Minnesota Real Estate Investors Association, Inc.

Yah… Your mortgages are going to cost you more to help offset the cost of people who have bad credit, isn’t that wonderful?  Yes, it’s true, beginning May 1, 2023, upfront fees for loans backed by Fannie Mae and Freddie Mac will be adjusted because of changes in the Loan Level Price Adjustments (LLPAs).

Example, beginning May 1, 2023, a buyer with a good credit score of 750 who puts down 25% on a $400,000 home would now pay 0.375% in fees on a 30-year loan, or $1,125, compared to 0.250%, or $750, under the previous fee rules, which is an increase of $375.

Meanwhile, a buyer with a credit score of 650 putting a 25% down payment on a $400,000 home would now pay 1.5% in fees on a 30-year loan, or $4,500. That compares with 2.75%, or $8,250, under the previous rules, which is a decrease of $3,750.

It is true that the increase to buyers with good credit is a small percentage of the overall loan and the borrowers with poor credit are still paying more, albeit less than before.  However, why should those of us who have worked hard and shown prudent money management and done without some things to build up good credit have to pay to lower the costs of those who have not suffered as much as those of us that have built good credit.

Over the past, the most common question I have heard is “what are you going to do about the Dodd-Frank Act”?  And my common responses have been, “not worry about it” or “understand it and work around it”.  So what is your response, and will you survive not that the dastardly bill that is now in full affect?

Many people are worried that this new law that has been in effect since January 10, 2014 will put them out of business.  There are many new regulations pertaining to lending and one segment in particular that affects investors the most, especially in the coming years with our current economic situation and that is seller financing.  People are worried that these new regulations will have a dramatic impact on our business, and I have heard several people predict that parts or all of the Dodd-Frank law will be repealed.

I don’t put a lot of faith in congress repealing anything these days.  Look at Affordable Health Care for instance; does it look like that will be repealed?  No, so why would you expect the Dodd-Frank Act to be any different?  The Dodd-Frank Act was a response to the sub-prime mortgage meltdown crisis to put the blame on a segment of the economy that was politically acceptable and to repeal it now would be an admission to that fact.  In an attempt not to offend certain political ideologies here, I will not get into the cause of the sub-prime mortgage meltdown crisis, or the political reasons for appealing the Dodd-Frank Act, but I will explain what it means to us as investors.

Here is the simple break down, as I understand it.
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This spring the market was chugging along just fine.  Then a 30 year fixed rate loan increased to just under 5% and the market came to a crashing halt. During the months of August and September, one of our largest local lenders saw a 72% decline in new and refinance mortgage applications and retail, renovated properties seemed to just sit there if they were priced a little high. 

Interested rates dropped by a mere half percent and houses that were sitting there started selling again and mortgagee applications returned to the same levels as they were in June and July.

I am assuming that the Feds will keep rates low for the foreseeable future because the economy is still too fragile, as evidence by less than a 1% rate increase in the real estate market.

Beginning on January 1, 2013, a new real estate capital gains tax will take effect to pay for Obama Care. When Obama Care was passed back on March 23, 2010, one of the funding measures was to take from Medicare.

“Bet you didn’t know that, did you?”

So how are they going to recover those costs for Medicare that they stole for Obama Care? Simply increase taxes on real estate and other interest and dividends. This new 3.8% tax is expected to raise $210 billion over the next 10 years.

The new 3.8% Tax Rate applies to:

• Individuals with adjusted gross income (AGI) above $200,000
• Couples filing a joint return with more than $250,000 AGI

Types of Income:

• • Interest, dividends, rents (less expenses), capital gains (less capital losses)

The new tax applies to the LESSER of:

• Investment income amount
• Excess of AGI over the $200,000 or $250,000 amount
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We knew this was coming, just a couple of weeks ago, BoA (Bank of America) sent out a letter to 1,000 customers who are currently in default offering them the option to rent the property back from BoA at fair market rent if they simply deed the property back to BoA in lieu of a foreclosure. This will only add to the currently unknown number of properties in the Shadow Inventory.

On Thursday April 5, 2012 the Federal Reserve issued a policy statement on the rental of REO’s.

The general policy of the Federal Reserve is that banking organizations should make good-faith efforts to dispose of OREO properties at the earliest practicable date. Consistent with this policy, in light of the extraordinary market conditions that currently prevail, banking organizations may rent residential OREO properties (within statutory and regulatory holding period limits) without having to demonstrate continuous active marketing of the property, provided that suitable policies and procedures are followed. Under these conditions and circu Read More...

On Friday September 2, 2011, the federal Government sued 17 big banks for selling mortgage-backed securities to Fannie Mae and Freddie Mac after those securities turned toxic.  This is just another example of the underling disease infecting this country.

In the 90’s, the federal Government was pushing banks to make it more affordable to first-time home buyers and lower income families to qualify for a mortgage to promote their American Dream agenda of everyone in America owning a home.  At first the banks pushed back and said this was a bad idea, because a good percentage of the borrowers would never be able to pay the loans back.

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Have you been making offers on REO’s only to get frustrated that none of your offers are getting accepted? I feel your pain and frustration. This is something that I have also been struggling with.

So why are our all of our offers getting rejected at such a high rate? There are a few reasons that I can think of. First of all, the banks have received so much federal bailout money that they are not hurting as much as one would think; therefore they are not pressured to liquidate their inventory fast. In fact a lot of their inventory never even makes it to the market, but rather quietly slides into the “Shadow Inventory” category.

Secondly, we have been competing with first time home buyers who are looking for a deal and beginning investors who are looking for rentals and plan on doing a light rehab rather than a full blown rehab, which enables them to offer less than most of us do. But don’t feel bad, the dirty truth about a lot of these investors is that their inexperience causes them to get hurt financially in the long run. I get calls from these types of investors all the time asking me how to get out of trouble with these properties. Unfortunately the only thing I can tell them is that they have no choice now but to hold on to the property for the long run and hope that the market value increases to recover their losses. I have even had two recently that came to me for help after they out bid me on the same property. Opps... 
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The new headlines catch phase is “Robo Signer”. These robo signers have been signing foreclosure documents at a rate of up to 1 document per minute. That’s 5,000 – 10,000 per month. Everyone knows that it is not physically possible for these robo signers to have read every document. That is the reason everyone is calling for a moratorium on foreclosures. Or is it?

If everyone was upset with the fact that these robo signers were not reading all the documents, then why wasn’t everyone upset that congress has passed health care and over a trillion dollars in stimulus programs while all along admitting that no one could possible read all of it before voting on it. So ask yourself, are they really upset that the robo signers didn’t read the documents. If you are honest with yourself, then the answer would have to be no.

So what is the real reason everyone wants a moratorium on foreclosures. Politics… In 3 weeks there is a major midterm election and this could be one of the most historic elections in our country. The politicians on both sides of the isle are looking for something to blame and point fingers at to make themselves look like they care and that all our problems are the banks. 
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Over the last few years we’ve been predicting records were going to be broken for years to come and that it would be a uniquely incredible environment for real estate investors. Today RealtyTrac issued a press release for the month of August that illustrates the fulfillment of this prediction in no uncertain terms.

Here are the key numbers to note:

• In August, 1 in 381 housing units received a foreclosure filing.
• RealtyTrac has seen 1.2 million repossessions so far in 2010.
• Before the housing bubble burst, in 2005 only 100,000 houses became REO’s.
• 95,364 property foreclosures in August, a historic record.
• An increase of 25% since the start of the 2010.
• In August, 96,469 homeowners receive a notice of default.
• 1% decline in the number of NOD’s filed in July.
• A 30% decline since August 2009 after a peak of 142,064 NOD’s issued in April 2009.

For a complete list of notable numbers you’ll find them all just above the comment section. Our initial prediction was that with the drastic turn in the economy. This would create a flood of opportunity for real estate investors based on the sheer volume of properties vulnerable to a declining economy. 
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Let me start out by saying that I generally try and stay away from political comments. I prefer to stay on topic and discuss the facts, but this time I have no choice but to comment on politics. This latest round of political games has my blood boiling and I can’t hold back any longer.

Congress just passed another $1 billion dollar emergency homeowners relief fund. You can read all about it on MarketWatch, here is the link: www.marketwatch.com.

Were shall I start?

I guess I will start out with the phrase “emergency homeowners relief”. Emergency, really??? The emergency was almost two years ago when they pasted the TARP funds to help, if you remember, homeowners and bail out the banks and financial institutions, but once the TARP funds were approved by congress, they decided it would be better to just buy stocks in the companies they chose to keep solvent. It didn’t seem to be that much of an emergency to congress in 2008, otherwise they would have spent that money on what they told us was the reason in the first place to pass the TARP funds. I think the only reason it is an emergency right now, is because the midterm elections are in 4 months.

So now that we understand the congressional definition of an “Emergency” we can then start to talk about the facts. They are as follows:  
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