Financing


Open Road   I received a text on May 31, 2013; if accelerator clauses are legal, a good idea? etc.  That’s funny, I had the same question posed to me, only not by text, years ago.  Here is what I said in 2004, as in 9 years ago.  Remember 2004?

Accelerator Clauses

   Accelerator clauses are appearing in buyers’ offers.  “Buyer will pay $___ over any other offer better than theirs.  Seller must provide Buyers copy of better offer.”  Selling agents are declaring that this should ‘guarantee’ a buyer to be in first position.  Listing agents are interested in accepting these clauses to ensure the highest price in a bidding war.  There are forms and clauses being exchanged.

The issue is the meaning of the clause and what terms are being accepted.  The lower offer may have different financing, closing costs, escrow dates, lease backs, repair request, etc. Thus when the clause is triggered….it renders, potentially, another purchase agreement in first position. But is that in a seller’s best interest? What other terms differ between the former highest bid and now the Accelerator Clause triggered bid?

In a recent scenario a listing agent entertained 4 offers, all different prices, close dates, finances, closing costs and different styles of buyer.  The buyers varied from investor group, independent flipper, and first time buyer. If the Seller accepts the accelerator clause of one of the buyers, what does it mean?  Does a buyer now have to change their terms of financing to meet another offer?  As to financing, this will not necessarily work. Does the Buyer have to close earlier or later?  There is little meeting of the minds as to most aspects of the sale, all very important aspects, other than the purchase price.

By accepting the ‘accelerator clause’ the Seller may loses their ability to choose what they feel is the ‘best offer.’  From a seller’s perspective, did they get enough? What if a seller does not accept the Clause and counters All Parties for a highest and best to be ‘reconfirmed,’ by the Seller.  From a buyer’s perspective you have agreed to a higher price, was the other offer even feasible? Assuming it is valid, was it a possible offer? Was the other buyer not concerned about the price due to an appraisal contingency?  Does the Clause Buyer have that protection?.  The now accepted offer triggered by the Clause may or may not be subject to appraisal.

The accelerator clause does not solve much.  It is attractive because it gives hope. The Accelerator Clause is a cousin to the lease option in the family of bad ideas.  In all markets, it is not just price.

  Darren Welsh, 2004

So, that was my opinion in 2004.  Not much has changed.  Except, as fair warning, the Nevada Real Estate disagrees with Accelerator Clauses for different reasons.  In the 2012 Third Edition Nevada Law And Reference Guide, p. 86 (§A(4)(c)) the NRED hints Accelerator Clauses may not be fair dealing.

“Acceleration” Clauses (not what you think!) – The Division has stated it is a violation of fair dealing to insert what it identifies as an “acceleration” clause. This is not the “acceleration clause” found in general contract or financing law. According to the Division, an acceleration clause is a clause in which the offeror promises to pay a certain set amount above the highest offered sale price and usually provides for a maximum or cap amount. The Division’s example is, “I will pay $2,000 over the highest offer up to $300,000.” This type of clause automatically gives one offeror a stated advantage over other offerors and may not allow fair dealing for the other offerors.”

“Though the previous two activities (disclosing offer terms and inserting an acceleration clause) are not a direct violation of any law or regulation, and there is some controversy regarding this, nevertheless, the Real Estate Commission has found these practices to be highly suspect.”

O.K.…per NRED, they are are not an outright violation, but apparently frowned upon as it gives one buyer a “stated advantage.” Clear as mud. I am not sure where the NRED is going with that, considering the fact that merely offering a higher sales price is a stated advantage.  Nonetheless yet another reason the clauses are problematic.

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As you know, there is a Federal “Home Affordable Foreclosure Alternatives Program” (in other words short sales) which is known as “HAFA”

As of June 1, 2010, Freddie Mac  & Fannie Mae (both government sponsored entities or (GSE)) have issued their HAFA programs.

Please see my first reporting on HAFA from 12.09.09 by clicking here ==>HAFA

Is your loan Freddie or Fannie? You can…   Look it Up Here

Here is a break down, the entire rules can be read here for Freddie Mac  & here for Fannie Mae

Freddie Mac

Fannie Mae

Fred Brochure…
 GSE Freddie Mac HAFA Brochure   

Fannie Brochure…
GSE Fannie Mac HAFA Brochure
Fred Effective Date…August 1, 2010, expires December 31, 2012. 

Fannie Effective Date…August 1, 2010, expires December 31, 2012. 

Fred Commission

…from the Short Sale Agreement Real Estate Commissions…
We will allow to be paid from sale proceeds, real estate commissions of _____ percent of the contract sales price, to be paid to the listing and selling brokers involved in the transaction. Neither you nor the buyer may receive a commission. Any commission that would otherwise be paid to you or the buyer must be reduced from the commission due on sale. [Optional text:]  Please note:  We have retained a vendor to assist your listing broker with the sale.  The vendor and your listing broker will work together on your behalf to facilitate the sale process. [Choose one and delete unnecessary text.]  [The vendor will be paid from sale proceeds [$ ________] OR [an amount equal to ____% of the sales price].] OR [The vendor will be paid by us outside of the sales transaction.]

 

Fannie Commission…from the Short Sale Agreement Real Estate Commissions…We will allow real estate commissions as stated in the listing agreement between you and your broker, not to exceed six percent (6%) of the contract sales price, to be paid from the gross sale proceeds to the listing and selling brokers involved in the transaction. Neither you nor the buyer may receive a commission. Any commission that would otherwise be paid to you or the buyer must be reduced from the commission due on sale.  Fees of a third party to negotiate a short sale with the servicer (commonly referred to as “short sale negotiation fees” or “short sale processing fees”) may not be paid from the sales proceeds. 

  

Fred Costs“Borrowers cannot make cash contributions or promissory note obligations to satisfy either the first lien or subordinate liens.” Fannie CostsYou may not charge borrowers any fees for participating in HAFA.”
Fred DeficiencyUpon completion of the HAFA Short Sale or HAFA Deed-in-Lieu all mortgage debts are extinguished.  Fannie DeficiencyThe mortgage lienholder determines in advance the minimum acceptable net proceeds it will accept as a short payoff in full satisfaction of the total amount due on the first mortgage loan. 
Fred Borrower Incentives…$3,000 will be paid to the borrower to help with relocation expenses after a completed HAFA Short Sale or HAFA Deed-in-Lieu.   

Fannie Borrower Incentives…Short sale or DIL – $3,000 to assist with relocation expenses. 

Fred Subordinate Lien Holder Incentives…Six percent of the outstanding unpaid principal balance of each subordinate lien in order of lien priority, with an aggregate total of $6,000 to all lien holders, will be offered in exchange for releasing their liens and satisfying the underlying debts. 

Fannie Subordinate Lien Holder Incentives…Not to exceed $6,000 in aggregate. Each lienholder in order of priority may be paid 6% of the unpaid principal balance of its loan, until the $6,000 cap is reached. 

Fred HAFA Short Sale Documents… HAFA Short Sale Agreement  is the Servicer/borrower agreement that authorizes the borrower to sell the mortgaged property to a third party and have Freddie Mac accept the sale proceeds in full satisfaction of the mortgage…. HAFA Approval of Short Sale, must be completed by the Servicer and sent to the borrower when they consent and approve a borrower’s request for approval of a HAFA Short Sale…. 

HAFA Disapproval of Short Sale, must be completed by the Servicer and sent to the borrower when they disapprove a borrower’s request for approval of a HAFA Short Sale.

Fannie HAFA Short Sale Documents…HAFA Short Sale Agreement  
Defines the terms and conditions of a short sale, including the following:
1. listing agreement, maximum real estate commissions and marketing terms;
2. servicer and borrower obligations and duties;
3. acknowledgement of risks, conditions, and contingencies; and
4. conditions for early termination….HAFA Request for Approval of Short Sale (“RASS”)
Defines the terms and conditions of a short sale transaction acceptable to the servicer and, together with the sales contract, provides settlement instructions to the borrower’s settlement agent….

HAFA Request for Approval of Short Sale without Short Sale Agreement
Must be used when a borrower submits an executed sales contract before the servicer and borrower have entered into a HAFA Short Sale Agreement.

Fred Eligibility…60 days late and have cash reserves less or $5,000 or 3 times their monthly mortgage.Borrowers must have first been considered for a Freddie Mac HAMP .Borrowers may be in foreclosure, in pending litigation involving the mortgage, or in active bankruptcy.

 
 

 

Fannie Eligibility.It’s a handful….read page 3 here===>Fannie Eligibility  

Fred Credit Bureau Reporting…”Servicers must continue to report a “full-file” status report to the four major credit repositories in accordance with the Fair Credit Reporting Act and credit bureau requirements as provided by the Consumer Data Industry Association (CDIA).” 

Fannie Credit Bureau Reporting…”We will follow standard industry practice and report to the major credit reporting agencies that your mortgage was settled for less than the full payment. 

 

Thank you for reading, this is my 100th blog.

MemorialDayLoans standards are high right now.  Many standards being met were always there but are being adhered to on a more consistent basis.  I have had a number of questions lately about loans being held up at the last minute for missing information.  However, the information are items such as, “Termite/Pest Inspection,” located on page three of the RPA.  

Here’s the issue.  If you request the inspection on behalf of your buyer, the lender will seek that inspection out and ensure that it was gained.  This follow up by the lender is good, and for the benefit of the buyer.  But this type of follow up may not be something to which you are accustomed.  The Receipt & Acceptance or Waiver of items/information concerning Purchase  was created to assist you in minding your sale as a result of escrow and lenders not collecting information we felt you and your buyer should be concerned about. 

But note, if the inspection requested is not gained, the lender will now require you to have your buyer sign that they are waiving a right that they requested within the RPA.  This can case unnecessary delay. 

The more organized approach to a sale is to discuss with your client the inspections they desire.  If they want the inspection, or think they do, but do not perform later – fine – request the inspection and deal with its non-occurrence.  However, be careful not to simply check every inspection if your client did not request it.  Have a meaningful conversation with your client to discover which inspections she believes she will be gaining.  It can make their closing smoother.

 

Tomorrow the President of the United States will unveil his complete eligibility details.  So far this is what we know per the Whitehouse Blog:

http://www.whitehouse.gov/blog/09/02/18/Help-for-homeowners/ 

Q: Which mortgage borrowers qualify?

The Homeowner Affordability and Stability Plan is limited to loans held or securitized by Fannie Mae or Freddie Mac, which as of January 1, 2009 have been capped at $417,000 for most areas of the United States and $625,500 for what are called “high cost” areas. There are higher limits for Alaska, Guam, Hawaii and the U.S. Virgin Islands. Mortgages that are linked to Fannie and Freddie are known as “conforming” loans.

Q: If I’m current on my mortgage but my home has decreased in value since I bought it, can I benefit by refinancing?

Perhaps. First, you have to hold a Fannie or Freddie conforming loan. Second, your house can’t be too far underwater. The Treasury Department says: “Eligible loans will now include those where the new first mortgage (including any refinancing costs) will not exceed 105 percent of the current market value of the property.”

Translated: If you owe more than $210,000 on a house that’s now worth $200,000, you’re out of luck.

Q: Couldn’t I already refinance a Fannie and Freddie mortgage?

Yes, but there was a specific loan-to-value ratio that was required. A senior administration official who did not want to be identified said on Wednesday that the loan-to-value criteria would be waived.

Q: Okay, let’s say I meet those qualifications — what does this get me?

The idea is to shift home-buyers (really home-debtors) from riskier adjustable-rate mortgages into traditional 15-year or 30-year fixed-rate mortgages without prepayment penalties. This means that your current payments could actually increase if you refinance, especially if you have a “teaser” rate, so choose wisely.

Q: If I’m current with my mortgage and use this program to refinance, will this reduce how much I owe?

Nope. It’s just designed to aid refinancing — meaning that if you have a 7 percent or 8 percent mortgage and haven’t been able to refinance, you now stand a better shot of doing it. You’ll still owe the same amount in debt. (Actually, because of refinancing costs, you’ll probably owe a few thousand dollars more.)

Q: So if my house has fallen by more than the approved amount, or I don’t have a confirming mortgage because I live in a more expensive area, and I’m not having trouble making payments, where does that leave me?

Unless the March 4 announcement contains some surprises, you’re left with the same options that you had before Wednesday’s announcement.

Q: The above answers are interesting, but they don’t apply to me because I’m behind on my mortgage or struggling to make payments. How am I affected?

This is a bit more complicated. If you’re behind on your payments or at risk of imminent default, you may qualify for a payment reduction. You need to (a) have a conforming mortgage; (b) have a monthly mortgage payment greater than 31 percent of your monthly pre-tax income; (c) live in the property as your primary residence.

Also, borrowers with “high debt levels,” meaning 55 percent of their pre-tax income including mortgage payments, car loans and credit card debt, will be required to enter a government-approved counseling program.

Q: If my monthly mortgage payment is less than 31 percent of my gross income, and my house is badly underwater, do I qualify?

Apparently not.

Q: If I meet those three conditions and I’m behind or struggling, then what?

There’s no one-size-fits-all rule. Mortgage lenders can choose to — but, as of the time this was written, are not legally obligated to — reduce interest rates or even lower the amount owed. If you think you qualify, the Treasury Department says you should wait until early April to see if you’re contacted automatically by your mortgage lender. If you’re not, call them directly.

Q: How does this idea of payment reductions work?

Details are still unclear, but it seems as though lenders that choose to participate in the program are supposed to reduce interest rates so monthly payments do not exceed 38 percent of gross income. Then the Treasury Department will kick in taxpayer dollars to bring the payments down to 31 percent of income, and those rates will last for five years.

Q: What happens after five years?

After five years, according to the Treasury Department, the “mortgage payment will adjust upward at a moderate, phased-in level.”

Q: What information will I need when I talk to my lender?

You’ll need information about the monthly gross income of your household including recent pay; stubs if you receive them or documentation of income you receive from other sources; your most recent income tax return; information about any second mortgage on the house; payments on each of your credit cards if you are carrying balances from month to month; and payments on other loans such as student loans and car loans.

Q: Does this create an incentive for homebuyers to run up large balances on credit cards or under-report income before contacting their lender?

Yes. This is what economists call “moral hazard,” which risks rewarding behavior that should be discouraged.

Q: If I understand this right, if I’m current on payments, I don’t qualify for a reduction in the amount owed (a principal reduction). But if I’m behind on payments or claim default is imminent, I do. Is that right?

Yes. The caveat is that it appears that borrowers who remain current get an “incentive payment” of $1,500 if they remain current through their loan modification. They also qualify for a bonus of $1,000 a year for five years if they keep up with payments (the lender gets $1,000 a year too).

Q: You said above that only owner-occupied homes qualify, but how will banks verify this?

Different banks are likely to use different techniques. Some banks may send a certified letter, and others may make a physical visit. There seems to be no requirement that you live in the property today, so it’s reasonable to expect some vacant homes to be quickly reoccupied in the next few weeks or months.

Q: What incentive do lenders have to participate?

Foreclosure is a lengthy and expensive process; a front-page article in Wednesday’s Wall Street Journal profiling judges hearing foreclosure cases in Lee County, Fla. noted that many cases have been pending for months or longer. Banks may decide they’ll lose less money on a property — especially if home prices eventually rise — by renegotiating the terms of the mortgage rather than taking it to foreclosure.

This is already happening. An analysis by Alan White, a Valparaiso University law school professor, showed that half of the voluntary mortgage modifications already result in lower monthly payments — and that the average foreclosure loss on a first mortgage in November 2008 was $145,000. The new incentives from the Feds may be enough to convince more banks to agree to reductions in interest or even principal.

Q: Will this new government program aid housing speculators?

Perhaps. If a speculator claims that a house with an underwater mortgage is his primary residence, he’d obviously benefit. Unless the final rules specify otherwise, a speculator could shift primary residences every few months and try to reduce payments on each property. Also, multiple-unit homes with up to 4 units qualify for the program.

Q: How long will this program last?

After three years from now, no more homeowners will be eligible.

The tax credit is back, that is good news.  It is a follow up to my blog Housing and Economic Recovery Act of 2008, Part I   and part II   and part III .

I asked a local accounting firm which I recommend to give us some tips:

Diane W Clough Cpa Ltd, 6130 W Elton Av, Las Vegas, NV

1 (702) 870-0888         cloughcpa@att.net

Thank you Diane.

 FIRST TIME HOME BUYER $8,000 TAX CREDIT

  • $8,000 TAX CREDIT (NOT DEDUCTION). A tax credit lowers your tax bill dollar for dollar. A deduction shaves money off your taxable income, so the value depends on your tax bracket. The tax credit is 10% of the home’s sale price with a maximum of $8,000. Here is a TABLE  provided by National Association of REALTOR® showing a comparison between the $7500 Tax credit from 2008 and this $8000 credit in the stimulus bill.explaining the difference between the $7,500 and the $8,000.
  • NO PAY BACK. This credit existed last year, there was a requirement that it be paid back, interest free of 15 years.
  • CLOSED IN 2008? You closed in 2008? You are stuck with the old model, and will have to pay back the credit, but there is talk of this debt being forgiven.
  • WHEN TO BUY. People who buy homes between Jan. 1 and Dec. 1 of 2009 year may qualify for the $8,000, no-repayment credit.
  • WHAT IS A FIRST TIME BUYER? Either they have never owned a house before, or they haven’t owned or co-owned one during the three years preceding the date they close on their 2009 purchase. Carefully planning the timing of a closing could be worth thousands of dollars.
  • HOUSEHOLD INCOME TEST. The income limit for single taxpayers is $75,000; the limit is $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced to zero for taxpayers with a MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.  The current program also removes last year’s prohibition against purchases financed with state and local tax-exempt mortgage revenue bond programs.
  • PRINCIPAL RESIDENT. The house you buy must be used as your principal residence, not a second home or investment property. But that residence can take a wide variety of forms, including “houseboats, housetrailers, cooperative apartments, condominiums,” among others, according to IRS rules.

 
 

If you are not aware the U.S. Department of Housing and Urban Development (HUD) is set to lower the Mortgage Limit amount for FHA loans in the Las Vegas Valley. Click HERE for an easy FHA Loan Limits Calculator.  Just type in Clark for the county and Nevada for the state, you can choose the time frame of 2008 or 2009 to see the difference coming.

 

These changes will limit what can be purchased with an FHA loan.  The new limit will be approximately $287,000 (down from $400,000).  There is a call to action from the National Association of REALTORS® to contact your Senators and Representatives of Congress to support a plan that would render FHA loans at an amount closer to their current limits permanently, approximately $400,000. 

 

At this TAKE ACTION WEB SITE you can find more information and a very easy way to send a letter to your representatives.

I encourage you to take the time to visit the above site Contact Congress today and ask them to include National Association of REALTORS®‘s Four-Points in the next stimulus package. 
 
National Association of REALTORS® Four Point Plan

The most recent economic stimulus bill, the Emergency Economic Stabilization Act, was a good first step towards stabilizing our nation’s economy.  Unfortunately, a number of the Act’s provisions have not proven to be as useful at stabilizing the nation’s housing markets as was first thought.

Congress may consider second economic stimulus bill this month.  If they do, there are a number of changes that could help to provide more stability to the nation’s real estate markets which most agree is a necessary step towards recovery.

NAR has urged Congress to include the following provisions in any future legislation:

·      Make the $7500 tax credit available to all purchasers and eliminate the repayment requirement. The credit’s limited availability and required repayment terms have severely limited the credit’s appeal to potential homebuyers. As a result, the credit has not been widely used or proven effective at stimulating sales.

·      Make the 2008 FHA, Fannie Mae and Freddie Mac loan limits permanent. New rules for 2009 would significantly reduce the FHA, Fannie Mae and Freddie Mac loan limit from their 2008 levels. Now is not the time to limit the availability of affordable mortgages.

·      Get the Emergency Treasury bank relief program back on track by targeting more funds to mortgage relief efforts and increasing efforts to mitigate foreclosures. Don’t just give the banks unrestricted cash. Make the program work to improve mortgage and housing markets as it was originally intended.

·      Permanently bar banks and banking conglomerates from engaging in real estate brokerage and management. The banks have proven they have enough to do to simply properly manage their current lines of business. Do we really want them to manage on the home buying process? Imagine what could have been the situation now if they already had the added ability to engage in real estate sales.

 

 

 

As always, we do not advise on taxes.  But for your personal information I wanted to address a change that will occur with the new Housing and Economic Recovery Act of 2008.

 Housing Tax Exemption.  As you all know under the current law, until the President signs the Housing and Economic Recovery Act of 2008, homeowners can exclude from taxation profits on the sale of their home to the tune of up to $250,000 if they’re single taxpayers, $500,000 if married filing joint returns.

The tax payer, as you also know, must own and live in the property as his/her main residence for two of the five years before they sell it.

Many persons have turned rentals into primary residences by simply moving in and living there for a couple of years (two out of last five), then upon selling they avoided capital gains.

That rule has changed.  When a person sells such a property on or after January 1, 2009, they will have to factor out those periods they did not live there and pay taxes on that portion of the profit.

Here’s an example:

George and Barbara next January buy a vacation home for $300,000. Five Years later, they sell their old principal residence and make the vacation home their new principal residence. Five years after that, George and Barbara, sell the vacation-turned-primary-residence for $800,000. That nets them a gain of $500,000.  Under pre- Housing and Economic Recovery Act of 2008, George and Barbara wouldn’t face any tax on the entire $500,000 gain.

The new law, however, means that George and Barbara can exclude only 5/10, or 50 percent, of the gain. That would give them $250,000 of nontaxable property sale profit and $250,000 upon which they would owe long-term gain taxes.

 This blog is for your use and not so you can give tax advice.  Always have your buyers seek tax advice if they have questions on subjects of tax deductions.  Here’s one I recommend, Diane W. Clough, CPA, Ltd. 6130 W. Elton Ave., Las Vegas, Nevada 89107 (702) 870 0888.

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