Orangecrest Riverside California Real Estate Blog
Orangecrest Riverside California Real Estate Blog

Scott Chappell and Brian Bean
Wednesday, January 30, 2008

Fed stays aggressive, cuts rates a half-point

Move follows last week’s cut in attempt to stabilize economy, markets

The Associated Press

WASHINGTON - The Federal Reserve on Wednesday cut a key interest rate for the second time in just over a week, reducing the federal funds rate by a half point. It signaled that further rate cuts were possible.

The Fed action pushed the funds rate to 3 percent. It followed a three-fourths of a percentage point cut on Jan. 22, a day after financial markets around the world had plummeted on fears that the U.S. economy was heading into a recession. That decrease had been the biggest one-day move in more than two decades.

The half-point cut Wednesday followed news that the economy had slowed significantly in the final three months of last year with the gross domestic product expanding at a barely discernible pace of 0.6 percent, less than half what had been expected. The report came amid increased concern from several quarters about a possible recession.

In a brief statement explaining their decision, Federal Reserve Chairman Ben Bernanke and his colleagues said that “financial markets remain under considerable stress.”

The Fed move was approved on a 9 to 1 vote. Richard Fisher, president of the Fed’s Dallas regional bank, dissented, preferring no change in rates.

The rate cut marked the fifth time that the Fed has cut the funds rate since it started with a half-point cut on Sept. 18 in response to the severe credit crisis which hit global markets in August.

Financial markets, which had been hoping for a bolder half-point move, rallied on the announcement. The Dow Jones industrial average, which had been in negative territory shortly before the Fed action, climbed back into the positive range in the minutes following the statement, with the Dow Jones industrial average up by more than 70 points in the first half-hour of trading.

Economists said the Fed decided to move a half-point rather than a quarter-point because it did not want an adverse reaction on Wall Street.

“At this tenuous time, they did not want to disappoint the markets,” said David Jones, chief economist at DMJ Advisors.

Jones said he expected at least one more rate cut, probably a quarter-point, at the next Fed meeting in March or at the April meeting.

The latest Fed action was quickly followed by cuts in banks’ prime lending rate, the benchmark rate for millions of consumer and business loans. Banks announced that they were cutting the prime rate from 6.5 percent down to 6 percent, the lowest level for the prime since the spring of 2005.

The Fed’s hope is that by making credit cheaper, it will encourage more borrowing, giving the economy a needed boost.

In its statement, the Fed said that “downside risks to growth remain” and pledged to “act in a timely manner as needed to address those risks.” That was seen as a pledge to cut rates further if the economy continues to weaken.

On inflation, the Fed officials said that they expected inflationary pressures to moderate in coming quarters but they also pledged to monitor price developments closely.

The GDP report showed that a key gauge of core inflation, which excludes energy and food, jumped at an annual rate of 2.7 percent in the final three months of last year, the fastest increase in a year and up sharply from a 2 percent increase in the July-September quarter.

The economy has been dealt a series of blows from a two-year slump in housing to a severe credit squeeze as banks faced with billions of dollars in losses from mortgage defaults have cut back on their lending and tightened standards.

The GDP report showed that the housing collapse had depressed economic growth last year by the largest amount in a quarter-century. Policymakers are worried that the slump could intensify this year as millions of subprime mortgages rest at higher rates.

To combat the threat of a recession in an election year, the Bush administration has been negotiating with congressional leaders for an economic stimulus package of around $150 billion, focused on tax rebates for households and business tax breaks to spur investment. The House passed its version of the proposal on Tuesday but Senate action could be delayed by efforts to expand the relief to senior citizens and the unemployed.
The Fed move Wednesday occurred at the first regularly scheduled meeting of 2008 for the Federal Open Market Committee, the group of Fed governors in Washington and regional Fed bank presidents who set interest rates.

The Fed’s three-quarter-point cut on Jan. 22 was taken after an emergency video conference held by Bernanke and other members of the FOMC.

That rate cut, the biggest reduction in the funds rate in more than two decades, was seen as an effort to boldly demonstrate that the central bank was prepared to do whatever necessary to keep the country from slipping into a recession — or at least make the downturn milder than it would have been otherwise.

Financial markets had complained that once the credit crisis hit in August, the Bernanke-led Fed had been too tentative in its responses until last week’s move.

Many private economists believe the central bank will keep cutting rates through the spring, especially if the unemployment rate keeps rising. The jobless rate jumped from 4.7 percent to 5 percent in December, the biggest one-month increase in five years.

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# posted by Scott Chappell and Brian Bean @ 4:07 PM

Tuesday, January 29, 2008

Number of foreclosures soared in 2007

Stage is set for more foreclosures in year ahead, data show

The Associated Press

LOS ANGELES - The number of U.S. homes that slipped into some stage of foreclosure in 2007 was 79 percent higher than in the previous year, a real estate tracking company said Tuesday. Many homeowners started to fall behind on mortgage payments in the last three months, setting the stage for more foreclosures this year.

About 1.3 million homes received foreclosure-related warnings last year, up from 717,522 in 2006, Irvine-based RealtyTrac Inc. said. Foreclosure filings rose 75 percent from the previous year to 2.2 million.

More than 1 percent of all U.S. households were in some phase of the foreclosure process last year, up from about half a percent in 2006, RealtyTrac said.

Nevada, Florida, Michigan and California posted the highest foreclosure rates, the company said.
The filings included notices warning owners that they were in default, or that their home was slated for auction or for repossession by a bank. Some properties may have received more than one notice if the owners had multiple mortgages.

A late-year surge in the number of properties reporting foreclosure filings suggests that many are in the initial stages of the foreclosure process and could end up lost to foreclosure this year unless lenders or the government steps in, RealtyTrac said.

“It does appear that we’re seeing a new batch of properties enter the process,” said Rick Sharga, RealtyTrac’s vice president of marketing.

RealtyTrac is forecasting that the pace of foreclosure filings will remain steady, rather than accelerate during the first half of 2008.

“Assuming nothing else bad happens economically ... we will have exhausted the bulk of the worst-performing loans by the end of June,” Sharga said, referring to adjustable-rate mortgage loans made to borrowers with poor credit.

Many of these subprime loans defaulted last year, triggering a credit crisis and saddling major financial institutions with losses.

More than 1.8 million subprime mortgages are scheduled to reset to higher interest rates this year and next.

Last year’s explosion in foreclosure activity came amid a worsening housing downturn, as falling home values ate into homeowners’ equity, making it harder for many to refinance into more affordable loans or to find buyers. Those options had helped keep troubled homeowners from sliding into foreclosure.

“We went from a sort of buying frenzy to a foreclosure frenzy in the last two years,” Sharga said.

Recent efforts by government and mortgage lenders to help homeowners at risk of falling seriously behind on mortgage payments have had a marginal impact on the U.S. foreclosure rate so far, Sharga added.

In December alone, foreclosure filings soared 97 percent from the same month a year earlier to 215,749. It was the fifth consecutive month in which foreclosure filings topped more than 200,000, RealtyTrac said.

In the fourth quarter, filings rose 86 percent from the prior-year quarter but only 1 percent from the third quarter.

Nevada had the highest foreclosure rate in the nation last year, with 3.4 percent of its households receiving foreclosure filings. That was more than three times the national average, RealtyTrac said.

The state had 66,316 filings on 34,417 properties in 2007, up more than 200 percent from 2006’s total.

Florida had more than 2 percent of its properties in some stage of foreclosure last year. The state reported 279,325 filings on 165,291 homes, more than twice the previous year’s total.

In Michigan, where job losses are pressuring many homeowners, 1.9 percent of all households received a foreclosure filing last year. In all, 136,205 filings were issued on 87,210 properties, up 68 percent versus filings in 2006.

California led the nation in total foreclosure filings and the number of homes in some stage of foreclosure last year.

A total of 481,392 filings were issued on 249,513 properties, more than triple the number of filings in 2006, RealtyTrac said.

In all, 1.9 percent of households in California received foreclosure filings.

Many of the homes receiving foreclosure filings in the state were in the inland markets, where new construction and more affordable prices helped fuel a spike in sales toward the end of the housing boom.

Other states in the 2007 foreclusure top 10 were Colorado, Ohio, Georgia, Arizona, Illinois and Indiana.

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# posted by Scott Chappell and Brian Bean @ 7:32 AM

Home seller quandary: Fix up house or offer credit?

Many buyers have trouble envisioning 'home' that needs work

By Dian Hymer
Inman News

Sellers who anticipate losing money if they sell their home may wonder why they should spend a dime fixing the place up for sale. Isn't this throwing good money after bad? Even sellers with plenty of equity in their homes often figure the way to get the most out of the sale is to cut sale costs to a minimum.

This attitude is directly contrary to the notion that the way to make the most money on the sale of a home is by pricing the property appropriately for the market, and by making cost-effective improvements that will result in a higher sale price in a shorter time.

Job applicants don't show up for an important interview in tattered old clothes if they want to make a good impression, particularly if there were plenty of other qualified applicants. Likewise, if you wanted to get top dollar from the sale of a car you would have the car detailed so that it looked its best. The same principal applies to selling single-family homes.

Today, many housing markets have plenty of homes for sale and far too few buyers. For years, buyers competed with one another in order to buy a house. Now, in general, sellers are being forced to compete with other sellers in order to get their home sold.

Consider the competitive nature of the market when deciding if you're going to improve your home before selling it, and how much you'll invest. Keep in mind that the point of fixing up a home to sell is to maximize your return from the sale. Don't waste money on improvements that have little or no value to buyers.

HOUSE HUNTING TIP: Ask your real estate agent or a staging decorator to walk through your home with you for the purpose of determining what fix-up projects you should ideally complete before marketing the property. For example, you might be inclined to replace worn-out carpet. Your agent, however, might advise otherwise.

An agent who specializes in the sale of older homes in the area might recommend refinishing the hardwood floor that is hidden underneath the carpet instead. Buyers looking for charming older homes usually prefer hardwood floors to carpet.

A common opinion expressed by sellers is that it's pointless to fix up a place for someone else whose decorating preferences might be quite different. For example, why not just offer a credit to the buyers so that they can either change the carpet or refinish the hardwood floors -- whichever they prefer?

The problem with this approach is that most buyers have a difficult time imagining how a home will look fixed up. They remember what they see, not what the house could look like with this or that improvement.

Imagine there are five homes listed for sale in an area, all similarly priced, but not all in the same condition. Three houses have old, worn carpet covering most of the floors; one has linoleum over the floor; and the fifth has pristine, recently refinished hardwood floors. Most buyers will gravitate to the home with the beautiful hardwood floors.

The best houses in the best condition and offered for the best price usually sell quickly. A fast sale is important to some sellers in this market. The sooner your home is sold, the sooner you stop paying mortgage payments, property taxes and various maintenance costs.

THE CLOSING: In areas where prices are declining, a quick sale can result in a higher price than might be attainable in a few months.

Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.

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# posted by Scott Chappell and Brian Bean @ 6:58 AM

Monday, January 28, 2008

Will Lower Rates Spark a Market Rebound?

David Streitfeld
The New York Times

Susanne Cannon, the director of the Real Estate Center at DePaul University, says that at a conference this month with other academics who specialize in housing, the consensus was that many buyers have been waiting on the sidelines until the market hits bottom and then plan to make their move.

Now that lower rates are a factor, Cannon says, the question becomes: At what point will buyers be compelled to act, thinking they are getting a price they can live with and a rate they do not want to miss out on?

Otha Greer, an associate with Coldwell Banker in Jackson, Miss., says the drop in rates ''has lit the fire in my business. I actually had an investor that called yesterday and she's interested in buying five homes.''

Not everybody is persuaded the turnaround has come. A Merrill Lynch report this week said housing prices were ''likely to remain in free fall.'' The report predicted a drop of 15 percent this year, 10 percent next year, and ''more depreciation likely beyond the forecast period'' — despite an expected series of rate cuts.

But Jim Klinge, an associate in San Diego, was closing his fifth deal this month, a decided improvement from the 16 houses he sold in all of 2007.

''It's very hard to find the right house at the right price,'' he says, ''but there's a strong undercurrent of very healthy demand.''

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# posted by Scott Chappell and Brian Bean @ 9:56 AM

Friday, January 25, 2008

Schwarzenegger joins push to raise conforming loan limit

Governor: Half of Californians can't get GSE-backed loans

By Matt Carter
Inman News

Breaking with the Bush administration's position, California Gov. Arnold Schwarzenegger has added his voice to the chorus clamoring for an increase in the $417,000 conforming loan limit, the ceiling for mortgages eligible for purchase or guarantee by Fannie Mae and Freddie Mac.

In a letter to congressional leaders, Schwarzenegger urged the passage of legislation raising the conforming loan limit to $625,000 in high-cost housing markets, allowing the government-chartered mortgage finance companies to play a greater role in California by expanding into what's now considered the jumbo loan market.

The secondary market for so-called jumbo loans that exceed the conforming loan limit was disrupted last August, by fears of rising mortgage defaults and falling home prices. Those fears -- which began with rising defaults on subprime loans made to borrowers with blemished credit but spread to alt-A and even some prime loans -- have made jumbo loans harder to obtain since last summer, and more expensive for those who still qualify.

Conforming loans -- those eligible for purchase or guarantee by government-chartered Fannie and Freddie -- have remained widely available, and at rates that are falling. That's prompted industry groups such as the National Association of Realtors to call for an increase in the conforming loan limit, so that Fannie and Freddie can provide liquidity for jumbo loans (see Inman News story).

Although the Bush administration has expressed reservations about taking such a step, California's Republican governor is breaking with the party line.

"In a state where the average price of a home far exceeds that loan limit, Californians find themselves priced out of the very help these loans are intended to provide," Schwarzenegger said in a letter to House and Senate leaders.

Last month, the California Association of Realtors reported that the median existing-home price in the state had fallen 11.9 percent in one year, to $488,640. At the end of November, median home prices remained far above the conforming loan limit in markets like the San Francisco Bay Area ($793,930), Santa Clara ($855,000) and Orange County ($661,580).

Leslie Appleton-Young, chief economist for CAR, said decreases in the statewide median prices seen in recent months were the result of difficulties in obtaining jumbo loans.

In his letter, Schwarzenegger claimed more than 50 percent of California home buyers lack access to loans that have the backing of the government-sponsored enterprises, or GSEs.

"When combined with the withdrawal of the jumbo loan market, it's no surprise that current home sales activity in California is half the pace seen in 2006," he said.

A recent analysis by the Office of Federal Housing Enterprise Oversight (OFHEO), which supervises the GSEs, concluded that while raising the conforming loan limit might lower interest rates on jumbo loans, it could also detract from Fannie and Freddie's core mission of providing financing for affordable housing.

Allowing Fannie and Freddie to venture into the jumbo loan market would entail greater risk and would consume funds the GSEs could use to buy up a greater number of smaller loans, OFHEO warned. OFHEO has proposed lowering the conforming loan limit in 2009 in concert with falling home prices.

But Schwarzenegger maintains that moderate- and low-income families in high-cost housing markets are "hit hardest" by the conforming loan limit, because it restricts their access to lower-cost, lower-down-payment, fixed-rate loans.

"Lifting the GSE loan limit in these areas would help put affordable home purchase and refinancing options within their reach," the governor said, noting that Federal Housing Administration and Department of Veterans Affairs loan guarantee programs also have limits tied to the conforming loan limit.

Some who oppose an increase to the conforming loan limit argue that much of the home-price appreciation seen in some markets during the boom was artificial. Speculators pushed home prices out of reach of average families, and prices should be allowed to return to more affordable levels, critics say.

The Bush administration maintains that before it will go along with an increase in the conforming loan limit, Congress must pass legislation overhauling oversight of Fannie and Freddie, which were rocked by management and accounting scandals that forced them to restate several years of earnings.

The House of Representatives passed legislation in May, HR 1427, that would create an independent agency with powers similar to those of a bank regulator to oversee Fannie and Freddie.

HR 1427 would authorize the GSEs to guarantee and securitize loans of up to $625,000 in high-cost housing markets, but not purchase such loans to hold in their portfolios.

A companion bill to HR 1427 has yet to be introduced in the Senate, and attempts to reform oversight of the GSEs have floundered in Congress for several years because of disagreements over limits on growth in their loan portfolios, which today total nearly $1.5 trillion.

New York Democrat Sen. Charles Schumer introduced a bill in September, S 2036, that does not address oversight of Fannie and Freddie, but would provide a temporary, one-year increase in the conforming loan limit.

The National Association of Home Builders (NAHB) and Housing Policy Council (HPC) of The Financial Services Roundtable last week said the groups support a temporary increase in the conforming loan limit in high-cost areas, "as part of prompt action on GSE reform legislation."

The groups called on the Senate to approve legislation similar to HR 1427, reforming oversight of Fannie and Freddie and mandating a two-year increase in the conforming loan limits. As envisioned by NAHB, the increase would be rescinded after two years if the jumbo market returns to normal.

Although Schwarzenegger's letter to congressional leaders did not address such details, a spokeswoman for the governor said he advocates a permanent increase in the conforming loan limit independent of HR 1427 or other GSE reform legislation.

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# posted by Scott Chappell and Brian Bean @ 7:11 AM

Wednesday, January 23, 2008

Interest Rates Are Dropping!

Here's an email we received today from one of our great mortgage resources:

TODAY’S RATES ARE FANTASTIC!

It’s a good time to purchase or refinance. Please have your client present this coupon to lock in this rate. Today’s offering ONLY!

5/1 ARM Conforming
5.00 w/ No Points

30 yr Fxd Rate Conforming
5.125 w/ No Points

15 yr Fxd Rate Conforming
4.625 w/ No Points

This is for a:
Full-Doc Loan
5% - 10% (depending on area) Down Payment

Conforming Limits / Loan Amount < $417,001 DU / LP / Emits Approved

Some clients may not qualify

Call Scott & Brian today at 951-314-5402 for more information.

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# posted by Scott Chappell and Brian Bean @ 12:11 PM

Tuesday, January 22, 2008

Fed slashes key rate to 3.5%

Citing weakening economic outlook, Federal Reserve makes biggest cut in nearly 24 years - three quarters of a point.

By Paul R. La Monica
CNNMoney.com editor at large

NEW YORK (CNNMoney.com) -- The Federal Reserve slashed two key interest rates by three-quarters of a percentage point Tuesday following an unscheduled meeting, citing continued concerns about a weakening economy and turmoil in the financial markets.

The Fed lowered its federal funds rate, which impacts how much consumers pay on credit card debt, home equity lines of credit and auto loans, to 3.5 percent from 4.25 percent.

The rate cut came more than a week before the Fed's next regularly scheduled meeting, a two day session that concludes on Jan. 30. Some market observers think the Fed will cut rates again at this meeting.

The Fed also lowered its discount rate, which is what it costs banks to borrow directly from the central bank, by three-quarters of a point, to 4 percent.

This was the biggest rate cut by the Fed since October 1984. And it was the first cut between regularly scheduled meetings since a half-point cut on the day the market reopened following the September 2001 terrorist attacks

"Broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets," the Fed said in a statement.

Treasury Secretary Henry Paulson, speaking at the U.S. Chamber of Commerce in Washington Tuesday morning, said that he hoped the rate cut would restore some confidence in the financial markets and U.S. economy.

"I think it's very constructive and what I think it shows to this country and to the rest of the world [is] that our central bank is nimble and able to move quickly," he said.

Investors didn't appear to share this sentiment. Stocks plunged at the open Tuesday morning, following two straight days of massive selloffs abroad. But stocks bounced off their lows as the morning progressed.

"You can get into a debate as to whether we're in a recession or not, but it's a really turbulent period right now and that makes it difficult for investors to figure out what to do," said Phil Dow, director of equity strategy with RBC Dain Rauscher.

Dow said the rate cuts are a welcome sign that should eventually help to stabilize the markets but he cautioned that stocks, particularly beaten down financial services companies, could still see more pain.

Along those lines, Rich Yamarone, chief economist with Argus Research, added that the Fed may be hitting the panic button, "There is no economic reason that the Fed couldn't wait until next week to cut rates," he said. "Something bigger is looming."

Yamarone suggested that the Fed might be worried that the problems facing banks and mortgage lenders are going to get worse very soon.

More aggressive action

Before Tuesday, the Fed had cut the fed funds rate by a full point since September. Investors have been clamoring for more - and bigger - rate cuts hoping that they would kick-start a moribund economy and encourage businesses and consumers to spend.

More cuts: And the Fed is still widely expected to aggressively cut rates again at its Jan. 30 meeting. According to futures listed on the Chicago Board of Trade, investors are pricing in an 66 percent chance that the Fed cut another half-point.

"This was a big step but there is still more to go," said Keith Hembre, chief economist with First American Funds. Hembre thinks that the Fed will cut the fed funds rate to at least 2.5 percent within the next few months.

Fed lending has helped: The Fed has also loaned $70 billion to banks through a series of three auctions since December to help mitigate the effects of the credit crunch on Wall Street. That appears to be working as the Fed said Tuesday that "strains in short-term funding markets have eased somewhat."

Government "stimulus" plan: President Bush and Congress are also working on an economic stimulus package to help beleaguered consumers. The plan is widely expected to include payments to consumers, and tax breaks to spur investments by businesses.

Too little, too late? Despite these efforts, markets have plunged so far in 2008. At this point, Hembre said, it's probably too late for the Fed to prevent a recession - he said it takes several months for rate cuts to have an impact. But he added the Fed's efforts could help to make a recession brief.

"This rate cut certainly leads to a better outlook in 2009, but it may not have any effect on the first quarter or even first half of this year," Hembre said.

Or too much? Still others think the Fed needs to proceed cautiously, especially since it's fair to argue that aggressive rate cuts during 2001 may be the reason why banks are in the subprime mortgage mess they are in now.

William Poole, president of the Federal Reserve Bank of St. Louis, voted against the current rate cut. According to the Fed's statement, Poole did "not believe that current conditions justified policy action before the regularly scheduled meeting next week."

Fed board member Frederic Mishkin did not participate in the emergency meeting.

In addition, high prices of oil, gold and other commodities, coupled with a weak dollar, are a sign that inflation is not necessarily dead. One market strategist said he thinks the Fed made a mistake by cutting rates so drastically since it could lead to bigger inflation worries down the road.

"The Fed is sacrificing the U.S. dollar, which may well compound our problems in the future. I think the auctions are a more precise way to alleviate credit issues," said Haag Sherman, managing director of Salient Partners, an affiliate of investment firm Sanders Morris Harris.

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# posted by Scott Chappell and Brian Bean @ 11:27 AM

Tuesday, January 01, 2008

Senate Finally Acts to Help Borrowers

By Kenneth R. Harney
Washington Post


Reversing months of inaction in a single day, the Senate recently passed two major bills that could help thousands of homeowners struggling with unaffordable mortgages or heading for foreclosure.

The long-stalled FHA Modernization Act -- which would reduce down payments and raise maximum mortgage amounts for Federal Housing Administration-insured loans -- passed the Senate Dec. 14 by a 93 to 1 vote. Senators also approved the Mortgage Forgiveness Debt Relief Act, which would remove the controversial tax on "phantom income" when lenders forgive portions of the balances on mortgages of financially stressed homeowners.

Versions of both measures had already passed the House. On Tuesday, the House adopted the Senate version of the mortgage-debt-relief bill and sent it to President Bush, who signed it. The differences between the House and Senate versions of the FHA Modernization Act will have to be resolved by a conference committee in the new year.

Besides eliminating the phantom income tax for three years, the Senate's debt-relief bill also would extend the tax deductibility of private and FHA mortgage insurance premiums through 2010. That benefit had been scheduled to expire at the end of this month.

The bill also would provide capital-gains-tax relief to surviving spouses who sell houses for substantial profit. Under current law, surviving spouses who have not remarried can qualify for the full $500,000 tax-free capital gains exclusion only if they sell during the tax year in which their spouses died. Otherwise, they qualify only for the $250,000 exclusion.

Under the Senate's bill, however, if a sale occurs no later than two years after the death of the spouse and the residence meets the eligibility tests for the full $500,000 "immediately before" the spouse's date of death, the survivor would still be eligible for the full $500,000 exclusion. Surviving spouses typically receive the deceased spouse's "stepped-up" tax basis in the property, reducing the amount of tax they would owe. The purpose of the change is to provide more time before the sale deadline for homeowners whose spouses die late in the year, and who would have large capital gains from the property. For example, if one spouse died in October, the surviving spouse would not need to feel pressure to sell the house before the end of December simply to receive the stepped-up basis and the full $500,000 exclusion for married, joint-filing homeowners. Instead, the surviving spouse would have two years to claim both tax benefits.

If the House and Senate agree on a final version, the FHA modernization bill should help many homeowners stuck with subprime mortgages that are heading for unaffordable higher payments. Most important, the range of consumers assisted will include those in areas of the country with high housing costs, such as California, the Northeast and the Mid-Atlantic states.

The Senate bill would raise the FHA's statutory loan amount limit to $417,000, the same ceiling that Fannie Mae and Freddie Mac have. But the House version would tie the limits to median home prices and could authorize FHA-insured loans in excess of $700,000 in expensive markets such as San Francisco.

The House bill also would allow FHA applicants to obtain loans with no down payments; currently the minimum is 3 percent down. The Senate's version would require down payments of at least 1.5 percent. The House bill would authorize the FHA to vary insurance premium levels by applicant risk categories; borrowers who make minimal or no down payments could be charged higher premiums. The Senate bill would impose a one-year moratorium on a risk-based pricing system developed by the FHA and scheduled to take effect Jan. 1.

FHA loans, which faded in popularity during the subprime boom years of 2001-06, are now regaining their market share. Not only do the FHA's fixed-rate loans cost much less than subprime alternatives -- often by three or four percentage points -- but they also come without prepayment penalties and have relatively flexible and generous underwriting terms.

Paul E. Skeens, head broker at Carteret Mortgage in Waldorf, said the FHA is far more lenient on credit-history issues than any of its competitors and routinely insures loans to applicants who have had bankruptcies and foreclosures.

With a no-down-payment option as in the House-passed bill, the FHA "will be the best solution anywhere in the market" for people with moderate incomes, first-time purchasers and those with less-than-perfect credit, Skeens said. He said that even many buyers with prime credit would apply for fixed-rate, consumer-friendly FHA-insured mortgages once the higher loan limits kick in.

In a head-to-head comparison of a hypothetical new $417,000 mortgage with no down payment and a 6.25 percent fixed rate for 30 years, Skeens said, an FHA-insured loan would have lower monthly payments than Fannie Mae's or Freddie Mac's directly competitive nothing-down programs.

On such a loan, according to Skeens's estimates, FHA borrowers would pay $2,779.80 a month -- including all insurance and fees -- vs. $2,877.57 a month for a Fannie Mae mortgage. Borrowers with high credit scores might be able to qualify for a Fannie Mae zero-down program that requires no separate monthly private mortgage insurance payments, but that would raise the interest rate from 6.25 percent to 6.75 percent. In that case, Skeens said, the Fannie Mae option would be about $75 cheaper per month than the competing 6.25 percent FHA loan.

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# posted by Scott Chappell and Brian Bean @ 7:51 AM


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