Real Estate in Prescott and across the nation could really use a program that would stabilize the market. Unfortunately, I don’t see how the most recent one will do that.

Today the President announced another attempt to rescue homeowners who’s homes are upside down. While we have only seen the President create an outline during a speech today, let’s try to extrapolate, piece by piece, how his program might work. The basis of this and other programs are that since mortgage rates are about  four percent today and rates on most mortgages for homes upside down are around seven percent, we could just refinance from seven percent to four percent and transform those monthly payments into affordable payments and turn interest currently paid to an investor into disposable dollars to be spent of saved.

Let me use an example. Let us say you have a mortgage of $200,000 and the rate was seven percent and the term was thirty years. Let us also say the current value of the home is now only $100,000.  The monthly payment would be $1,330.60 per month. If that loan rate was changed to four percent, the payment would be $954.83. A refinance would result in a decrease in payment by $375.77. That is a wonderful Pipe Dream.

Why do I claim that? Follow me through the mechanics of this transaction. If you were to refinance, the holder of the note gets paid the remaining balance on the loan, $200.000. They call that the payoff. Now, if you are the owner of that loan, why would you accept less than the $200,000 owed? You wouldn’t, nor will the note holder. So, where is the $200,000 going to come from? Consider the magnitude of this initiative. If there are 5 million homes that the president wants to adjust and there is a roughly $100,000 shortfall for each home, the balance to be paid of is still $200,000 per home. That is $1,000,000,000,000. Yes, that is $1 Trillion. Are we to expect that the federal government is going to print another $1 Trillion to underwrite this program? That gets funded how? The deficit.

Let’s assume that the governmet does this. The investors get paid off and they walk away with a very loud WHEW! Did they ever dodge a bullet. They came out whole avoiding foreclosures, short sales and “Out and out” abandonments.

The original note holder is now out of the mix and we are now looking at some entity financing the $100,000 on each home at 4%. If the government is the bank then the government will now take on another $500 Billion in debt that was transferred from the private market. That gets added to the deficit. How does that paperwork get processed? How much manpower will it take to process 5 million refis? They will have to use the banks. Will the banks do this for free?  Today there is an approximate cost of three percent to close a loan. That is another $15 billion in cost. We don’t know how that will get done as the government is currently going after the banks for sloppy paperwork processing to the tune of $15 B to $20B.

Add another $1.515 trillion to the deficit. We can’t afford that.

I am not a banker nor an economist, nor an expert on government. I will only say that all the grandiose plans offered so far and being revisited today are, in my opinion, pipe dreams.

Please prove me wrong.

Double taxation is pretty simple. A company you invest in makes money and that money is taxed at the corporate rate of 35%.  The profits which have just been taxed are sent to you in dividends. Guess what? You now pay taxes on the already taxed profits of the company for which you own a share through your stock ownership. That is double taxation.

Let’s take another view from the savers, you and I. Let’s say you make $100,000 and you pay taxes of $33,000 and you invest the $67,000 in the stock market. Each year you earn 5% or $3,350 on the $67,000.  After one year you have now paid $36,350 on the $100,000 you earned or 36.35%. After two years you have paid $39,700 or 39.7%. After five years, well you are up to 49.75%.

Not fair is it.

The housing market, including Real Estate in Prescott, could see a stabilization with a one simple measure. This however would fly in the face of a congress that has to make everything more complicated than it really is. You cannot pick up a newspaper today, watch a talking head on television or visit a political website without reading about yet another government program from some arm of government (And government has so many more arms today). Today there was an article that suggested that the Federal Reserve might propose a program for underwater homeowners to apply for a “Bridge Loan.” Imagine how many more government workers will be required in some government agency, bureau, unauthorized entity or the treasury or the federal reserve, to screen the applications to ensure that no rich guy receives equal treatment under the law.

 If you have ever applied to qualify under some government program you will know that it takes endless amounts of paperwork, confidentiality agreements, federal forms, hardship letters, bank statements, profit and loss statements and literally hundreds of pages of documentation.  All of that paperwork  in the hundreds of pages then goes to some bureaucrat who now views your entire financial landscape for the first time anfd then makes value judgments. Why, you might ask does this process or that process take so long and is so data intensive? You may all know the principle of CYA. All these people need to cover their respective bottoms against any possible indication of malfeasance. Now, it is necessary to be relatively thorough but, this is primarily due to the complicated nature of the programs.

What if we could come up with a simple solution or solutiuons that don’t require a lot of review, paperwork and time consuming cover for the underwriter, the tax attorney or accountant? I would like to propose the following solution for getting all these foreclosed homes off the market so the bottom can be reached.

Type II LLC – Just to explain,  Limited Liability Corporations are similar to “C” Corporations like IBM,  without a lot of legal filing and due diligence requirements. You can start an LLC with a name, a Federal ID application,  an operating agreement,a registration with your local state and a publication plan announcing its existence  for three weeks. There may be a couple of additional simple components. State requirements may differ. This results in a small business with some legal protection and permission to operate for a desired purpose.

So what would be the difference between your standard LLC and this new entity?

1. Used to purchase residential real estate only. These are the homes the bank owns that they are fearful will flood the market and drive prices down even further. It would also include their existing inventory.
2. Inventory from the banks must be purchased at $100.00 per square foot or higher to qualify. This will set the floor at $100.00 per square foot.
3. File one form with the government through the bank as a Qualified Type II Residential Purchase.
4. Exempt form taxes on profit for five years.
5. Exempt from filing any data for five years.
6. If held for five years and a day or longer and sold, there will be no tax on the gain.

This program, with minimal government intervention and reporting would stabilize prices and incent the banks to release the shadow inventory of foreclosed homes. This will speed up recovery of the housing market. It should also stabilize rents and even reduce them so middle income families will have move disposable income. The investors who bought homes prior to 2012 probably bought very low and the impact of lower rents would probably mean less profit but not more short sales or foreclosures. Imagine if the banks could get rid of all their real estate owned, REOs, and go back to their core business of lending. Do we think they might be more interested in providing mortgages to families desiring a new home?

A simple solution offered by someone who has rental homes, almost all of which are upside down.

I think real estate in Prescott might benefit, and I hope you the reader can see the merits of this simple solution.

Thomas Jefferson so famously said, “When governments fear the people, there is liberty. When the people fear the government, there is tyranny.”  

There has never been a more precarious time in the evolution of our nation then there is today. Everywhere we look there is more and more government intrusion in our daily lives. This is approaching tyranny. Our representatives are deaf to our wishes. Do fathers, mothers, grandparents want their children and grandchildren to inherit, not prosperous inheritances, but debt no government in this world will ever be able to repay. And, where does that lead us to?

Our debt is currently almost $16 T. See Federal Budget.  In the last four years we have paid out almost $1.7 T in interest payments. See Interest Payments. We are increasing the debt at about $1.5 T per year. Our revenues are somewhere around $2.0 T per year. So at what debt level does every collected dollar go to debt payments? Here is the math. If we use a 3% cost of borrowing, we need to know what $3% of what number totally eats up the $2.0 T of revenue. Keep in mind we are only paying the interest. We are not reducing the principal as most of us are doing with our house payment. So, .03 times X equals $2.0 T. The answer is $66 T. If we are at $16 T today, we are completely broke in 2055. By the way, this is optimistic. Our demise will likely occur much sooner as you don’t have to be completely broke to be broken. I believe in less than ten years we will be experiencing “Greeklike” problems.

 Think about what will be happening along the way. Today the treasury pays $454 B in interest of the $2 T we take in. As time passes and more debt piles up the $454 B goes up and deprives all the other programs of needed funds. How about our security, social security, medicare, education of our children…

Our payments to China for the treasuries they own, fund their military. If that does not scare you, I don’t know what fact will.

Just take a second to look at the two web links above and decide to participate. Do you want Liberty or Tyranny? Fortunately we live in a country where we actually have a choice.

 Get involved and be sure to vote.

Oh, and Real Estate in Prescott, we are seeing fewer price changes downward. The weather here has been nothing short of sensational. In the last week, Christmas to today, we have been sunny and in the middle to high sixties.

Real estate in Prescott, like almost all communities across the country, has homeowners who are struggling with their mortgage payment. Having heard or experienced the horrors of trying to get their mortgage modified, they have just stopped. The reems of data the bank requires is mind boggling. But, that beng said, there may be help on the way.

There seems to be a change in attitude by the banks and homeowners, bouyed by press coverage of HAMP, are more desparate or courageous and more likely to press for a modification and supply whatever data the bank requests. Le’s talk about the process, the specifics of what is needed and the expectations that you need to have.

To start with, if the bank thinks that your financials are so poor, that you will not even ba able to make modified payments you will be rejected. While the bank does not want your home, they don’t want to go through the process repeatedly. In order to make this determination they will ask for enough data to paint a complete financial picture of your ability to pay. 

What will they ask for? – There is a lot of data needed

1. A lengthy document describing the process for their bank.
2. Tax returns for 2010
3. Request for Modification form. This form requires you to document all you inflows and outflows. It also requires you to identify all your assets and liabilities. In the business world, a P/L and a Balance Sheet.
4. Three months of bank statements for all your accounts
5. An explanation for any deposits on the bank statements that are not readily identifiable (Payroll deposits are obvious) as they may be a source of monies. They want to know where it is coming from.
6. Three months of statements for any asset accounts you have excluding retirement accounts like IRAs and Roth IRAs.
7. Pay stubs for the last three months
8. If you are self employed, a Profit and Loss Statement for you personally
9. A hardship letter outlining any extenuating circumstances that changed your ability to pay. Loss of job, severe injury of whatever has changed in your life that prevents you from fullfilling your current obligations
10. Any LLC’s you manage or are a member will require a Profit and Loss Statement
11. Three months of bank statements for the any LLC’s you are involved in.
12. In any LLCs where therre are partners, the partnership return. This is needed to determine your percentage of ownership
13. Dodd-Frank Certification Form
14. HAMP Form from the bank.
15. Authorization to Release Information Form
16. 4506T-EZ. This permits the bank to request a copy of your taxs to verify that the 2010 return was accurate (Not forged)
17. This is not a complete list but a representative sample.

Some Expectations

1. Interest only loans will convert to amortized loans
2. Escrow payments will be included in any modification
3. Your Equity Line of Credit, your HELOC, will likely be frozen and you will not be able to borrow from it.
4. Usually there will be a two month reprieve period where no payments will be required, but not for free as the missed payments will be bundled into the loan
5. It is likely that the term of the loan will be consistent with the remaining time on the existing mortgage. So if you have 25 years left on a 30 year loan, they will use 25 years as the term.
6. Interest rate reductions vary depending upon where the interest rate is on the existing loan. But, since the bank does not want the house back, they will reduce the rate substantially. You can expect your primary mortgage rate to be reduced to between two percent (2%) and two and a half percent(2.5) and your HELOC, second mortgage, to drop to 1%. Example: Let’s say you have a $400K first and a $400K second, both are interest only. The two payments might be $2,500 for the first (6.75%) and the second payment will be $1,470(4.25%). The total approaches $4,000. After the modification, what can you expect? You might expect the first mortgage payment (amortized) to go to $2,150 (2.375%) and the second (Amortized) to go to about $1,300 (1%). While the cash flow has only been reduduced by only $550, the amoritization reduces the principal by about $2,000 per month so your actual cost  for the home is $3,450 minus $2,000, or $1,450. This is excellent even thought the cash flow was not significant relatively speaking. This example might reflect a loan held by the bank and not the servicer.
7. Overall, the bank does not want your home. They just want all the data to prove to their superiors that the decision the underwriter makes is well founded and justified.

During the Process

1. Keep a log of date, time, person spoken to and what was the nature of the call.
2. Document what data they are requesting.
3. Don’t hide anything. The bank has a model they plug with your data and they can tell what is missing.
4. If you are a member of an LLC, disclose it with appropriate data.
5. Check with your attorney, but I do not think you have to disclose IRAs or Roth IRAs.
6. Check with your attorney before, during and after the process.
7. Be prepared to send many pages via fax. Check out Kinko’s or Office Max to determine the faxing cost.
8. You will receive Overnight Envelopes to use to send in your data. Keep copies of everything you send, but do send them what they ask for.

In Conclusion, the process takes about six to eight weeks and is worth the hassle supplying the data, answering questions from the bank and tracking the progress, which is sometimes very slow. What I did not mention is that you will most likely take a hit on your credit score. I can’t frame that as the standards are in a constant state of change. Just know that if you decide to go through the process, take some time to analyze what you are planning to do in the coming months and be sure that a modification and the subsequent credit rating hit will not adversely affect your plans.

Best of Luck