  Spend a small amount of money on organizers, shelving units, wall storage or racks.  If you are able to stack containers along one side of the garage, this will free up a lot of floor space.  Also, hang items like bicycles, smaller tools, outdoor toys, etc. on racks or hooks attached to the wall to create floor space.  Every little bit of extra space that you can manage to create is beneficial. 

Kitchen - Clean out “extras” from your kitchen that you never use (i.e. formal glassware, formal dishes, ancient crock pots/serving dishes).  Pack all of these items away and put them in the basement or a crawl space.  Since you seldom use these items, it is not worth crowding the cabinets.  Organize your cabinets according to the spaces that you perform duties.  Put the cooking utensils near the pots/pans, the spices near the stove, the Tupperware near the refrigerator, the eating utensils near the dishes and the cleaning supplies all in the same place.  It will help to have everything handy when you are cooking, storing, eating and cleaning.  If everything has a place, the entire family will be more likely to put it back where it belongs. 

Closets - Get the most out of your space by installing shelving and hooks in closets and also storage racks on the door.   The main guideline to follow when organizing a closet is to assemble everything inside like a puzzle, but also keep everything readily accessible.  If you have a large area on the floor, store heavier or bulk items there.  Put the things that you use most often on the waist-level through the eye- level shelves.  Store as much as you can in each and every available space, but always keep in mind that you should be able to find it by looking directly into the closet without having to move everything to get to it.  Try to keep closets organized according to their location in the house (i.e. front hall closet should not have clothes or bathroom towels in it).  Use each closet for its intended purpose and you will be able to better organize the items going into each closet. 

Bathrooms - Change the décor in your bathroom in the spring to lighter colors.  It will give everyone a “pick me up”.  The best way to organize a bathroom is storage containers and shelving.  You should have several types of storage containers, some for smaller items and some for larger items.  Put related items together in each container and this will allow everyone to easily find items.  If you have room for a shelving cabinet, add that to your bathroom and use it to store towels and larger items like blow dryer, hair straightener and curling iron.  You should always have a place for these types of items or they will end up permanently on the top of the counter. 

Bedrooms - Change your bedding in the spring, it’s an affordable way to spruce up your home and give yourself the feeling of change without having to invest in new furniture.  Organize closets in the bedroom so that each and every article of clothing has a hanger or space in a drawer.  If it is difficult to put an item away, people will often times avoid the hassle and find a convenient hiding spot.  Arrange the furniture to allow enough room to get around each side of the bed.  One of the biggest drawbacks to making the bed is not being able to easily access each corner to tuck the sheets.  Make your bed every morning.  This phrase might remind you of your childhood days and your mom’s repetitive demands, but having the bed made makes a huge difference in the overall appearance of the room.  It’s the first thing YOU and everyone else notice. 

Children’s Play Room - Spring cleaning the children’s play room is something that should be considered fun, not a chore.  Take this time to filter out all of the toys that the children have not played with in over a year.  Include an additional 10% of the toys to help avoid clutter and donate all of the worthy items to charity.  This will be a great exercise for your children to learn how to give to the needy, relearn the specific place that each toy should be returned to and also make room for new toys that will be acquired in the upcoming year.  It is especially important to assign a specific place for each and every toy or piece of furniture.  Understandably, this might be a burdensome task to initially complete the process.  However, once you organize everything appropriately the first time, it will be the children’s job to put all of their toys away each and every time they play.

The City Council of the City of Chicago ordained an amendment to Sections 3-33-030 and 3-33-060 of the Municipal Code of Chicago stating:

¹ “Pursuant to Section 8-13-19 of the Illinois Municipal Code, 65 ILCS 5/8-3-19, as amended, a supplemental tax at the rate of $1.50 per $500 of the transfer price, or fraction thereof, shall be imposed on transfers taking place on or after April 1, 2008, for the purpose of providing financial assistance to the Chicago Transit Authority (CTA).”

The supplemental tax will not be applied to persons 65 years of age or older as long as he/she occupies the property as a principal dwelling place for at least one year and the transfer price is $250,000 or less.

Prior to April 1, 2008 buyers were required to pay $3.75 per $500 for transfer tax on real estate property.  The additional $1.50 per $500 supplemental tax increase will require the sellers to contribute to the transfer tax.  The total amount owed to transfer real estate property will be $5.25 per $500, equivalent to more than 1% of the property value.  Considering the current housing market, this was not the best possible solution to help the CTA’s deficit.  It is understandable that housing and transportation are related in a City, but requiring homeowners to pay additional taxes to support a deficit in the transportation system is as unrelated as increasing taxes on groceries to provide additional funds for the public library.  It is important to understand that not all home buyers/sellers living in the city use public transportation. 

The increase in the tax might lessen people’s willingness to buy and sell or make them reconsider the value of the property.  In today’s current market, buyers/sellers need every advantage and all the encouragement that can be afforded to keep them active in the market.  It is the only way we are going to be able to avoid additional downfalls in the trends of the housing market.  In December 2007, approximately one out of five hundred-twenty homes had gone into foreclosure in
Chicago.  Although that number is leveling off because of assistance from the federal government, it’s important that our actions city-wide encourage people to stay active in the real estate market. 

  ¹http://www.cityofchicago.org/city/webportal/portalContentItemAction.do?contenTypeName=COC_EDITORIAL&contentOID=536911200&topChannelName=HomePage