mortgages

Sellers once again might want to consider "owner financing" as a method to get that house sold -- and reap some tax breaks, too.

Owner financing (also known as "seller financing," "taking back the note," or "an installment sale") is estimated to be used in 10 percent to 15 percent of today's home sales. The term describes a legal transaction in which the buyer obtains financing to purchase a home through the seller, instead of through traditional banks, credit unions or other lending institutions. Essentially, the buyer makes payments directly to the seller.

Buyer and seller agree on a purchase price, down payment, and regular monthly payments to the seller. Payments are spread over time, like an installment plan. This spreads the seller's taxes due on capital gains over time. Sellers are taxed only as principal is received.

Could seller financing work for you?

While you're likely to still hear about mortgage fraud cases on the rise, the actual trend for new mortgage fraud is down 25 percent.

According to the 2010 CoreLogic Fraud Index, the mortgage fraud cases making it to the courts today primarily happened between 2006 and 2009. In fact, CoreLogic estimates that $14 billion in fraud losses were experienced by lenders in 2009. But yesterday's fraud increases are causing headaches for today's borrowers.

Why should homebuyers care about fraud?

CoreLogic found a high correlation between fraud risk and subsequent default rates. I'll bet you're not surprised to hear that, especially when you think of the so-called liar loans, or no-income loans, that were so prevalent during the housing bubble. As an everyday borrower doing the right thing, the efforts to recognize mortgage fraud are likely making it harder for you to get a mortgage.

You may not realize it, but there's another major financial bubble ready to burst. Few are talking about it, but Michael David White, a mortgage and real estate professional has graphed the mortgage bubble due to burst.

When the housing bubble burst, it left many with underwater mortgages. Yet nothing was done to deal with the debt levels on these homes. The mortgage values shown on the banks' books are still elevated beyond their true worth.

Right now we're seeing more and more people walk away from this debt. While property values fell from $20 trillion to $13 trillion when the housing bubble burst. Mortgages fell from $11.95 trillion to $11.68 trillion.

John Lounsbury, a financial and investment adviser, says home equity is now over 90 percent mortgaged. Historically our mortgage levels were 50 to 60 percent. He agrees with White that we're in a mortgage bubble that is ready to burst. In order to get back to the normal historic relationship, Lounsbury says "outstanding mortgage values would need to be about $7 trillion, which is $5 trillion below the latest level."

Clearly the purchase mortgage market continues to find new lows, which, of course, means the real estate sales market is just about flat since the deadline for taking advantage of the tax credit ended April 30. Last week's Purchase Index, which tallies mortgages approved for home purchases, was the lowest since December 1996 and dropped 2.9 percent on a seasonally adjusted basis from one week earlier, according to the Mortgage Bankers Association.

Refinances continue to dominate mortgage activity with 78.7 percent of the total applications from the previous week. The average for the refinance market was up 2.6 percent.

If you've been waiting for the bottom of the market to refinance, we may be there.

Do borrowers who decide to walk away from their mortgages by choice share certain characteristics? The answer appears to be yes.

A leading credit bureau partnered with a management consulting firm to figure out who is strategically defaulting and how lenders can get a better handle on risky borrowers. Experian and Oliver Wyman found that in the first half of 2009, 355,000 homeowners strategically defaulted, which is a 53 percent increase over the same period in 2008. (These statistics were included in the conclusions of the Q2 2010 report, "Understanding Strategic Default in Mortgages.")

The researchers define "strategic default" (or "walk-away") as a "default behavior in which the borrower has the ability to make monthly payments on his mortgage, but chooses not to do so, most likely for reasons of negative equity."

So what are the key characteristics of a strategic defaulter?

Are you unemployed and trying to find a way to keep your home? As of July, help is available from the Home Affordable Unemployment Program (HAUP). If you qualify for the program your mortgage payment could be suspended or reduced, depending on your financial situation.

Here are the basic eligibility requirements for HAUP:

• You must own a one- to four-unit property and live in one of the units as your principal residence.
• The mortgage on that property must be a first lien originated on or before Jan. 1, 2009.
• The current unpaid balance of the mortgage is equal to or less than $729,750.
• Your mortgage loan is in default or default is "reasonably foreseeable."
• Your mortgage has not been modified by HAMP or you have not received previous help from this program.
• You must seek help before three full mortgage payments are due and unpaid.
• You must prove that you are unemployed and document your unemployment benefits.

The servicer can also require that you have been on unemployment benefits for at least three months before your forbearance period can begin.

Buyers signed fewer contracts to buy homes in May than in any time since the government starting keeping records on them. Based on information from the National Association of Realtors, pending home sales dropped 30 percent from April -- from 110.9 to 77.6 -- which is also 15.9 percent below May 2009.

While some believe this may be a sign the housing market cannot survive without life support from the government, take a breath and think about where we are. Some do think we're heading into a deflationary spiral, with housing prices again taking another big fall. But many others have been expecting the drop.

It's not hard to think about a doomsday scenario with today's pending homes report and the report that new home construction fell 2 percent. In addition we continue to hear about flat sales in the new homes market. Last week's new homes report indicated that sales dropped 33 percent to a pace that is slowest seen since records started being kept 47 years ago.

But Celia Chen, of Moody's Economy.com said that new homes data is "volatile" and Moody's is expecting that the numbers "could be revised upward" next month. She added that Moody's does not think we're headed into a deflationary spiral.

You probably won't be surprised to learn that the key reasons people just walk away from their homes involve job loss and a significant drop in home value. What might surprise you is how long people hold onto their homes before they decide to walk away.

The Federal Reserve found in a recent study that most strategic defaulters don't walk away from their home until the equity in their home is negative 62 percent of the home's value.

If you choose to walk away from your mortgage rather than work something out with your servicer, Fannie Mae will block you from getting another mortgage for seven years from the date of the final foreclosure on the house. That's according to new rules that go into effect immediately.

But, if you do work with your servicer to come to some agreement -- whether a loan modification, deed-in-lieu of foreclosure, pre-foreclosure sale or short sale -- your wait time to buy a new house will be much shorter. In fact to encourage people to work with their lenders rather than just walking away, Fannie Mae is shortening the time you'll be eligible for another Fannie Mae mortgage.

"Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting," Terence Edwards, Fannie Mae's executive vice president for credit portfolio management, said in making the announcement.

"On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer, will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time."

Now that Senate and House negotiators have reached a compromise on new financial regulations, we know what will happen to the mortgage industry if the bill passes and how it will impact your ability to buy a house. Those freewheeling days of no-money-down, liar loans are dead. Instead you'll find more paperwork is needed to prove you truly can afford to make the payments.

If the final bill passes both houses of Congress -- still not a certainty, since Republicans are likely to try to block it -- homebuyers seeking a mortgage will face new minimum underwriting standards for home mortgages. The details of those standards are not yet available, but you can be sure that no-money-down loans will no longer be available, even in the private mortgage marketplace.

These no-money-down loans that were approved using stated income -- in other words, borrowers did not have to prove income -- will be history and against the law. Instead, lenders will have to verify borrower income to make a loan. Self-employed people will definitely find it much harder to buy a house, especially if they don't have two years of income tax filings to prove their income.

While the home tax credit extension looks dead, it's probably just on life support and may be revived by adding it to another bill on the Senate floor. The tax-credit extension had been attached to a large stimulus package including business tax breaks, renewal of the flood insurance program and extension of unemployment benefits.

Now the Senate will need to look for something else to attach the extension to, but since Senate Majority Leader Harry Reid (D-Nev.) is one of its big backers, it's likely that he'll find a way.

This extension wouldn't help those who didn't sign a contract by April 30, but it would help anyone who is not able to close on a deal by June 30 because of delays in getting a mortgage. The extension would give them until Sept. 30 to close the deal.

Lawrence Yun, the chief economist for the National Association of Realtors predicted that 25 to 30 percent of the buyers who made the deadline for signing a contract won't be able to close by June 30. That means about 180,000 home purchases could fall through. Most of the deals that will take longer than 60 days to close are those involving short sales or foreclosures, but with such a backlog of mortgage applications even others could be impacted.

Sales on existing homes that closed in May were up 19.2 percent from a year ago, according to the National Association of Realtors. But will that pace continue now that buyers have missed the tax credit? Probably not. Most likely some people who may have bought during the summer months signed contracts by April 30 to take advantage of the tax credit.

Indeed, some of these sales could fall apart if Congress does not extend the time to close homes until Sept. 30 rather than the June 30 deadline now law. Also, Congress needs to extend the National Flood Insurance Program, which has temporarily expired. Homes requiring flood insurance can't go to closing until that program is extended.

"We are witnessing the ongoing effects of the home buyer tax credit, which we'll also see in June real estate closings," Lawrence Yun, NAR's chief economist said in a statement released with the report. "However, approximately 180,000 home buyers who signed a contract in good faith to receive the tax credit may not be able to finalize by the end of June due to delays in the mortgage process, particularly for short sales."

He added that "many potential sales are being delayed by an interruption in the National Flood Insurance Program. Florida and Louisiana, also impacted by the oil spill, have the highest percentage of homes that require flood insurance."

This week starts a showdown on mortgage-lending rules. How strong the protections will be for consumers will depend upon how successful lenders are at softening the rules proposed by Congress. Up for grabs are rules for: loan repayment; appraisals; how much skin lenders must have in the game; and suing a lender for fraud or poorly underwritten mortgages.

Most of these rules ultimately will affect the cost of mortgages and the types of mortgages pushed by lenders. One of the key rules that mortgage lenders want to soften is the rule requiring lenders to hold a 5 percent stake in loans that are bundled and sold with other loans. Those bundles are the mortgage-backed securities that imploded and caused the financial disaster.

By requiring lenders to hold a stake, Congress believes that they will be more cautious about their underwriting. When lenders had no skin in the game they were very careless with their underwriting, allowing "liar loans" and other exotic types of mortgages that are now the most likely to default.

Has your income been hit hard by the oil spill? Frustrated by the slow response of BP and its CEO, Tony Hayward (pictured left)? If you have a Fannie Mae mortgage, you may be eligible for as much as a six-month suspension on your mortgage payments, according to a new emergency program announced by the government-sponsored corporation.

How much help you can get will depend on how hard your finances have been hit by the Gulf oil spill. You also may be eligible if your property has sustained severe damage.

Unless you are among the 180,000 people who signed a contract to buy a house before May 1, yesterday's Senate gesture to extend the deal-closing deadline on the federal homebuyer tax credit is the proverbial drop in the bucket.

Does anyone think that the closing of 180,000 more home sales on the market, in a national inventory of 4,044,000, really matters?

All the Senate's amendment would do is give an additional three months to close the deal for those homebuyers who were already in the system, already under contract on a home purchase by April 30. Now those wannabe buyers might be able to relax, get their nails done and stop calling their lender every hour to ask why the guy is still at lunch. (Delays in getting loans approved was the main reason these 180,000 people couldn't close on time. Lenders say they are overwhelmed by the volume of applications caused by the tax credit. That, and by being an industry known for spending a lot of time on Facebook.)

But it's about 180,000 homes. That's all. Under the amendment, those buyers, and only they, could still hope to claim an $8,000 first-time homebuyer credit or a $6,500 tax credit for repeat home purchasers. I'm happy for them, really. But what's the hoopla about?