Lean times lighten property tax load

By Tom Opdyke
The Atlanta Journal-Constitution

Published on: 07/07/08

Here’s a weak ray of sun in a cloudy economy: The taxable value of most metro Atlanta homes is not going up this year.

Reflecting the extended slump in homes sales, it means that unless you made improvements or additions, your tax office doesn’t think your home’s value has increased. It also means your taxes could fall by a sliver —- probably less than $10 annually —- unless your county increases its millage.

As counties finalize their tax digests —- the value of all commercial, personal and residential property —- for the Aug. 1 state deadline, most metro governments, with the exception of Forsyth County, are reporting fewer assessment increases than taxmen have seen in two decades.

Tax bases are still rising in metro counties because of increases in assessed valuation for commercial property, new construction and a boost in a small percentage of residential property. But nothing like prior years.

“Until this current market, a saying of mine was, there was not a residential property going down in value. In this market, yes, there is,” Gwinnett County tax assessor Steve Pruitt said.

With the exception of Fulton County, which showed about a 16 percent increase in its digest and increased commercial assessments by a median 44 percent, most metro counties are reporting about 6 percent growth, some less.

The storm cloud surrounding this silver lining: slower growth in the tax base could foreshadow an increase in taxes or service cuts in coming years.

Because the assessments are based on market value as of Jan. 1, 2007 —- and the Standard & Poor’s/Case-Shiller Home Price Index shows the Atlanta resale market has fallen 6.5 percent since March 2007 —- assessors foresee smaller tax base growth in 2009 unless sales heat up.

“I do think 2009 will be a lot more challenging than 2008 for local government,” said John Scott, chief assessor in Bullock County and executive director of the Georgia Association of Assessing Officials.

Only property owners whose valuation changes get a notice from the tax assessor, and not all properties are evaluated every year.

Cobb and DeKalb counties mailed the fewest notices of assessment changes in two decades.

“It would be normal for us to mail out in excess of 100,000 notices on an average year. This year it was about 26,000,” said Tom Stump, interim chief assessor in DeKalb. For about 1,700 who received notices, assessment went down.

Forsyth sent about 56,000 notices, with about 43,000 showing increases. But they were the exception.

Cobb’s Board of Tax Assessors in March ordered no increases in residential assessments unless a property had been improved —- an addition, a new bathroom or the like.

Instead of sending out the year’s typical 70,000 notices —- about one-third of the county’s residential stock —- Cobb sent about 13,000, and about 2,300 were notices of decreased valuation, said chief assessor Phil Hogsed.

Most assessors said the valuation decreases were not in a particular area or city. In some areas, the types of houses in the same subdivision have changed.

In the Hays Farm subdivision in west Cobb, larger houses that sold in the $500,000 range are now near smaller homes by a different builder that sell in the $300,000s.

While the assessors are not permitted by law to use foreclosures as part of their calculations, they are sensitive to the impact of foreclosures on communities.

“If 30 percent of the sales in a neighborhood were foreclosures, we tried not to make any adjustments,” said Rodney McDaniel, Clayton County’s chief assessor.

FREQUENTLY ASKED QUESTIONS

Q: I have foreclosures in my neighborhood that I think are dragging down my property value, why is it not reflected in my real estate assessment?

A: Foreclosures are not directly considered in property assessments because the taxman is required by law to consider only sales between a willing buyer and seller. A foreclosure is viewed as a forced sale.

Q: How do I appeal my property reassessment?

A: Most counties have an appeal process outlined on the assessment notice you receive. An appeal must be mailed within 30 to 45 days of the notice’s mailing date, depending on the county. Counties often provide a form on their Web site so you can file electronically. Go to your county Web site and click on the link for the Board of Tax Assessors.

Q: If I didn’t get a reassessment notice but believe my property value has diminished, what can I do?

A: Probably nothing this year. Early next year —- the deadline can be March 1 or April 1, depending your county —- go to your tax office and file a real estate tax return. You also can obtain the form by going to http://www.etax.dor.ga.gov/ptd/adm/forms/pt.aspx and downloading form PT-50R. Tell the assessors what you think your property is worth. Assessors will review your property and your will get an assessment.

A QUESTION OF VALUE

A tax digest, which includes residential, commercial and personal property assessed at 40 percent of market value, is set by the county appraisers. They determine the market value of property but do not set taxes. Once approved by the state, it is used by the county, its cities and the public school systems as the basis for setting tax millage. Here is what metro counties reported:

Clayton

2007……$8.1 billion

2008……$8.5 billion

Increase..5.9 percent

Cobb

2007……$26 billion

2008……$27.6 billion

Increase..6.2 percent

DeKalb

2007……$23 billion

2008……$24.1 billion

Increase..4.8 percent

Fulton

2007……$54.4 billion

2008……$63 billion

Increase..15.8 percent

Gwinnett

2007……$27 billion

2008……$28.5 billion

Increase..5.6 percent

UBS: Atlanta, Charlotte, and Texas Will Be First to Recover
by Sarah Yaussi
From: BIG BUILDER 2008
Related topics: business, local markets
It may be too soon to call a bottom in the housing market, but that’s not stopping UBS from pinpointing which geographical markets will be the first to rebound–and which single-family and multifamily builders will be most able to take advantage of the turnaround in those markets.

In a new Q-Series report released this morning, UBS analysts David Goldberg and Alexander Goldfarb selected Atlanta, Austin, Charlotte, Dallas/Ft. Worth, and Houston as their top picks for markets that will lead in a housing recovery.

The outlook for those five markets was optimistic because they exhibited stronger positive trends in demographics, economic growth, affordability, and inventory than the other eight markets examined.

Based on these same metrics, Orlando, Las Vegas, Phoenix, Riverside, and Tampa fared the worst. For-sale inventories and declining home sale prices have increased competition among single-family builders, a fact that also poses hurdles for apartment fundamentals.

San Diego, Los Angeles/Orange County, and Washington, D.C., were identified as “coincident” markets, meaning they were somewhere in between market leaders and market laggards.

Using the results of this analysis, Goldberg and Goldfarb also calculated home builders’ and apartment REITs’ exposure to each market and were able to forecast which companies would be the best positioned for a housing rebound. Out of the nine public home builders in Goldberg’s coverage universe, The Ryland Group was the big winner. With the release of the report, Goldberg upgraded Ryland stocks to a buy status.

Ryland’s geographic diversification–it has no more than 10% of its business concentrated in any one geographic market–merchant builder model, and strong balance sheet puts it in a position to take advantage of a market return quickly.

Moreover, the company has a higher concentration in markets with more favorable outlooks and less of a presence in more troubled markets such as Las Vegas, Phoenix, and Tampa. In a related conference call, Goldberg pointed out that, based on community counts, Ryland has roughly 33% of its communities spread across top pick markets Atlanta, Dallas, and Houston versus an average of 24% for the group.

On the multifamily side, Essex Property Trust was Goldfarb’s buy-rated stock. He pointed to the company’s exposure in coastal California and Seattle–markets less affected by the housing downturn–as major pluses.

During the call, Goldfarb also pointed out that the market report was slightly more reflective of single-family building than multifamily activity. “A good apartment market is where single-family remains in check,” he explained. Thus, as the single-family market has struggled, the apartment industry has felt some fallout.

He also stressed this point in the report: “There has not been an influx of new renters as the housing market collapses–indeed we are seeing competition from rental homes in some markets. For example, 14% of Camden Property Trust’s move-outs in Las Vegas are to rental homes.”

Going and gone: Developers of Tribute Lofts decide to put units up for auction because the condo market was sluggish.

By Kevin Duffy
The Atlanta Journal-Constitution

Published on: 06/23/08

Caleb Atkins gave himself a heckuva birthday present Sunday: a two-bedroom, two-bath condominium on the top floor of the Tribute Lofts building east of downtown Atlanta.

Tribute sold 26 units in an unusual one-hour auction Sunday at the Omni Hotel at CNN Center. The developers, Greg and Brian Wohl, decided to go the auction route because the condo market is so sluggish.

In a year’s time, Tribute, which recently won a new-construction award from Atlanta’s Urban Design Commission, has sold fewer than half of its 147 units. Many of the condos put up for auction had been under contract, but the deals fell through.

“I’m about to go and celebrate pretty heavily,” said Atkins, a Georgia Tech graduate who works in Suwanee and turns 25 on Friday. “I prefer to live where I play.”

Even before learning of the auction, Atkins was planning to buy a Tribute condo and say goodbye to his house-sharing in Virginia-Highland.

“But two days before I was to make that offer, the auction was announced,” he said. “We freaked out. The two-bedroom unit that I couldn’t afford, I could afford now.”

Atkins is a homeowner for the first time. He paid $263,000 —- the highest price at the auction —- for the 1,306-square-foot unit. Atkins pointed out his winning bid was “30.77 percent” less than the original asking price of $379,900.

Initially, the Wohls and auctioneer Accelerated Marketing Partners intended to auction 40 units. But 10 units were nixed beforehand because registrants showed little or no interest in them.

Four more units were not offered for sale when the sellers ended the auction early; they feared prices might go too low as the crowd thinned. “We had gone as low as we could tolerate,” said Jon Gollinger, Accelerated Marketing Partners’ co-founder and East Coast chief executive officer.

Nevertheless, Greg Wohl said he was pleased because selling that many condos will stabilize the development and help his company pay off its construction loan.

The project still has about 40 market-rate units left to sell, which will be reduced in price as a result of the auction, Wohl said. Tribute also has 10 unsold affordable-housing units.

Representatives of two of Atlanta’s biggest condominium sellers, the Marketing Directors and Coldwell Banker the Condo Store, were on hand to observe the results.

The cheapest sale was $132,000 for a 795-square-foot one-bedroom unit that originally was priced at $183,900 —- a discount of 28.2 percent. Minimum bid prices for the one-bedroom, one-bedroom-with-den and two-bedroom units ranged from $110,000 to $198,000.

Paul Nichols, a 30-year-old software engineer and Georgia Tech graduate, earned a round of applause as the first winning bidder. He paid $144,000 for his one-bedroom unit.

Nichols said he plans to move there from Buckhead and enjoy the seventh-floor view while waiting for his new home to appreciate.

“And if it doesn’t,” he said, “America is in trouble.”

The rising cost of crude oil has everyone talking about gas prices at the pump… but what about the actual oil in your engine? Are you spending too much on oil by changing it too often?

Most of us probably think a car’s oil needs to be changed every 3,000 miles. But that’s an old mechanics tale these days. Did you know that many car manuals now actually recommend changing the oil every 5,000, 7,500 or even 10,000 miles? That means you may be changing your oil twice or even three times as often as you need to! In fact, a recent study in California indicated that 73 percent of Californians change their oil more frequently than recommended by the manufacturers.

So how often should you change your oil?

The fact is, oil changes should be determined by what, how, and where you drive. If you have a newer car with little or no engine wear, you can probably go 7,500 miles between oil changes. And even if you have a slightly older car, but drive under ideal conditions such as predominantly highway, you can go a similar distance before changing.

Of course, many of us actually don’t drive under “ideal” conditions…if you make many short trips, endure lots of stop-and-go traffic, drive on gravel or dusty roads – then you might need to change your oil more frequently. So how do you know – and take advantage of saving money by only changing oil when it’s really needed?

Technology to the rescue

There are a few ways you can actually eliminate the guesswork. If you have a newer car, it may have a built-in sensor that estimates oil life based on engine running time, miles driven, outside temperature, coolant temperature and other operating conditions. When the indicator light comes on, it’s time to change the oil. It’s that simple.

Another idea is to purchase an oil monitoring sensor, such as the IntelliStick. These sensors are used in place of your car’s original dipstick and provide you with real-time, accurate information about the true condition of your oil. Better still, these sensors often have a transponder built into them so you can quickly and easily check the condition of your oil at any time using a cell phone, PDA or computer with Bluetooth connectivity…now that’s really going high tech.

Bottom line – dollars spent on oil changes add up fast. Especially with the increasing price of oil, it pays to be smart, check the manufacturer’s recommendations…and not let too-frequent oil changes cost you!

Dog owners love their pets, but bathing them is another story. CityDog Market (404-816-8050 and www.citydogmarket.com) recently opened in Brookhaven at 4244 Peachtree Road. It offers an easy to use dog bathing facility, complete with pH-balanced shampoos and conditioners, ear cleaner, temperature controlled trigger sprayer, towels and a hair dryer, all for only $18 for 20 minutes in a state of the art stall.
CityDog Market specializes in natural and organic pet products, such as durable toys made out of recycled material, boiled wool balls that benefit an orphanage in Nepal and hemp rope bones, toys and collars. Their soft pet bedding is made out of recycled soft drink bottles and dog and cat food products are natural, organic and free of additives and byproducts.
For your pet loving acquaintances, buy a gift card or purchase an organic dog cookie or cupcake made out of wheat and soy. How about the brake-fast dog food bowl that slows down a dog’s eating? Come meet store dog Big Daddy and friendly owners Patsy McGirl and Renee Palmer. Hours are Tuesday through Friday 11:00am to 7:00pm, Saturday 10:00am to 5:00pm and Sunday 12:00pm to 5:00pm.
– Bob Rosentreter

Atlanta Business Chronicle - by Douglas Sams Staff writer

For decades, Peachtree Industrial Boulevard between Buckhead and Doraville was a stretch of highway marked by small manufacturing plants, warehouses and car dealerships — hardly the picture of city living.

But that picture is changing.

Developers are lining up along the corridor to launch real estate projects that could turn Peachtree Industrial into one of Atlanta’s hottest infill markets, with townhomes and condos from $300,000 to $500,000 and new stores. One of the latest sites that could fit that mold is Chamblee Plaza, a nearly 20-acre property being marketed for redevelopment.

Although the residential downturn could slow the corridor’s transformation, it is nevertheless under way — its potential spurred even more lately by rising gas prices, the public’s increased reliance on public transportation and developers writing new business plans that see transit-oriented developments as profitable pursuits.

The Brookhaven area today, with its schools, churches, shops, restaurants, businesses, residences, government offices and superstores is becoming ever increasingly more populated. Brookhaven traffic is getting thick and parking crowded, and the community is beginning more and more to resemble Buckhead.
As recently as the 1950s and early 1960s, however, Brookhaven was a rural area with woodland roads, and sometimes the best way to traverse them was by horseback. Nearby Chamblee was dairy country with plenty of pastureland for horses to graze. Along Mabry Road and Hermance Drive near Oglethorpe University, there were farms with horses, in places where there are condominiums and fine homes today.
A favorite place for Oglethorpe students to ride horses was at Silver Lake, which had numerous trails. Horseback riding was a part of the intramural sports program at Oglethorpe in the 1950s.
- Dr. Paul Hudson, longtime resident of the Brookhaven area and historian at Georgia Perimeter College, writes stories of Bygone Brookhaven regularly in the Buzz.

April pending home sales rise as prices tumble
Monday June 9, 11:00 am ET
By Joanne Morrison

WASHINGTON (Reuters) - Pending sales of previously owned U.S. homes unexpectedly rose in April to the highest level in six months as foreclosed properties flooded the market and drove prices sharply lower, a real estate trade group report on Monday showed.

The National Association of Realtors Pending Home Sales Index, based on contracts signed in April and seen as a key barometer of future housing activity, increased 6.3 percent to 88.2 from an unrevised 83.0 in March. Despite the uptick, sales were 13.1 percent lower than a year ago.

“Bargain hunters have entered the market en masse, especially in areas that have seen double-digit price declines,” said the association’s chief economist, Lawrence Yun. Regions of the country that have seen sharp price declines, such as the West, are now seeing a sales recovery, he added.

Economists polled by Reuters before the report were expecting pending home sales to decline 0.5 percent.

“We are seeing an acceleration in foreclosures. As foreclosures have taken off, they put pressure on prices. Banks have become more aggressive with sales on homes they have foreclosed,” said Christopher Low, chief economist at FTN Financial in New York.

Low said the pickup in pending home sales could be a sign that the housing market could soon be stabilizing.

“Sales will stabilize in the next few months and that will set the stage for inventories turning to normal sometime next year and maybe even for prices to appreciate a bit,” he said. “For now, prices will continue to fall. There is still an inventory overhang that will take 18 months to work through. The end game of the housing bust is near.”

The median home price fell 8 percent in April from a year earlier, according to a report from the National Association of Realtors last month, which was the second-largest price decline on record.

U.S. Treasury debt prices fell on Monday after the surprise jump in April pending home sales, while U.S. stock markets were up.

The unexpected rise could be the result of statistical reporting issues being disrupted from an earlier-than-usual Easter holiday week.

“The exceptionally early Easter meant that all the holiday disruption was in March, so April had more selling days than usual,” said High Frequency Chief Economist Ian Shepherdson, expecting the May data will reflect a sharp drop.

Todd Crane
Sunshine Mortgage
When Alan Greenspan says that Adjustable Rate Mortgage (ARM) loans were a better choice than fixed rate mortgages, people start to pay attention. So if ARM loans could have saved homeowners very significant amounts of money, why have Fixed-Rate products been the overwhelming favorite? The answer could be in the borrower’s lack of understanding, experience, or perhaps it is unjustified fear. Additionally, many loan professionals may not have adequately and articulately walked their customers through the pros and cons of an ARM loan. Once a borrower gains a better understanding of the proper way to make comparisons between loans that can adjust vs. those that are fixed, as well as the historical data, they may be much more open to selecting an ARM loan and reaping the benefits.
There are lots of ARM loans to choose from and the features can vary quite a bit. The time that an ARM will remain fixed before adjusting and the factors governing the future adjustments, including the maximum amount the rate can change are important points to consider. The future adjustments are based on an index, so understanding what will cause the index to fluctuate as well as historical data on the index are both important to know. Let’s look at one popular type of ARM…a 5/1. This loan will remain fixed for the first five years but then adjust every year thereafter. A common misunderstanding that many consumers will have is that they feel they should only consider the 5/1 ARM if they plan to be in their home for five years or less. They often fail to recognize that the savings made in the first five years will offset future years of possible higher payments if the rate on the ARM increases. The best way to illustrate this is to look at a specific example. It is very common for the rate of a 5/1 ARM to be about 1% lower that the rate on a 30-year fixed loan. Assume the loan amount were $300,000. The 1% savings on the 5/1 ARM would save the borrower about $200 each month for the first 60 months (5 years). That would net them a hefty savings of $12,000 during that time. But most borrowers worry about what will happen after the initial period. If the $12,000 savings during the initial five years were just placed in a piggy bank, there would be enough funds there to draw upon to cover future worst case increases for the following 2-3 years. This assures the borrower of coming out ahead by selecting the 5/1 ARM for 7-8 years. Compare that to the average life of a mortgage loan, which is four years (because people will refinance or sell their home) and the odds become stacked in your favor that the ARM will save you money.
Let’s Get Creative
Another strategy that can be used for the above mentioned example is to take the $200 monthly savings and use it to reduce the balance on the mortgage. The pre-payment of principal will have an even greater effect because the borrower is now skipping down the amortization schedule and paying more principal and less interest on each subsequent payment. After the initial 60 payments made during the first five years, the borrower would have approximately $17,000 more equity in their home because of the reduced principal balance. Because the borrower has this extra $17,000 in equity, they would be better off with their 5/1 ARM for approximately 10 full years. This is true if rates moved higher after the initial five years…even in the worst-case rising rate scenario. And, it just so happens that the National Association of Realtors states that the average period of time that people sell their residence is every 10 years.
Another benefit when using the strategy of reducing the principal balance happens at the time of the initial adjustment. When an ARM loan adjusts, it essentially becomes a new loan where the payments are based upon the remaining years, the new interest rate and the remaining balance. Because the remaining balance is significantly lower when the savings are used to reduce principal, the payment can actually go down even if the interest rate adjusts higher.
I Am Not a Gambler
Many borrowers say they refuse to take a gamble on their selection of a mortgage product so they stick with a fixed rate. Well, like it or not, whatever their choice is, it’s a gamble. Selecting a fixed rate still means they are betting that, during the time they are obligated to pay the mortgage, the fixed will perform better than the ARM. Either way, they are rolling the dice and making a bet. The only difference is they will know the result of the fixed payment. The key here is to get the odds to work in your favor. That is where understanding and guidance from the loan originator can be worth its weight in gold.
Back to The Future
They say a picture is worth a thousand words. The chart below may be worth thousands of dollars. Over the past 200-years, interest rates on the US 10-year Treasury Note have, for the most part, remained fairly tame. The average has been close to 6%, but many fear the chance of runaway double-digit rates. Rates have remained in the single digits for all except 8 of the 214 years shown below. The rampant inflation of the late 1970’s had to be reigned in. So rates were pushed higher during the 1980’s. The result…low inflation and rates over the years leading to the present time. The lesson learned by the Fed was to use an ounce of prevention instead of a pound of cure. In other words, the Fed acts quickly now to hike rates a little so that inflation will remain in check, which helps keep rates from running significantly higher. The sky-high rates of the early 1980’s will probably never be seen again.

I Agree With You But…
“OK OK”, says the borrower, as they appear to finally see the benefits of utilizing an ARM loan. But…”Even though I know I will have saved the money in cash or equity during the first five years, I still may be faced with significantly higher payments to make. Where will I come up with the extra cash flow to pay the higher payment of, perhaps, $500 per month?” The answer is simple but not obvious at first. Let’s understand what would make rates skyrocket for 8, 9, or 10 years. The overall economy would have to be very strong, almost too strong, to see inflationary pressures causing rates to ascend and remain very high. Much of those inflationary pressures would come from employment wages rising at a torrid pace…perhaps 10% per year or more. But let’s assume the borrower is on the very low end of pay increases, and only sees an average increase of 4% each year. If their household income were $80,000 today and they were concerned about the possibility of a $500 increase in monthly payment 9 years from now, it sure would appear scary against today’s income. But they really need to consider what their future income will be. Even at a very modest 4% annual gain, which could be less than half the average annual gain in a hot economic climate, their $80,000 annual income will swell to almost $110,000 in 9 years. That means they would have an extra $2,500 each month to help pay the additional $500 possible bump in their mortgage payment. Sound far-fetched? An easy way for your clients to relate to the increase in their future income is to work backwards. This same formula would mean that their income 9 years ago was $58,000…Not very hard to believe.
Void Where Prohibited, May Cause Drowsiness and Your Mileage May Vary
Almost all of the above examples were given under the worst-case scenario for the ARM loan. And the worst-case is not likely to occur. Even so, the results appear quite favorable when compared to the fixed. But, that said, the wide variety of ARM loan types and their specific features require that each loan option be examined individually…thus, the above disclaimer. But the key is for borrowers to have an open mind and explore the many options. Even a great rate on the wrong mortgage selection can be far more costly than a fair rate on the right mortgage product to fit the individual’s needs.
Remember…it’s not getting what you want that counts…it’s wanting what you get.

Todd Crane, Sunshine Mortgage
Anyone watching or reading the financial news over the last few weeks has seen a lot of angst and consternation over the state of the mortgage industry. In fact, one of the larger lenders in the US, American Home Mortgage, was forced to shut down operations recently. But why? What is happening, what does all this mean to you and most importantly… what should you be doing do right now to make sure you are protected?
Here’s the scoop.
Over the past several years, many loans were made to homeowners with somewhat non-traditional or “non-conforming” situations, be it a poor credit history, inability to document income, or any number of factors that do not fit within the traditional “box” for home loans. These loans are often called “Sub-Prime”, or “Alt-A”, meaning that they were somewhat riskier in nature than A credit, prime, or traditional loans. Another type of “non-conforming” home loan is one where the credit and income might be perfectly fine, but the loan amount is higher than $417K, which is the current maximum loan that can be done using pools of money from mortgage giants Fannie Mae (FNMA) and Freddie Mac (FHLMC). If the loan amount is higher, it can certainly be done - it’s called a “jumbo loan” - but the end money comes from private institutions, not from the large government sponsored entities of Fannie and Freddie.
Most non-conforming loan product rates popped significantly higher recently. Here’s what happened.
The end investor for Subprime or Alt-A loans will charge a premium for taking on a pool of these loans, because they know that traditionally, they might have a higher rate of default and delinquent payments within that risky pool. But lately, default and foreclosure has been on the rise - partly due to the fact that with credit tightening and a soft real estate market, many troubled homeowners are unable to refinance or sell in order to get out of trouble. So now, these end institutions are demanding a much higher “risk premium” for taking on these pools of loans, as they see the rates of default are climbing higher.
But since these institutions are purchasing these pools of loans sometimes months after the borrower has actually closed at a given rate, this increase to the risk premium means that instead of paying $101K for a $100K loan that will bear interest, they may only be willing to pay $95K for that $100K mortgage to account for the risk. Multiply that times thousands upon thousands of loans…and you have millions upon millions of dollars in loss for the company trying to sell the pool at a much lower price than they were expecting. This is called a “liquidity crisis”, and is exactly what happened to American Home Mortgage - there was no mismanagement, but they simply got caught holding too many “hot potato” loans, forced to sell them at massive losses…and eventually they had to make the decision to close the doors and stop the bleeding.
Further, even when a lender is able to take some losses, they may be subject to a “margin call”. This means that as their losses and risk premiums increase, the value of their loan portfolio decreases. As the value decreases, the credit lines that are secured by those portfolios begin to issue margin calls as the value of the asset that they are secured on is now diminished. This is exactly like margin calls in the Stock market. If you have a loan against a Stock that is losing value, you will get a “margin call” and need to pay down the loan, as the underlying Stock is losing too much value to be considered adequate collateral any longer. So for the big lenders, as their portfolio is losing value due to increased risk premiums and losses…the margin calls start coming in, and they are required to pay down their balances. In turn, this means that they have less availability to fund their new loans, which then exacerbates the problem.
In response to seeing this situation play out in the demise of American Home Mortgage, lenders of other non-conforming loan products increased their interest rates dramatically almost overnight to be better prepared - and likely over-prepared - for increased risk premiums down the road. Even though loans above $417K are not presently suffering from increased delinquencies like the Subprime and Alt-A loans are, these rates popped higher as well, because they are being purchased by smaller private entities that can’t afford to take on any margin of risk.
What happens next? The major damage is probably already done, and the present situation will likely settle out over the coming year. Lenders will stop pulling products off the shelf, and the rates on products that have moved so significantly higher now should trend lower down the road as delinquency rates stabilize.
But here are a few important things YOU should do right now:
ONE: Even if you are not presently in the market for a home loan of any type, make sure that your credit standing is as solid as possible. Many people in the market for a home loan didn’t expect they would have a need, and didn’t plan in advance to ensure their credit would qualify them for the best possible financing. With no immediate need for a home loan, time is on your side… why don’t we take a few minutes together and just make sure you are prepared, should a need arise down the road? Call or email me right away.
TWO: If you are in the market for a home loan, or know someone who is - understand that now is the time to be working with a real qualified professional who can keep you informed of changes in the market and get your loan funded quickly. Now is NOT the time to be playing the risky game of trying to scour the entire nation to find someone who promises to save you a paltry amount on costs, or deliver a rate that seems too good to be true.