Why We Saved Fannie and Freddie

Fannie Mae and Freddie Mac - who or what are these entities, and why are they mentioned so often when discussing the current mortgage crunch? These two organizations either own or guarantee nearly half of all outstanding home loans. That's over twelve trillion in debt (that's a 12 followed by 12 zeros, or twelve million million dollars)!

So maybe you can see why the government took over and began overseeing their operations, bringing stability and continued liquidity to the national mortgage market. Both companies are placed in a government conservatorship, with the Fed taking up to an 80% stake. Progress is reviewed each quarter, and money injected into operations as needed.

Since the government is now explicitly backing the loans, the market for these securities is more like that for Treasuries, which lowers rates and benefits the real estate industry enormously.

Lower rates encourage more investors to return to the market. As that happens, rates continue to drop, and more funds go into the lending machine, further encouraging buyers to apply for financing. The result is increased housing sales, which helps to stabilize home prices.

As these companies and the Federal Housing Finance Agency plan a massive overhaul of operations, you can be assured that agents and the National Association of REALTORS® will provide feedback and help shape a better future for our housing industry.

Keep the Horse Before the Cart

While many buyers are aware that a mortgage pre-approval letter increases their buying confidence and power, most may not understand exactly why pre-approval is so important. Why should you jump through the application hoops before even beginning your home search?

First, you'll know exactly how much loan you can afford, making your initial home search much easier. Why waste your time looking at homes either out of your reach or well below your financial grasp?

Second, pre-approved buyers stand on solid negotiating ground with sellers. Sellers working with well-qualified buyers are more likely to accept the offer and less likely to stall on terms and conditions.

Notice that the topic of this column is "pre-approval," and not "pre-qualification." What's the difference? Pre-qualification is easy - you provide basic information to a lender, and in a few short minutes, you have an answer. Pre-approval requires strict verification of documentation relating to your employment, credit history, sources of income, etc. It takes more time, but is more accurate and carries more weight.

Understand that pre-approval is not binding, and is still subject to a satisfactory appraisal on the prospective purchase. If your financial situation changes, interest rates rise or fall, or the deadline passes, a recalculation will be necessary; but a little legwork now will pay off handsomely as you approach the finish line on your contract.

The Long and Short of It

You've been reading negative stories about the housing market, and while some are experiencing a slowdown, it's still no reason to keep you from pursuing the American Dream.

Anyone who's watched the industry for the last thirty years will tell you that it's a natural cycle, much like the adjustments the stock market experiences. All's well that ends well after a period of time passes.

Remember that housing is a long-term investment. Some people tried to create high yields over the short term, and that’s part of the reason so many markets are experiencing readjustments now.

Regardless of whether housing is up or down, individuals and families will always have a need to buy or sell. Home sales last year actually surpassed those of five years ago, which was another record year. Interest rates and prices are at historical lows, creating an excellent atmosphere for qualified buyers.

When reading the gloom and doom about foreclosures, it's important to keep the reports in perspective. Most defaults are associated with sub-prime loans, which account for less than 10% of all mortgages. Of those, only 0.6% are currently in foreclosure.

Now is the time to turn to the advice and guidance of a trusted local real estate professional, whether you're buying or selling. Keep a level head and take advantage of positive forces in the current housing market.

Keep the Cart Behind the Horse

It's probably no surprise that nearly all buyers require financing for their home purchase. The real challenge is not so much in getting the loan as it is in finding the loan that's right for you.

The time to start your loan search is before you begin looking at homes. After you've reviewed your loan options, you'll have a better idea of just how much home you can afford.

Starting early also gives you an edge when you offer to purchase a property, because most contracts will specify that you have to apply for financing within a certain amount of time, usually seven to ten days. Meeting with a lender in advance prevents your having to rush into a loan decision.

You'll also have an advantage with sellers, because an offer to purchase from a pre-approved buyer is more attractive to sellers who won't have to worry about whether you'll qualify for financing. It demonstrates to both you and the sellers that you have the financial strength to complete the purchase on schedule.

Many real estate agents have experience and relationships with local lenders, and can suggest one or more lenders who offer a variety of loans with competitive terms and quality service. Your mortgage is as individual as you are, so take the time early on to match a loan to your particular needs.

DEBT RELIEF IS NOT TAX RELIEF!

You've certainly heard and read many reports about defaults on mortgage loans. There are many reasons homeowners face such situations, some of which are completely beyond their control. There are also several solutions, but each carries a consequence.

In one example, a family had to relocate for an attractive job offer. The home they were selling languished in a slow market for over six months, and they defaulted because they couldn't continue the mortgage payments.

Their agent negotiated a "short sale," whereby the lender accepted an offer that was $10,000 less than the loan balance (rather than begin unpleasant foreclosure proceedings). In this case, it's important to understand that the shortfall is considered "debt relief" and is reported as taxable income to the IRS.

Since the sellers didn't have to repay that $10,000 to the lender, the IRS considered it the same as $10,000 income. This debt relief from a short sale is considered taxable to the borrowers, and the corresponding Form 1099 must be reported.

This is one of the simpler scenarios created by defaults or foreclosures, which are becoming more common as market corrections and rising interest rates prevail. No matter what reason you or someone you know might be facing default, it is absolutely critical to consult with a tax adviser and a trusted real estate agent before deciding how to proceed.