Is your home an investment or just another place to live?  Many homeowners say that it’s an investment because it helps them sleep at night after sipping the Kool-Aid during the housing boom.   Well, I’m here to get in your face just a bit and tell you that your home is a crappy investment.  Furthermore, it’s an investment that you’ll never truly own as long as not paying property taxes means that your home can be yanked from you and sold on the court house steps.  This further makes the concept of home ownership ie the American Dream, flawed at best.

Buying A Home Is Always A Good Investment

Historically we know this to be true, but since I forgot my crystal ball today, the verdict is out on whether or not this will remain true in the years to come.  It is doubtful as to whether or not real estate will return to the highs of 2005 which saw double digit appreciation each year.  If we do, then it means we’re probably headed for another recession as the market quite simply cannot handle another bubble.  That is the reality moving forward.

Right now, the current market is either at or near the bottom with no upswing in clear sight.  Prices will continue to go down or stay flat for the next 3-5 years, especially with so much uncertainty around how the government will get involved with trying to fix the mess that is the US housing market.

Keep in mind that life happens as we’re waiting for the housing market to rebound.  Many people move for new jobs, to be closer to family or other reasons which warrant the need to vacate the home they bought.  This means they will need to either rent the home at a loss depending on the financials or short sale the home.  There goes waiting out 30 years to realize any significant appreciation or profit during or near retirement.

Exhibit A

Homeowners who boast about making tons of money on their new investment, I submit to you exhibit A.  As always, the discussion only centers around purchase price and the eventual sale price.  As if the current market conditions aren’t enough, the chart above, is a sobering reality.  In that scenario, the home owner will need to net at least $1,073,000 on the sale, an appreciation of over $700,000.  Still think you’ll be minting money with your new “investment”?

An investment has to make, not lose or cost you money when all is said and done.  If you’re truly focused on making money as a homeowner then focus on making your “investment” produce income and not expenses.

You’re Forgetting The Tax Benefits

Am I?  Let’s take a look at that.  Scroll up and take a look at the list of expenses associated with owning a home.  Then based on your tax situation, calculate the actual monetary value of the tax deduction vs the expenses and see whether or not it makes a difference on your tax return.  For most, it does not.  The expenses of owning a home significantly outweighs whatever benefit the deduction provides.

But If I Rent, I’ll Be Throwing Money Away

With a mortgage comes property taxes, HOA fees, home insurance and other mandatory costs which make buying a home a veritable money pit.  Keep in mind that the amortization table I.E. your schedule of mortgage payments makes it so that during the early years, there really is no difference between renting and buying.

It Takes 18.5 Years To Pay More Principal Than Interest With An Amortizing Mortgage

Still think renters are throwing money away?

Furthermore, most people move every 7 years, and if you decide to move within 7 years then you’ve sunken a substantial down payment, closing costs, taxes, maintenance and repair fees, not to mention the huge amount of interest you pay upfront during that time.  Renters can also usually rent for as long as the landlord will allow or needs a renter in the home.  If a renter loses a home, there’s the option to get a cheaper rental until things get better.  When you own a home, even if your financial situation changes, you must continue to pay the mortgage payment as agreed upon during closing.

Well, Paying My Mortgage Is Forced Savings

If you want to save money, open a savings account.  The argument here is that as you pay down your mortgage you build equity which builds “savings” as you pay down your mortgage.  There’s one problem with that assertion.  A “savings account” allows you access at any time and you earn interest on the money in that account.  For the purposes of this discussion, the forced savings theory is just that, an expensive theory called equity.  When you’re ready to access the equity in your home, one can only do so via Home Equity Line Of Credit (HELOC), refinancing or selling the home.  With the exception of selling,  this ends up costing you money, a lot more money in the long run.

And that my friends is why your home is a crappy investment.  To believe otherwise is to soothe yourself to help you sleep at night.  When you wake up, the only difference is that you’ve exchanged your landlord for the bank and once you’re finished with the bank you’re now at the mercy of the state as you must continue to pay property taxes.    Say hi to your Realtor for me.

Every where you turn there’s a new mortgage program out there for people unable to afford their mortgage for a variety of reasons.  Homeowners are spread thin, often a mile wide and an inch deep when trying to cover all of the costs associated with paying a mortgage and owning a home.  These include:

• Mortgage
• Home owner’s Insurance
• Property Taxes
• Utilities
• HOA fees
• Maintenance fees
• Condo fees

So what happens when after paying all of the above-mentioned fees the value of your home tanks to 50% of what you paid for it?  Should you continue paying into an investment that is essentially worthless?  Or should you be able to give it back to the bank in exchange for being released from the loan while taking a hit on your credit report?  What if you can afford the payments but you don’t feel that the investment is worth it to continue making payments?

Hard Questions Invariably Bring Hard Answers

This is the other side of the debate that no one really talks about. The homeowners who can afford the home, but plan to strategically default due to the declining value since the beginning of the recession.

The New Yorker published a piece, Living By Default  by James Surowiecki which ever so neatly delved into this issue: (skim the bold font for a quicker read)

“It is now generally accepted that when it’s economically irrational for a company to keep paying its debts it will try to renegotiate them or, failing that, default. For creditors, that’s just the price of business. But when it comes to another set of borrowers the norms are very different. The bursting of the housing bubble has left millions of homeowners across the country owing more than their homes are worth. In some areas, well over half of mortgages are underwater, many so deeply that people owe forty or fifty per cent more than the value of their homes.

In other words, a good percentage of Americans are in much the same position as American Airlines: they can still pay their debts, but doing so is like setting a pile of money on fire every month.These people have no hope of ever making a return on their investment in their homes. So for many of them the rational solution would be a “strategic default”—walking away from the mortgage and letting the bank take the house. Yet the vast majority of underwater borrowers keep faithfully paying their mortgages; studies suggest that perhaps only a quarter of all foreclosures are strategic. Given how much housing prices have fallen, the question is why more people aren’t just walking away.

Paying your debts is, as a rule, a good thing. But the double standard here is obvious and offensive. Homeowners are getting lambasted for doing what companies do on a regular basis. Walking away from real-estate obligations in particular is common in the corporate world, and real-estate developers are notorious for abandoning properties that no longer make economic sense. Sometimes the hypocrisy is staggering: last winter, the Mortgage Bankers Association—the very body whose president attacked defaulters for betraying their families and their communities—got its creditors to let it do a short sale of its headquarters, dumping it for thirty-four million dollars less than the value of the building’s mortgage.

When it comes to debt, then, the corporate attitude is do as I say, not as I do. And, while homeowners are cautioned to think of more than the bottom line, banks, naturally, have done business in coldly rational terms. They could have helped keep people in their homes by writing down mortgages (the equivalent of the restructuring that American Airlines’ debt holders will now be confronting)

So far, banks have been partially insulated from the consequences of those bad decisions, because Americans have been so obliging about paying off overinflated mortgages. Strategic defaults would help distribute the pain more evenly and, if they became more common, would force lenders to be more responsible in the future. It’s also possible that a wave of strategic defaults—a De-Occupy Your House movement—would get banks to take mortgage modification more seriously, which would be all for the better. The truth is that banks have been relying on homeowners to do the right thing. It might be time for homeowners to do the smart thing instead. 

What would a great argument be without opposing, yet valid viewpoints? 

Obviously there are two sides to this debate:  Strategic homeowners who see this as a business decision vs homeowners who feel a moral obligation to continue throwing good money after bad money.   Who wins?  Who is right given the above-mentioned factors?

Felix Salmon from Reuters.com poses an interesting counterpoint to the New Yorker’s assertion that more homeowners should strategically default in order to level the playing field:

“I agree wholeheartedly with Jim Surowiecki’s sentiments this week about strategic default and the way in which it’s entirely rational for homeowners to walk away from their underwater mortgages. But I think he soft-pedals the consequences of what he calls “a De-Occupy Your House movement”

I’m not convinced that a world where homeowners mark their homes to market is an obvious improvement on the status quo ante — even though I’m wholly convinced that in any given case, it’s entirely rational for homeowners to walk away from their underwater houses. The question, of course, is whether we can ever return to the status quo ante.

Let’s say that you’re significantly underwater on your mortgage and you don’t have much in the way of savings. Does it then make sense to say that you’re insolvent? Historically, homeowners never thought that way — the mortgage was a monthly payment they made to stay in their home, and their home was a place to live rather than a financial asset.

If we move to a world where houses do become financial assets, that might be a good thing. But let’s be honest about what such a move entails: a large decrease in home ownership. It’s not sensible, on a financial level, to have so much of your net worth tied up in one illiquid asset. So if homes are marked to market, they become attractive mainly to landlords who will in turn rent them out to the rest of us.

If Surowiecki wants millions of Americans to walk away from their underwater mortgages, I hope he knows where the buyers of those homes are going to be found. Because if they don’t appear, we could have another massive housing crash and another huge recession.”

Richard Barrington then chimes in with the unintended consequences of the “De-Occupy Your Home” movement described by the New Yorker:

To really understand the unintended consequences of the Occupy Our Homes movement, you have to think of the people on the other side of the issue. After all, it’s not just banks that are hurt when people fail to meet mortgage obligations. Other victims could include:

1. Future mortgage borrowers. Especially at current mortgage rates, banks have little enough incentive to make new loans these days. If they are blocked from collecting on their loans, future borrowers can expect mortgages to be more expensive and/or harder to obtain.
2. Current homeowners. For the same reason as the above, the actions of Occupy Our Homes may make it tougher for current homeowners to refinance their homes. Ironically, the more homeowners can take advantage of current mortgage rates, the fewer would have to face foreclosure.
3. Depositors. Low interest rates on savings accounts and other deposits are partly the result of weak profits in the lending business. Erode those profits even more, and you can forget about seeing those interest rates rise anytime soon.
4. Bank shareholders. No, don’t think about rich one-percenters. More likely, bank shareholders are pensions and 401k plans, whose participants are ordinary people. When borrowers don’t meet loan obligations, those ordinary shareholders can take the hit.

In short, the Occupy Our Homes movement seems to demonstrate that good intentions don’t always make for a good cause.

All three are very rich and valid perspectives which make for a hearty debate around whether or not one should strategically default on their credit obligations in the face of declining asset values. Homeowners today face tough decisions that draw on morality which breeds a sense of obligation.  All while making a decision that could have deep consequences for their financial future.

What say you?  Should homeowners walk away and level the playing field?  Should residential real estate be seen simply as the place you live in and not as a financial asset?  Or should we fear the consequences of the De-Occupy Your Home movement and stay put?  Let’s discuss!

Most people see buying a home as a part of the “American Dream”, well for most it’s become a nightmare.  Buying a home is pretty much the best way to throw your money away and here’s why.  Renters win because they have the flexibility that homeowners do not and after 30 years alone of paying interest to the bank, you’ve lost out on any potential monetary benefit.

You never truly own the home.  Even after paying off the mortgage, there’s still property taxes, HOA fees, home insurance and other mandatory costs which make buying a home a veritable money pit. You must consider every single penny that you spend in direct or indirect relation to the home.  5 years ago, real estate investors would only consider the purchase price and subsequent sales price to determine the profit made.  Nowadays with reduced and nonexistent equity, investors are looking at every penny to determine whether or not the deal is worth it.

• Renters only rent.  No HOA fees, property taxes, home insurance, home repairs or any other cost usually handled by the landlord.   The counter argument here is that the landlord rolls all of these fees into the rent.  However, consider that while this may be true of some rentals, it is not of all rental.  In some cases, doing this drives up the rental rate which makes it unattractive to most renters.   Consequently, there are many landlords who eat the cost of extraneous fees as it is better to have someone in the unit than have it empty. 

There is no guarantee of a “permanent home” with home ownership.  As we’ve seen with the recession, should you lose your job and exhaust all reserve funds, you are out of luck and that home will be sold to the highest bidder.

• Renters can usually rent for as long as the landlord will allow or needs a renter in the home.  If a renter loses a home, there’s the option to get a cheaper rental until things get better.  When you own a home, even if your financial situation changes, you must continue to pay the mortgage payment as agreed upon during closing.

Buying a home locks you in for as long as you own the home.  Think you’ll just sell it?  Fat chance.  Given that most homeowners who bought their homes in the last 10 years are underwater, good luck.  Though it isn’t impossible, the only chance of getting out is to strategically default or sell via short sale if you’re underwater.  Both options trash your credit since the originally agreed upon balance isn’t what the bank receives in the end. 

• Renters on the other hand are free to go at the end of the lease which can be month to month upwards of 2 years.  There’s also the option to break the lease with a fee paid which equates to 2 months or that may be waived if the renter or landlord is able to find someone to replace the renter.

Today’s economic conditions require a 20% down payment.  In some areas, this can be as much or more than $100k for a starter home.  Once you sink the money into the home, you don’t see it again unless you’re lucky enough to sell at a profit.  This is a gamble and unfortunately, many homeowners come out on the losing end.

• Renters only need to put down the 1st month’s rent and security deposit. The latter is returned at the end of the lease term.

Home ownership is no longer an investment.  With the recession, this became a daunting reality for many homeowners.   Home equity became non-existent which meant kissing good bye the good ole “forced savings” theory.  For this reason alone, renters come out on top since the lack of an investment potential makes the argument that buying is more advantageous a moot point.

• Renters in this case, just pay rent with no expectation of long term investment potential.

Homeowners are responsible for the cost of all repairs and upgrades.  This is self explanatory.  As a homeowner you are responsible for every single repair that comes your way, renters only pay for repairs that are a result of intentional damage or negligence.  Otherwise, the landlord pays for everything.

• Renters don’t deal with repairs unless the resulting damage is their fault. 

What’s your perspective on renting vs buying?  This is an age old debate that’s certainly changed it’s course over the last 3 years.  Which side of the fence are you on?  Renting or buying?

Hopefully you’ve been following the recent deficit reduction proposals by the commission in charge of finding ways to reduce the deficit.  No doubt, this is a difficult task for all involved which will invariably result in everyone tightening their belts in the unified attempt at “shared sacrifice”.

However, what sort of sacrifices are on the horizon?  For the purposes of this article, we’ll discuss the home loan interest tax deduction as there are many other tax cuts on the chopping block.

What?  Don’t You Touch My Mortgage Interest!

Yes, it’s true!  This treasured tax deduction enjoyed by homeowners for decades is on the chopping block.  CBS MoneyWatch reports:

One of the three tax plans offered up by the co-chairs of President Obama’s fiscal deficit commission would end the mortgage interest deduction on primary-home mortgages above $500,000, down from the current limit of $1 million. The deficit-cutting duo also proposed to completely eliminate the deductibility on second homes and home equity loans and lines; currently up to $100,000 of interest on such loans and lines qualify for the tax break.

While nothing is finalized, I’m sure this has both homeowners and Realtors foaming at the mouth ready to pounce on the likelihood that whoever votes for this measure will not see another term in office.

So what are the potential ramifications of this change?

I am on the fence about whether or not it will tank the housing market as many seem to think.  Still, we have some information from the slump post $8,000 home buyer tax credit earlier this summer, more on that later.  Similar proposals like the Ronald ReaganTax Reform Act of 1986 phased out the ability to deduct the personal interest from your credit card purchases didn’t tank the industries it targeted.  Since 1986, I don’t think the credit card industry has been hurt one bit.  Reports of billions in profit since that time I assure you.

What’s the likelihood that this will actually go through?

If there seems to be a shared sentiment that everyone needs to tighten their belts and share in the pain to cut the deficit then it might become a reality.  Long gone are the days of double digit appreciation within the same year as we saw during the boom.  So I do think now is the time to institute something like this to help reduce the deficit while forcing more people to live within their means.

Will this lead to a double dip recession for the housing market?

Let’s look at housing numbers shortly after the $8,000 home buyer tax credit expired.

Realtor.org reported:

Following a surge driven by the home buyer tax credit, pending home sales fell with the expiration of the deadline for qualified buyers to sign a purchase contract, according to a report released Thursday, July 1, 2010 by the National Association of Realtors (NAR).

The Pending Home Sales Index, a forward-looking indicator, dropped 30.0 percent to 77.6 based on contracts signed in May from a reading of 110.9 in April, and is 15.9 percent below May 2009 when it was 92.3. The falloff comes on the heels of three strong monthly gains as home buyers rushed to take advantage of the tax credit, which expired April 30.

Existing-home sales that close in June will remain elevated, but we’ll then see a notable decline for July and August.”

This information tells us that potential home buyers in this recession are more likely to be inclined to lock themselves into a long term financial arrangement with a bank when the government gives them incentive to do so.  I am of the opinion that if this tax deduction is removed/adjusted as proposed, we may see an even deeper decline in the housing market.  This may result in a much needed correction (tethered to the adjustment of the deduction)in line with the limitation of said deduction to homes no more than $500k.

But wait, you coasters are itching to tell me that finding a home below $500k is darn near impossible.  Living in the DC Metro area, I can see how that would be true for some, but not all and certainly not impossible.  We live in troubling times and if finding a decent home below $500k is a problem, then it is a relatively good problem to have.  My advice?  If you can’t find a home you want to buy for under $500k then rent one until you can afford to buy one regardless of the tax credit.  Or, rent one.  One of the enduring lessons of any recession is forcing people to live within their means.  Even if it means finding a home for less than $500k.

Your thoughts?  What do you think are the possible implications with eliminating the mortgage interest tax deduction?  Are you likely to purchase a home of the tax deduction of mortgage interest is adjusted to a limit of $500k?

I’ve been quietly watching different outlets discuss the possibility that the 30 year mortgage might just be out of touch with 21st century reality:  People just don’t stay in their homes for 30 years anymore thus making this American dream a nightmare for many.

|Aside: This is a long post and I rarely write articles this long, but I promise, the information presented is worth it |

Arkadi Kuhlmann, CEO of ING wrote a well thought out piece in the Washington Post Op-Ed and I think lawmakers should take note:

More than nine out of 10 U.S. homeowners have long-term, fixed-rate loans. But the 30-year fixed-rate loan is dangerously outdated. It was created in the late 1940s, when the economy was fundamentally different. Just as fewer Americans remain with one company over their careers, fewer Americans remain in one home over their working lives.

And while a locked-in interest rate can provide peace of mind, consumers pay for that stability in front-loaded interest costs, slow buildup of equity and the many fees associated with refinancing or remortgaging. Last week, according to the Mortgage Bankers Association, refinances accounted for nearly 83 percent of mortgage applications.

If Congress is going to play a role in the housing market, it should create an incentive for consumers to pay down their principal home cost more quickly and accumulate equity. The tax deduction for mortgage interest payments encourages Americans to purchase homes, but the break comes on the wrong part of the loan — the interest, not the principal.

This tax credit could work well for consumers and banks. Shorter-term, fixed-rate loans generally carry lower risks for banks than 30-year loans do, resulting in lower interest rates. On a typical $225,000 mortgage, a buyer who gets a five-year, fixed-rate mortgage at 3.50 percent might well pay 4.75 percent for a 30-year loan. The savings would come to more than $11,000 when it’s time to refinance the five-year agreement.

The savings generated from shorter-term loans could be put directly toward paying down the principal by consumers eager to build equity. Instead of chipping away at their mortgage over half a lifetime, people would achieve the security that comes from homeownership much faster – and our nation would be encouraging savings, not debt. And anyone worried about a potential rise in interest rates could simply refinance at a different point or for a slightly longer period.

- Read more here

It’s time for change.  I think he brings solid ideas to the table that should be considered, but our political system makes it hard to bring about that needed change.  Looking to Canada’s system for inspiration once can see that it does indeed work while meeting the needs of homepotential homebuyers.

1. Full Recourse Mortgages in Canada. Almost all Canadian mortgages are “full recourse” loans, meaning that the borrower remains fully responsible for the mortgage even in the case of foreclosure. If a bank in Canada forecloses on a home with negative equity, it can file a deficiency judgment against the borrower, which allows it to attach the borrower’s other assets and even take legal action to garnish the borrower’s future wages. In the United States, we have a mix of recourse and non-recourse laws that vary by state, but even in recourse states, the use of deficiency judgments to attach assets and garnish wages is infrequent. The full recourse feature of Canadian mortgages results in more responsible borrowing, fewer delinquencies, and significantly fewer foreclosures than in the United States.

The full recourse feature of Canadian mortgages results in more responsible borrowing, fewer delinquencies, and significantly fewer foreclosures than in the United States.

2. Shorter-Term Fixed Rates in Canada. Canadian mortgages carry a fixed interest rate for a maximum of five years, and rates are then re-negotiated for the next five years, similar to a five-year adjustable rate. This practice allows banks to achieve a better maturity match between their assets (mortgages and loans) and interest income, and their liabilities (deposits) and interest expense, which protects them from the kind of maturity mismatch and interest rate risk that resulted in our S&L crisis and almost 3,000 bank failures in the 1980s and 1990s.

3. Mortgage Insurance Is More Common in Canada than in the United States. About half of Canadian mortgages carry mortgage insurance (compared to 30 percent in the U.S. currently and only 15 percent before the crisis), primarily for those mortgages financing the purchase of a home with less than a 20 percent down payment, and the borrower is required to pay the full mortgage insurance premium upfront. Another difference from the U.S. is that when private insurance companies in Canada insure mortgages, they have the authority to approve or reject the property appraisal, and they have strong financial incentives to only approve realistic property appraisals. Mortgage insurance in Canada covers the full loan amount for the full life of the mortgage, and cannot be eliminated like in the United States when the property value exceeds the mortgage balance. The traditionally much higher frequency of mortgage insurance in Canada compared to the United States helps to stabilize Canada’s mortgage and housing markets, and is one of the many features that contribute to its ranking as the safest banking system in the world.

Compared to the United States, the Canadian banking system is much more concentrated, with the five largest Canadian banks (out of only 82 in the entire country, compared to more than 8,000 banks in the U.S.) holding more than 80 percent of total bank assets.

4. No Tax Deductibility of Mortgage Interest in Canada. Home mortgage interest has never been tax-deductible in Canada, so there is no tax advantage to home ownership in Canada over renting. (Addendum: Except that any capital gains from the sale of a principal residence in Canada are not taxed). There is also no tax benefit to converting home equity into household debt in Canada, which has resulted in a much greater equity accumulation in Canada (70 percent of total real estate value) than in the United States (currently only about 45 percent). Also, paying down your mortgage in Canada is a tax-free investment and further encourages greater equity accumulation than in the United States. Interestingly, even without any tax advantage for home ownership, the Canadian homeownership rate (69 percent) is actually higher than in the United States (67.2 percent).

5. Higher Prepayment Penalties in Canada. Prepaying mortgages in Canada is allowed, but there are much stiffer prepayment penalties (three months of mortgage interest) than in the United States, which discourages the kind of refinancing that frequently took place in the United States leading up to the housing meltdown, and often involved pulling home equity out in the refinancing process (encouraged by the tax deductibility of mortgage interest).

Home mortgage interest has never been tax-deductible in Canada.

6. Public Policy Differences for Low-Income Housing. To promote affordable housing for low-income households, the Canadian government has not used public policies like the Community Reinvestment Act in the United States, which encouraged homeownership for lower-income and less creditworthy borrowers, financed frequently with subprime mortgages. Instead, the Canadian government provides public funding for low-income rental housing, rather than encouraging homeownership for low-income households, and Canada has thus avoided the American mistake of using misguided policies to turn good, low-income renters into bad homeowners.

7. Differences in Canada’s Bank Concentration and Greater Diversification. Compared to the United States, the Canadian banking system is much more concentrated, with the five largest Canadian banks (out of only 82 in the entire country, compared to more than 8,000 banks in the United States) holding more than 80 percent of total bank assets. This concentration became an advantage during the recent financial crisis because it facilitated critical discussions among the five large banks and the single federal regulator (the Office of the Superintendent of Financial Institutions). Also, Canada has never had branching restrictions like the U.S. laws that prevented interstate banking up until 1994, and this has historically allowed Canadian banks to achieve geographical diversification for their deposits and loans portfolios. It was largely this difference in geographical diversification that help explains why the United States had 9,000 bank failures during the Great Depression (each operating within only one of the 48 states, due to the prohibition on interstate branching) and not a single Canadian bank (all with branches nationwide) failed in the 1930s.

Interestingly, even without any tax advantage for home ownership, the Canadian homeownership rate (69 percent) is actually higher than in the U.S. (67.2 percent).

8. A Few Other Differences that Contribute to Bank Safety in Canada. There is a much lower rate of loan originations by mortgage brokers in Canada (only 35 percent) than in the U.S. (70 percent), far less mortgage securitization in Canada than here, and a much smaller subprime mortgage market. Banks in Canada keep and service 68 percent of the mortgages on their own balance sheets that they originate and underwrite, which encourages prudent lending since banks are putting much of their own capital at risk. Finally, almost all mortgage payments in Canada are made electronically by an automatic payment arrangement, which minimizes late payments.

Bottom Line: Taken together, the features and regulations of banks in Canada outlined above create a healthy and sound “pro-lender” environment absent of political motivations for outcomes like greater homeownership, compared to the often politically motivated “pro-borrower” and “pro-homeowner” policies of the United States. While Canada’s banking system has promoted responsible borrowing and prudent lending and underwriting practices with little politically motivated interference, the U.S. banking system seems to have encouraged excessive lending to risky borrowers because of the political obsession with homeownership.

Keep in mind that while I agree with most of the above-mentioned, I don’t agree with all of it.  There should be no pre-payment penalty if you want to move or have to for work, divorce or other reasons.  People shouldn’t be tied down to a mortgage resulting in a penalty if they want to leave.

My plan?

Introducing the morlease.

Since no one really buys homes with the intent to stay in it for 30 years ….

How often do people move?

About 40 million people move annually in the US. Nearly 3/4 of the US population moves an average of once every 5 years. Many things contribute to these statistics:

- shifts in the economy; for instance, from the Rust Belt to Silicon Valley.

- the doubling of the divorce rate in last 30 years; divorce results in many moves, and sometimes moves can trigger divorces!

- corporate transfers play a role

– changes in status (i.e., marriage, graduation from college, retirement, etc.) are common reasons for moving.

Why not create a hybrid mortgage-lease with some benefits remaining (equity, tax benefits etc, the longer you stay the more you get) and at the end of the term then you renew OR leave.

I haven’t done the numbers on how that would work when you’re selling to someone else or if the bank is stuck with it until it is sold but it’s an idea worth discussing since the way things are right now isn’t working.

People are moving for new jobs, to be closer to family, military transfers, divorce etc and can’t because their credit will plummet if they aren’t able to manage two payments or rent it out with enough cash flow cover the mortgage.

So requiring someone to stick out a 30 year mortgage nowadays just doesn’t make sense anymore.  The goal wouldn’t be to pay off the home in 5 years but to stay in it for at least 5-7-10 years and then have the option of leaving.  If you plan to stay in it for over 10 years then you can get the standard 15-20-30 year mortgage or go with the above mentioned plan by Arkadi Kuhlmann.

This way there would be at least 3 options for those wanting to buy a home.  And yes, that means I am throwing in my thoughts on mortgage changes into the ring.

What are your thoughts on this blossoming debate?  Is the 30 year mortgage outdated?  Why?  Why Not?

As you probably know the original $8,000 Home Buyer tax credit only applied to first time home buyers and capped the income of those eligible to purchase a new home using the $8,000 credit.

The House (H.R. 1245) and Senate (S.1230) have presented the following (CBS NEWS):

Increase the first-time home buyer tax credit from $8,000 to $15,000;

Expand the tax credit’s eligibility to apply to any buyer;

Eliminate the $75,000/$150,000 income cap;

Extend the tax credit for one year from the date of enactment.

This would be an awesome deal if they expanded the credit in this manner.  I feel the $8,000 credit is short sighted in that the real estate market could stand to benefit from the surge in ANYONE buying a house, new and seasoned home buyers.  I’m no economist, but seeing all the short sales and foreclosures in my area I am salivating at the thought of picking up a few condos in neighbouring states and the tax credit would certainly help.  I’m sure other local real estate investors feel the same way, especially since it would take more than a few nuisance properties off the market with new owners intent on getting them occupied with renters or as a primary residence.  I see this as win win.

Now, as for the current $8,000 credit, here are some things you need to know per US NEWS:

1. Eight grand, new buyers: The tax credit included in the economic stimulus legislation is much narrower than the $15,000 proposal. This credit is equivalent to 10 percent of the purchase price of the home–although it’s capped at $8,000–and applies only to first-time home buyers and principal residences. But unlike an earlier $7,500 home buyer tax credit, this one does not have to be repaid.

2. First time buyers defined: For the purpose of this legislation, a “first-time home buyer” is someone who hasn’t owned a principal residence for three years before buying a house. (The date of purchase is considered the day that the title is transferred.) That means if you’ve owned a vacation home–but not a principal residence–within the past three years, you would still qualify for the credit.

3. 2009 buyers only: Only those who purchase a home on or after January 1 and before December 1, 2009 are eligible for the credit. Anyone who bought a home last year won’t be able to take advantage of it.

4. Income limits: The tax credit is subject to income limitations. Single buyers need a modified adjusted gross income of $75,000 or less to qualify for the full credit, that’s $150,000 for married couples. Those earning more than these thresholds may be eligible for reduced credits.

5. Refundable: Because the tax credit is “refundable,” qualified buyers can take advantage of it even if they don’t have much tax liability.

6. Recapture: Buyers have to own the home for at least three years in order to capitalize on the credit. If they sell the home before then, they will have to return the credit to the government. (Exceptions will be made in certain cases, such as death or divorce.)

What are your thoughts? If you are a new or seasoned homeowner would yo take advantage of the credit?

How likely are you to leave a bad marriage if you have no education or poor career prospects? I realize there may be other factors such as children, years put into the marriage and each party’s willingness to work things out.

But let’s put that aside for the moment.

I have always always said that I wouldn’t want a lack of education or financial viability without my husband to stop me from leaving should things go sour.  While I value the sanctity of marriage, my sanity comes above all else and if it’s bad, I have to go.  God forbid I ever get to a point where I want out, I don’t want my future to be dependent on a random divorce settlement arbitrarily determined by a judge.

If you’ve been keeping up with me on Twitter, then you know I watched the movie This Christmas at least 3 times this weekend LOL  I had no idea it was that good!  But a few scenes caught my eye and I immediately thought of this post because this is a message I want to drive home to women.  Do not let your lack of career prospects or financial viability without your husband stop you from leaving a bad situation.  If this is the case then get in a position where you have options.  This also happens to be the central message of this blog, teaching women how to take charge of their finances so they are able to make decisions not bound by  financial limitations.

Please dont stay in a bad situation because you feel that you can’t make it on your own.

But I realize there are women who feel this way and I’d like to hear from you.  If you are or were in this situation, what drives your decision outside of love and children to stay?  We are having a discussion about this on Twitter so feel free to jump in:

How likely are you to leave a bad marriage if you have no education or poor career prospects? (Read from the bottom up)

	sundaycosmetics @gingerlatte@adonyaWong I have 0 tolerance for anyone who “assumes” I won’t make it. Oh NO The devil is a liar. Feel a sermon comin’ 13 minutes ago from web in reply to Gingerlatte
	sundaycosmetics @Gingerlatte @AdonyaWong That’s right! I learned to pray and STEP real quick. As an entrepreneur/person – I BLOCK the negativity 16 minutes ago from web in reply to Gingerlatte

AdonyaWong @gingerlatte I have friends who stay in unhealthy spots because they think they can’t do any better. Me? Scared or not, I wouldn’t stay. 25 minutes ago from TweetDeck in reply to Gingerlatte

	tjonsek @gingerlatte i think it does make a diff. espec if they haven’t had a job in awhile. could be terrifying. 32 minutes ago from TweetDeck in reply to Gingerlatte
	glennette @Gingerlatte Chances r slim 2 none, unless spouse is physical. 33 minutes ago from TweetDeck in reply to Gingerlatte

	tjonsek @gingerlatte yep. i remember at 1st before education & good job I was married & 2 scared 2 leave. thought i couldn’t take care of myself. 35 minutes ago from TweetDeck in reply to Gingerlatte
	AdonyaWong @Gingerlatte I’ll take the leap of faith for a thousand, Alex! Staying in a crappy marriage/relationship is not an option. 35 minutes ago from web in reply to Gingerlatte

Question?  What advice do you have for women in this predicament?

Check the video. Disclaimer: By the way I do not advocate violence or destruction of property. But it is rather funny! LOL This is for all the Jazmine Sullivans out there:

There’s been heavy talk recently around “walking away from foreclosures” and the devastating effect it’s having on banks and homeowners.  Jingle mail occurs when the borrower drops the keys in the mail and sends them back to the bank as final step in walking away from their home due to a rising mortgage and hard economic times all around.   But one thing we bet you hadn’t considered is that depending on the state, the lender may or may not have recourse or legal ability to seek the balance from you upon foreclosure in the form of a deficiency judgment.

Some states are non-recourse, which means they aren’t able to pursue a deficiency judgment against the borrower, most notable, the homes in California are non-recourse for purchase money mortgages.

Before walking away from your home consider ALL of your options:

• Short sale: Call your lender to find out whether or not this is an option for you.
• Loan modification: A loan modification can reduce your interest rate thereby changing your monthly payments to reflect one inline with your budget
• Loan extension This option allows the bank to place your payments on hold for a period of time and the balance that is unpaid is put towards the end of your loan to be paid in a balloon payment at the end of the term.  But this may not be available through all lenders.
• Principal write down The bank will refinance your loan down to the current market value, giving homeowners some equity back in their homes and more reason to stay put as most homeowners are disenchanted by the negative equity and perception of their largest investment being worth nothing or very little to them.

The above mentioned options can be pursued through your lender or better yet through housing non profit organizations like NACA and ACORN.

If the above options aren’t available to you for one reason or another you may be thinking about walking away from your home altogether.  Before you mail the keys, consider the following consequences:

Payment

You may be on the hook for the balance of what is owed after your home goes into foreclosure depending on your state and it’s laws around lender recourse.   The lender may seek a deficiency judgment where you either pay it off or let it charge off on your credit report which leads to severe damage to your credit standing.

Taxes

You may also be taxed on the amount forgiven or the balance owed in either situation.  The tax rate can range from 10-35% depending on your income.  The IRS treats the discharge of the debt as income or it is listed as “discharge of indebtedness income” on your tax bill.  So while losing your home is bad enough, just wait until you get the tax bill.

Now that you have more information, let’s take a look at how the situations are treated depending on whether or not you live in a recourse or non-recourse state.  Take note of your state’s laws, the bank’s ability to see a deficiency judgment and, if so, then consider your tax liabilities.  The IRS is far more tenacious in its collection of taxes owed so please consider the penalties and consequences of walking away from your home.

The following is a list linking to all the states and their respective laws and information around bank recourse:

If you live in a state that permits recourse then you are liable for the balance owed.  If the sale did not yield enough proceeds to cover the balance then you, the borrower must pay the difference which includes the interest that accrues during the process of foreclosure.

For example, if you have a home that is worth $600,000 and you have a $675,000 loan, in a recourse state, the bank has legal standing to go after the borrower for the balance and the IRS will send you a tax bill for the taxes owed on the $75,000 as this is treated as income.  The lender is required to send you a 1099 detailing the forgiveness of the debt of which a copy is also forwarded to the IRS.

If your loan is non-recourse then it is secured by the loan collateral.  If the sale of your home in foreclosure does not cover the balance on the loan then your lender has no legal standing on which to pursue the remaining or outstanding balance.  Therefore if you have a home that is worth $600,000 and you have a $675,000 loan, in a non-recourse state, the bank may not pursue the remaining $75,000.

Keep in mind that you could end up owing capital gains taxes if your loan is non-recourse.  You are reading correctly: the bank is selling the house, you are not, still the IRS treats this transaction as if you are selling the home.

Straight talk from the IRS:

Publication 544:

“If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. This is true even if you voluntarily return the property to the lender. … You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized.”

There you have it.  Straight from the IRS.  Please consider all your options before walking away from a home you worked hard to obtain.  Foreclosure can have devastating consequences not only financially but psychologically as well.  Please be sure to talk to your lender, CPA and Realtor to gain an understanding of the options available to you.

*Whispers* But if you decide to walk away because it’s just a devalued money pit, that’s alright with me, but you didnt read that here.

Question:  Would you consider Jingle Mail if you lived in a non-recourse state?

What are your rights with regards to Realtor representation agreements? Did you sign a buyer representation agreement? A seller representation agreement? If so, or if you’re considering it, this article is for you.

When we started the process of buying our home last year we went were forced to fire one and quickly find another.  But before doing so we were faced with the issue of terminating the first agreement and making sure there were no continuing obligations with the broker as most agreements are really signed with the brokerage and not the Realtors themselves.

Realtor representation agreements are legally binding agreements which inform the buyer and agent of their rights and responsibilities to each other while engaged in a contract for services. This is known as agency The buyer grants the Realtor agency and the Realtor provides a service within the bounds of the agreement. However, every agreement doesn’t always end in a happy purchase or sale of a home. Sellers and Buyers may choose to terminate agreements for a myriad of reasons. Whatever the reasons, make sure that you read the fine print before signing the dotted line.

Let’s reiterate: READ THE FINE PRINT.

How To Cancel Your Realtor Agreement

This should typically be done in writing, not over the phone and not via email. If you do cancel your agreement via email, please be sure that you get confirmation and acknowledgment via email (or snail mail) of the Realtor’s response and plans to terminate your contract moving forward. In some cases, your agreement is with the broker of the company your Realtor works for and you will need to make sure that the broker has agreed to cancel the agreement at your request. You will need to obtain proof of this as well.

We live in a litigious society and you need to make sure you have concrete proof of said cancellation, receipt confirmation and acknowledgments by broker and Realtor that they will release you from the agreement and discussion of any potentials penalties for cancellation.

Your Rights

Read the fine print before signing any agreement as this is typically not done until something happens and the buyer or seller need to cancel the agreement. Does your agreement permit you to cancel within a certain time frame with no penalty? What about Realtor compensation upon cancellation?

Legally a Realtor cannot continue to represent you once you have terminated agency; however this does not prevent them from holding you to penalties per the contract you signed.

This may include:

• Compensation fee
• Commission for the sale of the home said Realtor accompanied you on a showing or open house or a home said Realtor presented to you

Recourse Upon Difficulty Exiting The Contract

• Contact the broker
  
  • Most brokers are more than happy to discuss the situation with you and offer you another Realtor within the company or simply terminate the contract. After all, bad news spreads like wildfire and they would rather have your business or release you from the contract without issue
• Local Real Estate Board for clarification and/or complaint
  
  • If your broker (for whatever reason) refuses to release you from the contract then your next recourse may be to discuss the situation with your local real estate board for clarification on your rights and/or to make a complaint.
• Real Estate Attorney
  • When all else fails, consult with a real estate attorney

Contracts can be tricky, again read the fine print and understand each point within the contract as buying and/or selling a home is a large and important transaction. You’ll want to make sure it goes as smooth as possible.

photo credit: pingnews.com

Some of you know that I am originally from Jamaica, for those that didn’t, well I am! How I ended up here in a America is a long story but the short of it is that my father died shortly after I came here to the States some years ago. He left my brother and I the house we lived in and we have been trying to sell it for the longest time.

How long? 3 years. Why so long? I’m not sure, but between my living here in the States, being in school, getting married, personal life stuff, Jamaican bureaucracy and a tenant that has possibly worked my last nerve, closing is tentatively set for the end of April. What. A. Relief !!

A few thoughts as I near the end of this process….

• I am more attached to the house than previously thought and even though I’ve been brought to tears while discussing the closing specifics its too far to go back now.

• I learned the importance of setting up a proper will/estate/trust as this was the hardest process I’ve ever gone through in life. The short of it, if you have children, set up a trust in the even that you pass away with SPECIFICS. Let them know, let all parties involved what’s set forth in the documents so they are no issues upon your passing around clarification of final wishes.

• Keep all important documents around final wishes and paperwork handy. Going through the court system to get copies of the death certificate, will and deed to the house have been one drama after the other. I wasn’t old enough to figure all of this out then but moving forward I’ve learned the importance of doing so.

• I am not cut out to be a landlord. I am too much of a sap! I hear all the sob stories not knowing or sensing my tenant is pulling another fast one meanwhile she owes me 14 months of back rent! I wish I had it in me to kick her out but I didn’t. Still, working things out with her has given me an advantage I am seeing now in hindsight.

• The money comes at an excellent time. No wedding or house to save for but debt to pay off, emergency fund and retirement accounts to fund. While it’s a tidy sum I am determined to be a good steward, the temptation is so strong to get hardwood floors and a deck but I know better!

I still miss my dad, terribly, and historically this has been a hard subject for me to discuss with anyone who asks about him. My dad was well respected in his community and whenever I visit I get the “you look so much like him” comments which are almost certainly a tear jerker. Selling his house opens up a new chapter in my life as it means I am that much more removed from the memories now.

First it was moving to the States, then finding myself in American culture, most recently it was getting married and now it will be finding myself once again. I am not sure why selling the house brings up all these old feelings but I am willing to process them to see what comes of it. I have been looking forward to the day that I’d be able to get this house off my back and now that it’s finally on the horizon, I can stand to wait a bit longer.

photo credit: ☻mrhappy☻

It’s sort of like wanting time to stop as the sun goes down while you enjoy the beauty of the sunset. Just a few more minutes while I remember old times in the park nearby the house, evenings when he came looking for me after the street lights were off, weekends at Devon House getting ice cream and spending all day at the beach. I’ll never forget his gentle temperament and unfailing patience with me even during the last days. There are times when I think he was taken away from me too soon, but again in hindsight, it was for the best.

Thankfully my husband has been really understanding during this time because the range of emotions I’ve experienced during this process have been draining. He has been nothing short of supportive and really stepped things up to help me get through it all.

This was supposed to be a long detailed post about the personal finance related lessons I learned but they really came from learning how to close the door on the past while opening another to the future. The loss of a parent is never easy but it does get better with time. I just hope I get to a point when it won’t hurt as much and I can reflect on the happier times and know that he is in a better place.