Flood Insurance Program Still Threatened

If you buy a property in the flood plain, your lender will require flood insurance. The National Flood Insurance Program (NFIP) was scheduled to expire July 31, 2018. Trump delayed its expiration through November 30, 2018. Gee, do you think that date has anything to do with hurricane season and mid-term elections? After that, Congress has to reauthorize it. If they don't, you won't be able to buy flood insurance, so you won't be able to buy or sell a house in the flood plain unless you pay cash.  

This Wikipedia article discussed the history and problems of NFIP.

These two statements from the Wikipedia article on NFIP are particularly disturbing:

The cost of the insurance program was fully covered by its premiums until the end of 2004, but has had to steadily borrow funds since (primarily due to Hurricane Katrina and Hurricane Sandy), accumulating $25 billion of debt by August 2017. 

Another criticism is that FEMA doesn't administer all policies, instead outsourcing many policies to private insurance companies. When a disaster occurs, FEMA makes payments to those private insurance companies to offset their costs. However, there is little oversight and few rules as to how the money should be distributed. As a consequence, private insurers have been known to use FEMA payments to hire attorneys that fight policyholders in court. One law firm is estimated to have received US $29M from FEMA payments to fight Hurricane Sandy claims. 

Flood Insurance Program Threatened

FEMA, the federal agency that provides flood insurance to homeowners living in the flood plain, is deeply in debt because of numerous major floods in recent years. Mortgage companies require flood insurance for homes located in the flood plain. The flood insurance program will expire July 31 unless Congress re-authorizes it. The House has passed a bill that will allow FEMA to write insurance policies effective for one year for four more months. The bill may not pass the Senate. Some Republicans contend that if FEMA makes flood insurance unobtainable, homeowners will be  unable to sell their flood-prone homes, and after the dust settles from all the foreclosures and bankruptcies, no one will be living in the flood plain and all will be well. Unfortunately, with climate change, floods are occurring where they never occurred before. The sea level is rising, and properties near the ocean that didn't use to be in the flood plain are now flooded on sunny days at high tide.

Student Loan Debt Precludes Mortgage Debt

Because the cost of acquiring a college education has increased so much in the past decade, many millenials have crippling student loan debt. Before they can begin to save a down payment on a house and take on a home mortgage, they need to spend years paying off their student loans. The rate of homeownership among young people has plummeted.

Inability to save the down payment is only part of the problem. Lenders will only allow borrowers to spend about 36% of their gross monthly income on all debts, including student loans, car payment, credit card payments and mortgage. If student loans are eating a large portion of their young peoples' pay checks, they won't have much left to qualify for a mortgage.

The other problem is the lack of jobs. College graduates who are unable to find a job or who lost a job will be unable to make their student loan payments. When they default on their student loans, their credit is trashed, and they are in a hole that will be very difficult to climb out of. Adding to the difficulty is that some employers do a credit check as part of the hiring process. Bad credit means no job offer. 

Some people who had been promised that their student loans would be forgiven if they worked in a public service job found that rug pulled out from under them last year.

Has Equifax Ruined Your Credit?

As you probably know, Equifax allowed the credit data of millions of consumers to be breached. If you want to know whether you were a victim, first you have to give up your right to sue them. 

Someone could be charging stuff in your name as we speak. Here is an interesting article with advice on how to monitor your credit.

Guess I'd better get my free credit report and see whether my identity has been stolen. 

Government-Subsidized Housing for the Wealthy

The National Association of Realtors says that they will fight any threat to eliminate mortgage interest as an income tax deduction. They claim that it makes home ownership more affordable, and the housing industry and consumers will be harmed by the loss of the mortgage interest deduction (MID).

They needn't worry. The MID is wildly popular, and few politicians dare to suggest its demise.

The New York Times has an interesting article about the MID, its beneficiaries, and its cost to the U.S. economy.

What Does "As Is" Mean?

Sometimes my buyers become alarmed when the seller says they want to sell their house "As Is". Many people assume this means the seller has something to hide. Not necessarily.

Sometimes a seller wants to sell a house "As Is" because they don't have money to make repairs or they don't want to be bothered making repairs. If the sale is a short sale or foreclosure, "As Is" is frequently a requirement of the seller's lender in the case of a short sale, or the owner/mortgage company in the case of a foreclosure.

When the buyer and seller agree that the house will be sold "As Is", they both sign the Arizona Association of Realtors "As Is" Addendum. Lines 23 to 24 of the "As Is" Addendum state the seller still has to tell the buyer about known problems with the property. This is required by Arizona law. However, lines 8 to 14 of the "As Is" Addendum state that the seller does not have to fix even the "Warranted Items" mentioned on lines 172 to 177 of the Purchase Contract. "Warranted Items" are heating, cooling, plumbing, electrical and mechanical systems, plus pool equipment, stove and built-in appliances. Without the "As Is" Addendum, the seller is obligated to fix "Warranted Items". With the "As Is" Addendum, the seller is not obligated to fix "Warranted Items". That is the only difference between "As Is" and "Not As Is". 

Lines 15 to 18 of the "As Is" Addendum state that the buyer is still allowed to do a home inspection, and the buyer retains the rights in Section 6j of the Purchase Contract. In other words, the buyer can cancel the Purchase Contract for any reason during the inspection period, and the buyer can even ask the seller to make repairs, but with the "As Is" Addendum, the seller is under no obligation to fix anything, even if the buyer's lender requires repairs such termite treatment or replacement of a broken water heater or window. If the buyer's lender requires repairs that the seller can't or won't make, usually the Purchase Contract has to be cancelled and the buyer gets his earnest money refunded.

FHA Reduces Loan Limits

The maximum FHA loan amount for a single family house in Pima County is $316,000. For purchase contracts initiated after December 31, the loan limit will be reduced to $271,000.

To check loan limits in other counties, go here.

The End of Fannie Mae and Freddie Mac as We Know Them

President Obama and the U.S. House and Senate are finally in agreement about one thing: the Federal government needs to get out of the mortgage business. Fannie Mae and Freddie Mac are quasi-governmental agencies that buy bundled mortgages from mortgage lenders. This not only frees up the mortgage lenders' funds so they can continue to make mortgages, but as we saw in the housing market collapse, it freed the mortgage lenders of responsibility for the bad loans they made. The tax payers were left holding the enormous bag full of stinking, unethical mortgages.

Now mortgage lending practices have tightened up because Fannie and Freddie will not buy any mortgage with a whiff of impropriety. In fact, Fannie and Freddie now make mortgage lenders buy back mortgages, even mortgages that are not delinquent, if Fannie or Freddie suspects the mortgages were made fraudulently. So the mortgages lenders now walk on eggshells, ever learning new lending requirements. Even the most respectable borrowers have a hard time getting a mortgage.

The Senate plans to reduce government's role in the mortgage industry, and no surprise, the House wants to go much further to almost eliminate it. USA Today reports that interest rates will be higher on mortgages without government backing. On a typical $200,000 mortgage with 20% down, a borrower would pay an extra $75 per month under the Senate plan, or an extra $135 per month under the House plan.

Ironically, now that Fannie and Freddie's lending criteria are really strict, both agencies are extremely profitable. They have already repaid $132 billion to the U.S. Treasury, which is more than two-thirds of what they received in the bailout.   

"Put Other REALTORS in Tucson Out of Business"

An unnamed Tucson real estate agent was given foreclosure listings by Armando Granillo, a Fannie Mae foreclosure specialist in Irvine, California. In February, Granillo met in Tempe with the Tucson agent, identified as A.M., expecting to receive a cash kick back from A. M. in exchange for more foreclosure listings. This is illegal, but not uncommon at Fannie Mae, according to a fired whistle-blower.

A.M. had reported the kick back scheme to the FBI, and was wired when he met with Granillo, who told A. M. he would give A. M. so many foreclosure listings, that together they would "put other Realtors in Tucson out of business". Granillo acknowledged that the kick backs were illegal, but "a natural part of business". Check it out here.

Loan Deliquencies Down to Pre-Bubble Levels

According to a study by Lender Processing Services, only 0.84% of all mortgages that were current six months ago are now 60 days late. This is only slightly higher than the levels seen prior to start the housing bubble in 2004.

People who say that homeowners are losing their homes because they never qualified for mortgages haven't thought the matter through. Mortgage loan qualifications have been very strict since the bubble burst in 2007. People who shouldn't have been given mortgages lost their homes by 2009. People are losing homes now either because they lost their jobs or they lost their equity in their homes when the market became dominated by foreclosures and short sales. They are not reckless or foolish. They are responsible people who did everything right and were victims of the housing bubble and recession.

New Down Payment Assistance Program

A new down payment assistance program offers down payment grants to qualified home buyers in Tucson and Pima County. The buyer's income must be under $65,500 and the buyer needs a credit score of at least 640. The house doesn't have to be a vacant foreclosure like that cumbersome Neighborhood Stabilization Program grant, and the house can be anywhere in Pima County, including the City of Tucson.

To see whether you qualify, please call loan officer extraordinaire Catherine Ellinwood at Fairway Independent Mortgage. 520-954-1907. Or email her at cellinwood@fairwaymc.com.

We All Benefit from the Extension of the MFDRA

The best real estate news this year is that the Mortgage Forgiveness Debt Relief Act of 2007 has been extended through the end of 2013. Until today, we thought it expired two days ago and went over the Fiscal Cliff. Without the extension of this Act, homeowners whose mortgage debt has been forgiven through loan modification, short sale or foreclosure would have the forgiven debt taxed as regular income.

For example, a homeowner owes $200,000 on his house, and his bank approved a short sale for $100,000, because that's all the house is worth in today's market. As far as the IRS is concerned, that homeowner has $100,000 in taxable income. If he is in the 28% tax bracket, if the MFDRA hadn't been extended, he would have owed $28,000 in income tax.

In order to qualify for a short sale, a homeowner has to prove he has a hardship: job loss, death, divorce, and moving out of town are among the few qualifying reasons. A homeowner who is capable of making his payments but just doesn't want to pay an underwater mortgage will not get much sympathy from his mortgage holder.

Homeowners who do qualify for a short sale are not likely to have thousands of dollars to pay income tax on money they didn't receive. Saddling homeowners with debt they can't pay is pointless for two reasons: 1) noncollectable income tax owned to the IRS won't help balance the Federal budget, and 2) defaulting on this obligation will prevent the former homeowners from getting back on their feet. Who wins in this scenario?

It is stressful enough for the homeowner to do a short sale, and the prospect of being responsible for income tax on income that wasn't received would have caused a lot more homeowners to walk away from their home. They would still have owed the income tax if the house were foreclosed, but the prospect of paying the tax bill would have given many homeowners a disincentive to jump through all the short sale hoops.

Foreclosed houses sell for less than short sale houses. These lower sale prices depress the value of nearby houses, putting more homeowners under water. The cycle of short sales and foreclosures will continue until we deplete the back log of short sales and foreclosures. Failure to extend the MFDRA would have dragged the housing market down and could have reversed the recovery we have enjoyed in the past year in Tucson.

Still to be resolved in debt reduction negotiations: whether the once-sacred mortgage interest deduction will be eliminated. Stay tuned.  

Fiscal Cliff for Homeowners Doing Short Sales

The Mortgage Forgiveness Debt Relief Act of 2007 is due to expire at the end of the year. It is one of the many issues bundled up in the infamous "Fiscal Cliff" negotiations. If the Act is not extended, homeowners who have debt forgiven in a short sale, loan modification or foreclosure will owe the IRS income tax on the forgiven debt.

Suppose a person owes $200,000 on his house, and it is sold in a short sale for $125,000. This seller will get a IRS form 1099 showing $75,000 income, and he will be expected to pay income tax on money he never had. It's pretty obvious that someone who qualified for a short sale does not have tens of thousands of dollars to give to the IRS. I fail to see how we will reduce the deficient by sending tax bills to people who don't have the ability to pay them.

Read more on CNN.com. To get the official IRS take, check here. And of course consult a tax expert if you are facing short sale, loan modification or foreclosure.

Mortgage Interest Deduction Threatened

The mortgage interest tax deduction is also on the chopping block. This doesn't concern me as much, even though I am a beneficiary of it. The federal government subsidizes home ownership in dozens of ways, but I don't think this should be one of them.

Suppose a person with a $150,000 mortgage at 5% interest loses his mortgage interest deduction. So what if he can't deduct $7,500 from his taxable income? If he's in the 25% tax bracket, he won't save $1,875 on his taxes. This is going to stop him from buying a house?

The current proposal the Obama administration has on the table will reduce the limit on mortgage principal eligible for a deduction to $500,000 from the current $1 million. The tax deduction will be replaced by a tax credit capped at 12% of interest paid. Mortgage interest on second homes will no longer be tax deductible.

The National Association of Realtors says the mortgage interest deduction is sacred, and changes to the tax code will cause home prices to plummet. Critics of the tax reform say people will no longer be unable to afford to pay as much for homes without the tax subsidy. This is nonsense. When a person applies for a mortgage, the mortgage broker does not count the amount the buyer will save on his taxes as income.  

Flood Insurance Becoming More Expensive

Private insurance companies do not offer flood insurance for properties that are in the flood plain. Using tax payer funds, the National Flood Insurance Program provides subsidized flood insurance. The program borrowed $18 billion to pay claims from the Katrina hurricane, and had just $3 billion in borrowing power left prior to the Sandy super storm, which could require $6 to $12 billion in payouts.

Flood insurance premiums will increase an average of 20% in January on second homes and businesses. Houses built before there was a NFIP have rates that are half those of new construction. The discounted policies will be gradually eliminated through annual 25% premium increases.

Read more in this New York Times article.

Let Housing Lead the Recovery

With election day tomorrow finally putting an end to all the campaign drama, it is important to remember that the winner of the Presidential election can either help or hurt our economic recovery with their policies regarding the housing industry. Unfortunately, neither candidate has address this extremely important issue.

Our government has the power to let the housing market lead the economic recovery. Even if neither party wants to spend money to help the housing market, they could be very effective if they eliminated policies that hurt the housing market.

 Dave Liniger, Co-Founder and Chairman, RE/MAX, LLC, put it beautifully in this open letter to Obama and Romney.

Short Sale Pain May Hurt More in 2013

Unless Congress acts quickly, people who lose their homes in short sales may be hit with a tax bill for the "income" they received in the form of forgiven debt.

Another Foreclosure Casualty: Desert Tortoise

I was showing a vacant foreclosed house in South Tucson a few weeks ago when my client noticed a tiny little desert tortoise on the concrete patio. The yard was surrounded by chain link fence, and any part that wasn't covered with the house, shed or patio had been paved. Every square inch. The former owners of this house really didn't want to do any yard work. This left no food and no burrowing opportunity for the poor tortoise.

It takes at least a month after a house is foreclosed before it goes on the market, so this tortoise had been abandoned and trapped with no food or water for at least that long, probably longer. I live in the desert, and thought I would be doing this captive tortoise a favor if I released her in my yard. That was when I was as ignorant as the people who had imprisoned and abandoned her.

I had proclaimed her a female because she had a flat belly, and I knew males have a concave belly. I took her home and released her in the shady north side of my house. She went down a pack rat hole as far as she could. I could still see the back fourth of her. I did some internet research and found that captive tortoises eat shredded carrots, kale and spinach, among other things, but those were the veggies I happened to have, so I put them outside the hole with a flower pot saucer of water buried below grade. Then I left.

I couldn't stop thinking about her, though. I named her Ophelia, after my favorite song by The Band. I checked to see whether she had eaten anything, and it didn't seem she had. The veggies were drying within minutes in the 0% humidity. I pulled her out of her hole and put her in the water dish. She seemed to drink. Then I put her in front of the food. She ate some of the carrots, so I went away again.

Next time I checked, she was back in the hole. I pulled her out again, and excavated the hole. As I was doing this, I realized I was lucky not to encounter a scorpion, snake or rat. I let her go back in.

Next time I checked, she was so far in the hole, I needed a flashlight to see her. I knew I was bothering her, so I left more food and decided she was on her own.

By now, I had checked the Arizona Game and Fish site and realized I was in way over my head. For one, it is illegal to release a captive tortoise. I know of two couples who adopted tortoises (Panzer and Helmut) legally from the Arizona Sonoran Desert Museum, and it isn't simple. The caretakers needed to acknowledge that they are making a 100 year commitment to the care of their tortoise. Then they had to provide an enclosure with walls a foot below grade so the tortoise can't dig his way out. A burrow must be built. Preferably there should be separate burrows designed for staying cool in summer and warm during the winter hibernation. A patch of grass must be provided, along with a crop of native flowers, a wading and drinking dish, and daily vegetable diet supplements. This is much more responsibility than I wanted to take on.

I thought it was cruel to keep a tortoise by itself, but learned that the Desert Museum only allows one tortoise per household because tortoises are loners, fighters, and breeders. There are already 300 to 400 captive tortoises needing adoption in Arizona, so more tortoise are not needed.

Unfortunately, I talked to many people who knew of people who had breeding tortoises. They blithely allow the tortoises to roam around their yard breeding and eating what they can find. The people throw some low-nutrition lettuce to the tortoises when they think of it, and give the baby tortoises away to friends. Ophelia was probably the result of one of these thoughtless breeders.

I hadn't seen Ophelia for a few days and was feeling guilty. I could no longer see her by shining a flash light down her hole. I didn't know if she or the rabbits were eating some of the food I provided, but for the most part, it just seemed to dry up and get wasted.

The Saturday before last, we had a glorious thunder storm in the Tucson Mountains. I thought Ophelia might come back from wherever she had gone and seek refuge in the pack rat hole. Much to my surprise, I found her emerging from the partially collapsed hole, covered with mud. Apparently she had been hiding in there the whole time.

I realized I had to give her up. I wasn't planning on making a 100 year commitment when I "rescued" her. I called the Desert Museum to ask about bringing her to them. I got no answer on Sunday. I called again on Monday, and got call back from a volunteer. She said the Desert Museum, the only official tortoise adoption program in Tucson, probably couldn't take her because they have so many tortoises already. She assumed I had removed this tortoise from the desert, and said I should take it back where I found it. I said returning it to an abandoned house wasn't an option. She said she might be able to get a tortoise program in Phoenix to take her. Oh my gosh, what have I gotten myself into? But Ophelia was my responsibility now.

Fortunately for Ophelia and me, the Desert Museum was sympathetic to my misguided actions, and agreed to take her. Steve and I took her to the Desert Museum and gave her to Renee, the herpetologist. When I told Renee over the phone that Ophelia's shell was four inches long, Renee said she was a baby. However, when she saw Ophelia, and counted the growth rings on the hexagons on Ophelia's shell, she said Ophelia was eight to ten years old, but severely malnourished. I had noticed that the hexagons on Ophelia's shell were raised, not flat like the photos of desert tortoises I had seen. She said those bumps are called pyramiding, and they are the result of a poor diet. How sad! It's also possible she is a he, because the males don't get their concave bellies until they are about eight to ten inches long.

I hope Ophelia is learning to eat alfalfa and other healthy foods. The Desert Museum will keep her until she is large enough that she won't easily get stepped on. Then they will try to find her a home with responsible caretakers. I will call in a few months to see how she is doing.

Buying a Condo in Tucson? Consider This.

Most of the condo listings in Tucson indicate that a buyer can purchase the condo using FHA financing. Most of the time, this is not true.

The Department of Housing and Urban Development (HUD), the agency that insures FHA mortgages, established some rules last year that created huge liability for condo complexes that want to allow FHA financing. As a result, only three condo complexes currently qualify for FHA financing.

I explained the risks of obtaining HUD certification in my 7/23/11 blog post.

The eligible complexes, and the date their HUD certification expires are 1) Midtown Condominiums, 3646 E Blacklidge Dr., 9/28/2012, 2) Pinnacle Canyon Condominiums, 6/21/2013, and 3) Tierra Catalina Condominiums, 3201 E Skyline Dr., 4/7/2013.

Condos Eligible for FHA Financing in Tucson.

Dirt Road Blues

Have you ever thought it would be nice to live way out in the desert on a dirt road? If you are contemplating such a move, be sure to find out who is responsible for maintaining the road. When a summer monsoon turns the only route to your house into quick sand, who will put it right? Do you think it's 1) Pima County, 2) A helpful neighbor who likes to play with his Bobcat 3) A contractor hired by the people who live on the road or 4) Nobody?

If you assumed it wasn't number 4, you may have a hard time getting home. I just got this from loan officer extraordinaire Catherine Ellinwood with Fairway Independent Mortgage:

If a property is on a dirt road, you’ll want to know whether the road is county-maintained or has a private road maintenance agreement. Recent lesson learned: it’s not enough for the seller to say the county goes by once in awhile and grades the road, as the road in question turned out NOT to be county-maintained. Conventional, VA, FHA, and USDA loans will require some type of road agreement. So if you’re buying a property on a dirt road, you’ll want to know in advance if the road is not maintained. This was not really an issue before 2011, but now all dirt roads must be county-maintained or have a maintenance agreement on the preliminary title report if it’s a private road.

Pima County has a website that shows all the roads they maintain. Determining the maintenance status of a particular road seems like a pretty byzantine process, so call Catherine (520-954-1907) if you want her to walk you through it.

Why do I say Catherine is a loan officer extraordinaire? In order for one of her customers to buy a house on a dirt road, all the homeowners on the road had to sign a road maintenance agreement. Catherine and the buyer's agent went door to door to get the signatures and saved the deal.