As home loans get harder to obtain, the number of renters increases, and so will rent

Come October 2011, buyers’ purchasing power is will reduce even further:

• The FNMA (Fannie Mae) loan limit will be reduced from $729,000 to $625,500, pushing more buyers into jumbo loans for which there are fewer lenders and consolidators.

• Jumbo loans require 6-12 months of reserves, which is more than FNMA requires.

• Interest rates will likely rise, making qualifying for a loan even harder.

• Mortgage insurance for FHA loans will increase by 30% in April 2011.

• Credit scores are on the decline.

• As home equity has vanished, buyers who want bigger homes will not have the equity from the sale of their current home to put toward the new purchase, which will likely require a 30% down payment.

What does this means?  More people staying in their homes, more people unable to qualify for a loan, more people renting instead of buying.  This is all true before we get to the conversation of the recurring suggestions in Congress that the mortgage interest deduction should be reduced or eliminated.  There are times when it’s good to be a landlord. This is one of them.  And, yes, we do investment property loans, too.  Give us a call.

Review your refinancing opportunities

What we’re talking about here is loans over $730,000, which are those that are not bought by Fannie Mae and Freddie Mac.  Just because the loans are available doesn’t mean that everyone gets one.  You still have to go through the relatively stressful process that loan underwriting is these days and prove that you can pay the loan back (and then some, it seems).  Expect to produce documentation over and over again, expect your appraisal to come in low, expect the lender to want to see 20-40% in equity.  It’s a tedious process and potentially worth it.

These conditions are strict compared to five years ago, but the fact that more loans are being made is a good sign.  While perhaps not a loosening of credit standards to something more reasonable, it is a loosening of credit.  The reason that is significant is that it means the secondary market for mortgages is starting to show signs of life again.

To oversimplify (remember, this is a blog), there are two major “consolidators” of mortgages—(1) the government agencies that buy loans at $730K and below and (2) private consolidators that buy loans at $730K and above.  When these “consolidators” buy mortgages from lenders and securitize them, they infuse the lender with cash to make more loans.  Expand your geographical horizons for a minute to remember that there are far more loans in the country made for less than $730K than there are over that amount.  In the recovery from the “financial meltdown,” the under-$730K consolidators have had more opportunity to re-establish confidence in the buyers of these mortgage securities, so the consolidators have had an easier time loosening up money for loans at $730K and lower.

The larger-loan consolidators have lagged behind simply because there is less of a secondary market in which to sell these loans.  To see that more of these loans are being made suggests that there are more confident buyers of larger-mortgage securities, which in turn gives the larger-loan consolidators money, which in turn allows them to buy more loans from lenders, which in turn allows those lenders to lend again to someone else that needs a loan for $730K or higher.

While the days of getting a mortgage by putting a fog on a mirror are nowhere close to returning, this sign of life in the jumbo market is a good thing.  If you couldn’t refinance before, you might want to see if you should refinance now.

It’s a great act of love for your family

I understand first-hand the importance of getting these documents done.  My mom died when I was 21, and my sister and I were the beneficiaries of her estate (for which I am deeply grateful) but were also the beneficiaries (victims?) of some pretty poor choices in her estate plan because she got lousy advice.  My grandfather died and made me the executor of his estate, but then I watched my aunt usurp that planning because a trust was not put into place.  My cousin died and made me his sole heir and I had to probate his estate in Georgia.  Then, a very close personal friend of mine dropped dead of a heart attack at 43, and he was 10 days away from signing his trust documentation.  Took me three years to probate that estate.  As you can see, I come from a long line of dead people.  Let me tell you:  No matter how much you think your family loves you and loves each other, there is no worse combination than death, family and money.  I’ve seen very few exceptions. Death has an uncanny ability to bring out the worst in everyone.

The best thing you can do for your loved ones is get your estate planning done.  It will save them the headache and heartache of wondering what it is your wishes would have been for you when you died, not only what to do with your corpse but what to do with your kids, your pets, and your assets.   It will save them a ton of money and pain of the probate court system.  We live in a very wealthy part of the world where it will be easy to accumulate $1 million or more over 30 years.  You need to have your estate planning in order.  Yes, the laws are in flux right now. But that does not excuse you from making sure that you’ve done your estate planning.  Hire a good lawyer.  Pay the fee.  Get it done right.  Get your assets titled into your living trust.  Do it today.

What’s wrong with sharing real estate?

The problem with sharing real estate ownership or any other illiquid asset is the fact that it’s illiquid.  If you want out for whatever reason—there’s another opportunity, you don’t like the investment anymore, you need the cash, you get divorced, your partner dies, you have to fund college education, or whatever the reason—you can’t unload that asset without the consent of the other owners.  If the other owners do consent but still want to own their share, you now have an asset with little market viability.  Who’s going to want to own property with your previous partners?  Probably very few.  How will you sell?  You probably can’t.

Then there’s the flip side.  What if you don’t want to sell and your partner does?  Now you might have to sell an asset when it doesn’t work in your financial plan.  You might have to be in business with a new owner.  You might have to buy out your partner(s) when you don’t have the cash to do so.  This will create a layer of stress in your life you don’t need right now.

Any exceptions?  Not really.  I wouldn’t share a mountain chalet, a beach cottage, or any vacation property.  I wouldn’t share an investment property.  I wouldn’t share with friends, family, or colleagues.  The only time I’ve ever seen this happen successfully is in two instances:  (1) a business arrangement among friends to buy, fix, and flip (and they got very lucky on timing, picked a good property in a great location, and did a phenomenal upgrade); and (2) two family members bought a vacation home to share, were both very wealthy, and when one wanted out, the other had no problem buying out the share of the other owner (but again, good timing helped—the cash was available).

This is the same reason I’m not wild about REITs or TICs unless there’s an obvious exit strategy that can be executed at any time.  Real estate ownership shares:  Just don’t do it.

As a member of the Estate Planning Team, I can work with clients to implement a tax strategy called the Deferred Sales Trust, which just got its private letter ruling from the IRS this summer.  This strategy allows owners of highly appreciated assets—real property, businesses, private stock—to sell those assets and defer the capital gains taxed owed. Those clients can then earn money on the money they owe the government and can come out ahead financially with proper planning.  Even in a down economy.

How the DST works

The process starts with a property owner transferring ownership of the property to a dedicated trust, which promises to pay the client with an “installment sales contract.”  The trust then sells the property, stock or other capital asset to the buyer. The contract promises payments to the owner or their trust and those payments can be structured to continue to future generations with additional estate planning.  The tax code does not require payment of the capital gains tax until the seller starts receiving installment payments.  The DST is not unlike a no-risk “seller carry-back” financing structure.

The Deferred Sales Trust has the ability to generate substantially more money over the long run than a direct and taxed sale. It is also superior to a direct installment sale as the concerns of a defaulting buyer are eliminated.  Check it out:  www.mydstplan.com/jlanning