Walking real estate tightropes
Mood of the Market

Tara-Nicholle Nelson
Inman News

I recently watched the 2008 documentary "Man on Wire," a literally breathtaking retelling of Philippe Petit's illegal 1974 tightrope walk between the twin towers of the World Trade Center. At 110 stories -- a quarter-mile above the streets of New York City -- Petit walked back and forth about eight times over 45 minutes, only stopping after the Port Authority threatened to pluck him off the wire via helicopter.

With inhuman agility, Petit lay down on the rope, he danced on the rope, and he glided back and forth on the rope as though he relished every second of his time up there (which, it seems, he did).

Even at nearly 60 when the documentary was filmed, Petit simply glided across his backyard practice rope, taking each next step as though there was simply no other thing to be doing.

By contrast, it is with very human, halting fear and trepidation that today's real estate consumers take their next steps in the tightrope-esque balancing act of decision-making contexts presented by today's real estate market.

No frolicking on the ropes for them, buyers and sellers alike are constantly faced with resolving matters of which value, priority, threat or danger is weightier before taking whatever next step is necessary to move their transaction forward.

The New York Times just ran an article illustrating one such dilemma faced by condo buyers nationwide. Is it wiser to buy a unit before the building even goes up, with the prospect of saving thousands and thousands of dollars, but risk problems if the building has construction defects or the other units don't sell well (in which case buyers might not be able to obtain financing and risk forfeiting thousands in deposit money)?

Or is it wiser to wait until after the building is done, limiting your choice of unit and risk having to throw money at the developer to buy one of the last few units?

Is it wiser to extend yourself to buy as much house as possible right now, while prices are good, rates are low and loans are still accessible to get? Or buy conservatively now, knowing that your move-up might be much more difficult and costly?

Buy with an FHA loan, saving your cash cushion but risking not having your offer accepted by sellers who frown on FHA-financed offers, or buy with a conventional loan, sinking all your cash into a home you know might have some depreciating left to do?

It's no simpler for sellers. Sell now to get the move-up home on the cheap and collect the move-up tax credit, but also get less than "peak pricing" for your current home? Or sell later when prices for both your current home and your next one might be higher?

Determining your offer price is a tightrope act, walking the line between appraisable fair market value, avoiding "overpaying" and being sufficiently aggressive to best other offers. Same with setting your list price: Sellers crave to lure buyers in with the prospect of a good value without selling their home short or setting the stage for lowball offers.

So often, buyers and sellers cast desperately about to find the "right" answer to these dilemmas of balancing various factors before taking their next real estate step. However, when it comes to their perspectives and mental approaches to walking these real estate market tightropes, often there is no one answer that is "right" for every buyer, seller, building or situation.

Rather, there are simply right approaches -- many of which can be learned from Petit's approach to his crazily gorgeous tightrope walk between the twin towers, which will never be duplicated by another human being.

Buyers and sellers must be mentally nimble and agile -- they must be able to move easily and gracefully to take account for the rapidly changing scenery of facts about their intended home, their transaction, their mortgage and the market. This takes flexibility: the ability to wrap their heads and their decisions around new information.

But it also takes certainty -- to be bold, agile and flexible decision-makers in this rapidly changing market, buyers and sellers must have a clear vision of the outcome they want, the "after" picture they are trying to create of their lives once they've made their real estate move.

Interestingly enough, Petit's seemingly insane tower walk was actually planned with meticulous precision and the involvement of numerous expert advisers over a six-year period of time -- starting before the towers were even constructed.

And that sound preparation freed him to relax and enjoy the precious moments of the walk itself, knowing he was prepared for every humanly imaginable contingency that might arise.

The clear parallels for homebuyers and sellers abound -- who should also plan their house hunts and home sales with precision and thoughts toward course correction around predictable obstacles, with the advice of their own expert advisers.

Of course, the unexpected dangers of Petit's walk are also instructive for real estate consumers. You just can't plan for everything. The most dangerous portion of his escapade was when the police threw him down the stairs after he came down. As Petit himself might say in his native tongue, "c'est la vie" (French for "such is life") when it comes to walking tightropes -- both literally and those of the real estate variety.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.

Finding value in loan assumptions
Mortgage insurance, length of ownership can reduce advantages

Jack Guttentag
Inman News

"Does the assumability option on FHA loans offset their high mortgage insurance premiums?"

That is a great question and very timely. The value of assumability right now is as high as it is ever likely to go because of the broad consensus that interest rates in future years will be higher than they are now.

Loans insured by the Federal Housing Administration (FHA) are assumable, while conventional loans, with a few exceptions, are not. That means that a home purchaser today who finances the purchase with an FHA-insured loan and who sells his house later when interest rates are higher will be able to offer a potential buyer the right to assume his low-rate FHA loan.

After approval of the buyer by FHA, on sale of the property the buyer will assume all the obligations under the mortgage, just as if the loan had been made to her, and the seller will be relieved of liability.

The major driving force behind assumptions is the lower interest rate on the assumed mortgage relative to current market rates. If the home seller has a mortgage with a rate below the current market rate, both buyer and seller can be better off if the buyer assumes the seller's loan. The buyer enjoys a lower rate and also avoids the settlement costs on a new mortgage.

Assume a home purchaser today taking a $200,000 mortgage on a $250,000 house who is offered the choice between a conventional 30-year fixed-rate mortgage at 5 percent with no mortgage insurance and an FHA loan at 5 percent with mortgage insurance, and, of course, assumability.

The FHA has an upfront mortgage insurance premium of 1.5 percent of the loan, and a monthly premium of 0.5 percent. The purchaser expects to have the house for five years, at the end of which the mortgage balance will be $183,657. Let's assume for the moment that the market rate at that time will be 10 percent.

I have a spreadsheet on my Web site that values the 5 percent mortgage to a buyer relative to the 10 percent mortgage available in the market. In addition to the factors in the preceding paragraph, the spreadsheet requires an assumption about how long the buyer expects to have the mortgage (six years), and on the "investment rate" -- the rate the buyer could earn on her savings, which I set at 4 percent.

On these assumptions, the value of the assumable 5 percent loan, relative to the alternative 10 percent loan, is $49,012. The present value at 4 percent is $40,141, without considering the savings in settlement costs on a new loan.

The cost of the FHA mortgage insurance is the upfront premium of $3,000, plus the present value of the monthly premium discounted at 4 percent, which is $4,525, for a total of $7,525. This suggests that the value of the assumability option on an FHA loan could outweigh the mortgage insurance cost by a wide margin. For a number of reasons, however, this calculation overstates the value of assumability.

First, we ought to be more conservative in our interest-rate assumptions. If we assume a future market rate on a new mortgage of 8 percent, rather than 10 percent, and a discount rate of 8 percent as well, then the assumable mortgage will be worth $23,166 in five years with a present value of $15,549, and the mortgage insurance cost will be $7,110.

That is still more than 2 to 1, and it does not include the savings in mortgage settlements costs to the buyer.

Second, the savings to the buyer from assuming the existing mortgage would be reduced if the buyer has to supplement the existing loan balance with a new second mortgage at a higher rate. This could well be the case if the house has appreciated during the period since the mortgage was taken out.

The value of assumability to a buyer strapped for cash would be much lower than to a buyer who has the cash to pay the difference between the sale price and the balance of the old loan. The borrower today has no way to anticipate the financial status of the person who buys his house years later.

Third, the borrower today cannot expect that when he sells and offers an assumable loan with the house that the price of the house will include the full value of the assumable mortgage. In their negotiations, the value of the assumable mortgage will be shared in some unknown proportions. This further increases the uncertainty in the value of assumability to a borrower today.

In sum, the assumability of FHA mortgages could have significant value to borrowers today, in some cases equaling or exceeding the cost of FHA mortgage insurance. In other cases, however, assumability could be worth little or nothing.

If the borrower has the house for 10 years before selling, the larger paydown of the balance plus property appreciation could sharply reduce the value of the low-rate mortgage to the buyer at that time. Furthermore, whatever value is there would be further reduced by the longer discount period. 

The borrowers today for whom assumability has the greatest potential value are those who expect to sell their house within three to seven years. Short of three years, it is not clear that interest rates will be significantly higher than they are today, and after seven years it is not clear that assumability will have significant value to homebuyers.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.

Walkaway's Catch-22
Home Sale Hindsight

Tara-Nicholle Nelson
Inman News

Q: As a single woman a couple of years ago, I bought a loft with a 5/1 adjustable-rate mortgage (ARM) and no money down. My mortgage will start adjusting in about two years, and I am now about $50,000 upside down. In the meantime, though, I've gotten married (my husband is not on the loan) and we'd like to have a child soon, which won't work in the loft.

We are thinking of walking away from the loft and getting some closure on it, so we can move into a home that makes sense for our family. We're also thinking about trying to get a loan modification, although I'd really rather not hold on to the loft. And some people we know have recommended a short sale. I feel like my past decision to buy the loft with that ARM trapped us in this situation. But I also want to know what to do now so we don't get trapped again.

A: Between putting no money down and the depreciation in value, you now find yourself, like almost 30 percent of your fellow Americans who own homes, owing more than your home is worth. Somewhat more rare about your situation, though, is the fact that you also are having a major change in lifestyle situation that renders your home less feasible to hold onto, even if you were willing to do so to wait for the value to rebound.

You might have found out that it's very tough now -- and impossible, for many -- to qualify for an additional mortgage for a more suitable home, unless you have income (rental and otherwise) to more than offset the expenses of owning both homes. Hence, you feel trapped: You need to move on, but can't sell the home for what you owe on it.

Whether walking away is the right decision for you is not something I can tell you -- it depends on your personal situation, including what state your home is in and the resulting ramifications of foreclosure, which do vary by state.

Foreclosure is a traumatic experience, emotionally and otherwise, and walking away implicates the ethics of going back on your word to the bank. However, there is a countervailing point of view to the effect that, in the words of a colleague of mine, your highest ethical obligation is to your family, not the bank.

In my latest, free white paper, "REThinking the Walk Away," I deeply explore the issues you should consider before deciding to walk away.

Here's my advice. Reflect on how you got trapped in the first place, and how there were some things in your control (your downpayment, loan choice, etc.) and other contributing factors (like the market's dramatic decline) that were not. The point of this analysis should be to scrape every single lesson out of your experience.

The point is not to create a guilt complex, chastise yourself or fixate mentally on what you would have done differently. In fact, many homeowners I know have conducted this analysis and concluded that, if they could do things over again, they would probably not do a whole lot differently, but in the future they might operate more conservatively with their real estate and mortgage decisions (or not!).

So, get the lessons out of this thing, and then keep it moving.

The primary thing I want you to take into your current decision process is that the various options you've been considering are not mutually exclusive. In fact, many real estate professionals counsel homeowners that the first step to all three of your options (i.e., short sale, loan modification and walking away/foreclosure) is the same thing: ceasing your mortgage payments.

If you decide to go that route, before you stop making your mortgage payments be very clear ahead of time that your intention is to dispose of the property, in one way or another.

Also, make sure you fully understand and are truly comfortable with the implications of walking away or losing the loft to foreclosure before you miss a single payment. I've seen too many people stop making their mortgage payments, hoping it will nudge the mortgage company into offering them a loan modification so they can keep their home, and end up losing the home when their arrearages spiral out of control.

And the reverse is true: Around 26 percent of homeowners who apply for and receive a loan modification end up redefaulting on their mortgages, most winding up in foreclosure. Before you apply for a loan modification, which is not a simple, fun process, be aware that the chances you'll receive principal reduction are very low (around 1-2 percent).

If you're disinclined to hold onto the home anyway, you might be better off to simply sell the place on a short sale (assuming your lender will allow it) and get closure, rather than missing some payments to get a loan modification, (predictably) outgrowing the loft and then circling back around for some more late payments and credit damage in six months or a year when you decide to do a short sale or walk away.

Developing certainty and clarity about your vision and dreams for your family for the next few years, and using that to drive your decisions, will keep you from setting yourself up for failure this time around.

If you do decide to stop making your mortgage payment, there's no reason you can't submit applications to your bank's loss mitigation department for both a loan modification and a short sale. (If you do this, please be honest with your broker/agent about it, so they are aware and can make prospective buyers aware that a loan modification is a possibility, in which case the house will not be sold.)

Walking away and foreclosure should be your very last resort, not your first one. Whatever decision you make should be with full information about the financial, credit and tax consequences you face. Please consult a local real estate broker or agent, a mortgage pro you trust (who can advise you about the impacts of your next move on your ability to buy again in the future) and a tax adviser.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

***

What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.

Walkaway's Catch-22
Home Sale Hindsight

Tara-Nicholle Nelson
Inman News

Q: As a single woman a couple of years ago, I bought a loft with a 5/1 adjustable-rate mortgage (ARM) and no money down. My mortgage will start adjusting in about two years, and I am now about $50,000 upside down. In the meantime, though, I've gotten married (my husband is not on the loan) and we'd like to have a child soon, which won't work in the loft.

We are thinking of walking away from the loft and getting some closure on it, so we can move into a home that makes sense for our family. We're also thinking about trying to get a loan modification, although I'd really rather not hold on to the loft. And some people we know have recommended a short sale. I feel like my past decision to buy the loft with that ARM trapped us in this situation. But I also want to know what to do now so we don't get trapped again.

A: Between putting no money down and the depreciation in value, you now find yourself, like almost 30 percent of your fellow Americans who own homes, owing more than your home is worth. Somewhat more rare about your situation, though, is the fact that you also are having a major change in lifestyle situation that renders your home less feasible to hold onto, even if you were willing to do so to wait for the value to rebound.

You might have found out that it's very tough now -- and impossible, for many -- to qualify for an additional mortgage for a more suitable home, unless you have income (rental and otherwise) to more than offset the expenses of owning both homes. Hence, you feel trapped: You need to move on, but can't sell the home for what you owe on it.

Whether walking away is the right decision for you is not something I can tell you -- it depends on your personal situation, including what state your home is in and the resulting ramifications of foreclosure, which do vary by state.

Foreclosure is a traumatic experience, emotionally and otherwise, and walking away implicates the ethics of going back on your word to the bank. However, there is a countervailing point of view to the effect that, in the words of a colleague of mine, your highest ethical obligation is to your family, not the bank.

In my latest, free white paper, "REThinking the Walk Away," I deeply explore the issues you should consider before deciding to walk away.

Here's my advice. Reflect on how you got trapped in the first place, and how there were some things in your control (your downpayment, loan choice, etc.) and other contributing factors (like the market's dramatic decline) that were not. The point of this analysis should be to scrape every single lesson out of your experience.

The point is not to create a guilt complex, chastise yourself or fixate mentally on what you would have done differently. In fact, many homeowners I know have conducted this analysis and concluded that, if they could do things over again, they would probably not do a whole lot differently, but in the future they might operate more conservatively with their real estate and mortgage decisions (or not!).

So, get the lessons out of this thing, and then keep it moving.

The primary thing I want you to take into your current decision process is that the various options you've been considering are not mutually exclusive. In fact, many real estate professionals counsel homeowners that the first step to all three of your options (i.e., short sale, loan modification and walking away/foreclosure) is the same thing: ceasing your mortgage payments.

If you decide to go that route, before you stop making your mortgage payments be very clear ahead of time that your intention is to dispose of the property, in one way or another.

Also, make sure you fully understand and are truly comfortable with the implications of walking away or losing the loft to foreclosure before you miss a single payment. I've seen too many people stop making their mortgage payments, hoping it will nudge the mortgage company into offering them a loan modification so they can keep their home, and end up losing the home when their arrearages spiral out of control.

And the reverse is true: Around 26 percent of homeowners who apply for and receive a loan modification end up redefaulting on their mortgages, most winding up in foreclosure. Before you apply for a loan modification, which is not a simple, fun process, be aware that the chances you'll receive principal reduction are very low (around 1-2 percent).

If you're disinclined to hold onto the home anyway, you might be better off to simply sell the place on a short sale (assuming your lender will allow it) and get closure, rather than missing some payments to get a loan modification, (predictably) outgrowing the loft and then circling back around for some more late payments and credit damage in six months or a year when you decide to do a short sale or walk away.

Developing certainty and clarity about your vision and dreams for your family for the next few years, and using that to drive your decisions, will keep you from setting yourself up for failure this time around.

If you do decide to stop making your mortgage payment, there's no reason you can't submit applications to your bank's loss mitigation department for both a loan modification and a short sale. (If you do this, please be honest with your broker/agent about it, so they are aware and can make prospective buyers aware that a loan modification is a possibility, in which case the house will not be sold.)

Walking away and foreclosure should be your very last resort, not your first one. Whatever decision you make should be with full information about the financial, credit and tax consequences you face. Please consult a local real estate broker or agent, a mortgage pro you trust (who can advise you about the impacts of your next move on your ability to buy again in the future) and a tax adviser.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

***

What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.

Walkaway's Catch-22
Home Sale Hindsight

Tara-Nicholle Nelson
Inman News

Q: As a single woman a couple of years ago, I bought a loft with a 5/1 adjustable-rate mortgage (ARM) and no money down. My mortgage will start adjusting in about two years, and I am now about $50,000 upside down. In the meantime, though, I've gotten married (my husband is not on the loan) and we'd like to have a child soon, which won't work in the loft.

We are thinking of walking away from the loft and getting some closure on it, so we can move into a home that makes sense for our family. We're also thinking about trying to get a loan modification, although I'd really rather not hold on to the loft. And some people we know have recommended a short sale. I feel like my past decision to buy the loft with that ARM trapped us in this situation. But I also want to know what to do now so we don't get trapped again.

A: Between putting no money down and the depreciation in value, you now find yourself, like almost 30 percent of your fellow Americans who own homes, owing more than your home is worth. Somewhat more rare about your situation, though, is the fact that you also are having a major change in lifestyle situation that renders your home less feasible to hold onto, even if you were willing to do so to wait for the value to rebound.

You might have found out that it's very tough now -- and impossible, for many -- to qualify for an additional mortgage for a more suitable home, unless you have income (rental and otherwise) to more than offset the expenses of owning both homes. Hence, you feel trapped: You need to move on, but can't sell the home for what you owe on it.

Whether walking away is the right decision for you is not something I can tell you -- it depends on your personal situation, including what state your home is in and the resulting ramifications of foreclosure, which do vary by state.

Foreclosure is a traumatic experience, emotionally and otherwise, and walking away implicates the ethics of going back on your word to the bank. However, there is a countervailing point of view to the effect that, in the words of a colleague of mine, your highest ethical obligation is to your family, not the bank.

In my latest, free white paper, "REThinking the Walk Away," I deeply explore the issues you should consider before deciding to walk away.

Here's my advice. Reflect on how you got trapped in the first place, and how there were some things in your control (your downpayment, loan choice, etc.) and other contributing factors (like the market's dramatic decline) that were not. The point of this analysis should be to scrape every single lesson out of your experience.

The point is not to create a guilt complex, chastise yourself or fixate mentally on what you would have done differently. In fact, many homeowners I know have conducted this analysis and concluded that, if they could do things over again, they would probably not do a whole lot differently, but in the future they might operate more conservatively with their real estate and mortgage decisions (or not!).

So, get the lessons out of this thing, and then keep it moving.

The primary thing I want you to take into your current decision process is that the various options you've been considering are not mutually exclusive. In fact, many real estate professionals counsel homeowners that the first step to all three of your options (i.e., short sale, loan modification and walking away/foreclosure) is the same thing: ceasing your mortgage payments.

If you decide to go that route, before you stop making your mortgage payments be very clear ahead of time that your intention is to dispose of the property, in one way or another.

Also, make sure you fully understand and are truly comfortable with the implications of walking away or losing the loft to foreclosure before you miss a single payment. I've seen too many people stop making their mortgage payments, hoping it will nudge the mortgage company into offering them a loan modification so they can keep their home, and end up losing the home when their arrearages spiral out of control.

And the reverse is true: Around 26 percent of homeowners who apply for and receive a loan modification end up redefaulting on their mortgages, most winding up in foreclosure. Before you apply for a loan modification, which is not a simple, fun process, be aware that the chances you'll receive principal reduction are very low (around 1-2 percent).

If you're disinclined to hold onto the home anyway, you might be better off to simply sell the place on a short sale (assuming your lender will allow it) and get closure, rather than missing some payments to get a loan modification, (predictably) outgrowing the loft and then circling back around for some more late payments and credit damage in six months or a year when you decide to do a short sale or walk away.

Developing certainty and clarity about your vision and dreams for your family for the next few years, and using that to drive your decisions, will keep you from setting yourself up for failure this time around.

If you do decide to stop making your mortgage payment, there's no reason you can't submit applications to your bank's loss mitigation department for both a loan modification and a short sale. (If you do this, please be honest with your broker/agent about it, so they are aware and can make prospective buyers aware that a loan modification is a possibility, in which case the house will not be sold.)

Walking away and foreclosure should be your very last resort, not your first one. Whatever decision you make should be with full information about the financial, credit and tax consequences you face. Please consult a local real estate broker or agent, a mortgage pro you trust (who can advise you about the impacts of your next move on your ability to buy again in the future) and a tax adviser.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

***

What's your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.