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US Banks Slow to Absorb Commercial Property Losses
The Wall Street Journal says a U.S. Federal Reserve report found that banks in the country are slow to take losses on their commercial real estate loans that have been hit by slumping property values and rental payments. In a Sept 29 presentation to banking regulators, K.C. Conway, a senior real estate analyst at the Federal Reserve Bank of Atlanta, suggested that regulators were preparing for a rerun of housing-related losses that plagued many banks after the residential property bubble burst. Conway’s report predicted that commercial real-estate losses would reach roughly 45 percent next year, and that the most “toxic” loans on bank books were interest-only loans, which get no benefit from amortization, since it requires borrowers to repay interest but no principal. The report also stated that banks have been slow to absorb the losses on their loans, partly due to “capital preservation” concerns. The Journal said a Fed official had confirmed the authenticity of the document, but added it did not represent the central bank’s formal opinion.
MBA – Mortgage Applications Increase
The Mortgage Bankers Association’s (MBA) Market Composite Index, a measure of mortgage loan application volume, increased 16.4 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index also increased 16.4 percent compared with the previous week. The Refinance Index increased 18.2 percent from the previous week, the seasonally adjusted Purchase Index increased 13.2 percent from one week earlier, the unadjusted Purchase Index increased 12.9 percent compared with the previous week, and the seasonally adjusted Government Purchase index is at a record level in the survey after a 14.4 percent increase from the week before. The four week moving average for the seasonally adjusted Market Index is up 4.2 percent. The four week moving average is up 0.2 percent for the seasonally adjusted Purchase Index, while this average is up 6.7 percent for the Refinance Index. The refinance share of mortgage activity increased to 66.3 percent of total applications from 65.3 percent the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 6.1 percent from 6.2 percent of total applications from the previous week.
The dollar who came in from the cold
An article in Britain’s “Independent” newspaper said that secret meetings were taking place between Arab states, China, Russia, Japan and France, to end dollar dealings for oil and moving instead to a basket of currencies. The reports were later denied, but the news helps explains the sudden surge in gold prices which would be included in the basket along with the Japanese yen and Chinese yuan, the euro, and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar. It’s not the first time a story like this has been out and about. “I’ve heard the story many times,” explains strategic investor Dennis Gartman on Fast Money. “But what’s different this time is that the story came out in the Independent, which is a pretty well respected newspaper.” Also, the fact that France and Japan were supposedly part of the discussion makes it seem more credible. “Of course everybody denied being at the meeting, they have to,” says Gartman. “But do I doubt for a moment that those talks have taken place somewhere? That leaders have talked behind curtains about the fact the world needs to diversify away from the dollar? I don’t doubt that for a moment.” After all, China has broached the subject before too. In any event, it’s all just talk at this point.
Bill raises down payment requirements
FHA Taxpayer Protection Act of 2009 — HR 3706, a bill introduced in Congress Monday, would increase the minimum down payment for Federal Housing Administration (FHA)-insured mortgages from 3.5% to 5%, and prohibit financing initial service charges, appraisals, inspections, or other fees or closing costs with any part of an FHA mortgage. The bill’s author, Rep. Scott Garrett (R-NJ), said the current policy of allowing closing costs to be rolled into the mortgage effectively reduces FHA down payments to as low as 2.5% because borrowers don’t have to have as much cash on hand at closing. “[T]he benefits of promoting homeownership using government subsidies must be balanced against the potential risk of insuring less creditworthy borrowers and exposing the American taxpayer to that risk,” Garrett said in a statement on his Web site. “As we have learned repeatedly throughout the mortgage crisis, the amount of equity a homeowner has in their home directly correlates to the credit risk associated to their mortgage.” But Scott Stern, CEO of the Lenders One mortgage cooperative, a group of independent mortgage lenders, says the down payment requirement for FHA loans has been consistent for years before the mortgage crisis, and the FHA program worked well. Instead, he said, it was the layering of risk, including questionable product terms, prepayment penalties, and unsound adjustable-rate mortgages (ARMs) that led to the rise of foreclosures.
Credit debt down, scores up
Credit Karma, a consumer advocate, released its U.S. Credit Score Climate Report with trend data for September 2009. Consumer credit card debt decreased this month. In addition, from June to September credit card debt decreased by 4% nationally and four states experienced double digit decreases in credit card debt quarter over quarter. In September, the average consumer with an open account had:
– $6,641 in credit card debt
– $190,096 in home mortgage loan
– $50,812 in home equity
– $14,402 in auto loans
– $26,295 in student loans
In addition, credit scores are on the rise for many consumers. 39% of consumer credit scores have increased, 29% have decreased, and 32% remained the same. The current average U.S. consumer credit score is 672, which is down two points since June and four points since the beginning of the year.
Now on to our real estate educational section…
VAT – Value Added Taxes May Result in Dramatic Real Estate Rate Increase
Although others may not fully appreciate the complete impact of the recently proposed VAT (Value Added Tax) proposed at the recent G20 summit, here at the short sale blog we try to keep readers informed about issues with plenty of advance notification…after all, information is key to success in short sales as well as any other forms of investment.
The VAT or Value Added Tax has long been a bone of contention but growing budget deficits and increased spending has created a need for more tax revenues—and fast. One proposed “solution” is a European style value-added tax or VAT. If recent rumblings and ruminations are any indication, it could be a matter of time before the United States follows the examples of other nations around the world.
According to Jon Podesta, co-charimant of Obama’s transition team and White House advisor, a “value –added tax is more plausible today than ever…there’s going to have to be revenue in this budget”.
A recent speech at the Center for American Progress by Roger Altman, CAP President Podesta, Laura Tyson and others noted “$400 billion in new tax revenue is needed almost immediately to calm financial market fears, and a VAT would be a great way of doing it”. That’s $400 billion a year, by the way, not over ten years.
In an interview with Charlie Rose, former Federal Reserve Chairman Paul Volcker stated “if Washington can’t get spending under control, either a VAT or a carbon tax would be effective revenue raisers.”
So, what how would a VAT impact real estate? Let’s take a look at Greece for one possible example. The overall VAT in Greece stands at 19% with reduced rates for food, medicine and other necessities. Real Estate transfer taxes average 9% to 11% depending upon the value and location of the property and are paid by the buyer of the property not the seller. Additionally, real estate owners are taxed on the value of the real estate owned much like local property taxes are assed today; there is an exemption for properties below a specified values while those above the limit are assessed .35%-.94% annually.
Taking an average sales price of $160,000 USD and adding an additional 10% would cost the buyer $16,000 more for the exact same home with another $1,600 per year.
Lest you think Greece is an extraordinarily high example, consider Romania with their flat 19% VAT for all real estate or the newly implemented VAT for Cypress of 15% for applicable properties (older properties are grand-fathered in and not subject to the full VAT).
Bottom line…should a VAT be implemented in the United States it could increase the cost of new homes practically overnight while driving up the residual value of existing properties. Is this a sure bet? By no means but it certainly is one quick solution to a growing liquidity problem facing the federal government. Keep your eyes and ears open for both short and long term opportunities to profit from the current economic changes taking place.
See you at the top!
Chris McLaughlin
http://www.shortsalesriches.com
P.S. : YOU MUST SEE THIS! The move celebrated real estate
investing movie of the year:
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About the author:
Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.
* As the top Florida foreclosure and pre-
foreclosure expert, he oversees more than
100 short sale & REO closings each month
* Long-time authority on real estate investing
and rapid reselling of distressed homes. Owns
portfolio of nearly 100 high-value, high-profit
properties
* Owner of one of Florida’s largest Real Estate firms,
running 4 different offices, supporting nearly
400 agents, uniquely positioning him to help
thousands of investors make money in the
biggest market opportunity ever!
* Highly sought-after speaker, consultant, and
seminar leader for current trends and hot topics
in Real Estate Investing, Entrepreneurship, and
Wealth Building
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