Home Sales And Job Creation Would Rise With Sensible Lending Standards

WASHINGTON (September 17, 2012) – New survey findings, combined with an analysis of historic credit scores and loan performance, show home sales could be notably higher by returning to reasonably safe and sound lending standards, which also would create new jobs, according to the National Association of Realtors®.

Lawrence Yun, NAR chief economist, said there would be enormous benefits to the U.S. economy if mortgage lending conditions return to normal.  “Sensible lending standards would permit 500,000 to 700,000 additional home sales in the coming year,” he said.  “The economic activity created through these additional home sales would add 250,000 to 350,000 jobs in related trades and services almost immediately, and without a cost impact.”

A monthly survey* of Realtors® shows widespread concern over unreasonably tight credit conditions for residential mortgages.  Respondents indicate that tight conditions are continuing, lenders are taking too long in approving applications, and that the information lenders require from borrowers is excessive.  Some respondents expressed frustration that lenders appear to be focusing only on loans to individuals with the highest credit scores.

Even though profits in the financial industry have climbed back strongly to pre-recession levels, lending standards still remain unreasonably tight.

Yun said all it takes is a willingness to recognize that market conditions have turned in the wake of an over-correction in home prices, with all of the price measures now showing sustained gains.  “There is an unnecessarily high level of risk aversion among mortgage lenders and regulators, although many are sitting on large volumes of cash which could go a long way toward speeding our economic recovery.  A loosening of the overly restrictive lending standards is very much in order,” he said.

Respondents to the NAR survey report that 53 percent of loans in August went to borrowers with credit scores above 740.  In comparison, only 41 percent of loans backed by Fannie Mae had FICO scores above 740 during the 2001 to 2004 time period, while 43 percent of Freddie Mac-backed loans were above 740.

In 2011, about 75 percent of total loans purchased by Fannie Mae and Freddie Mac, which are now a smaller market share, had credit scores of 740 or above.

There is a similar pattern for FHA loans.  The Office of the Comptroller of the Currency has defined a prime loan as having a FICO score of 660 and above.  However, the average FICO score for denied applications on FHA loans was 669 in May of this year, well above the 656 average for loans actually originated in 2001.

Loan performance over the past decade shows the 12-month default rate averaged just under 0.4 percent of mortgages in 2002 and 2003, which is considered normal.  Twelve-month default rates peaked in 2007 at 3.0 percent for Fannie Mae loans and 2.5 percent for Freddie Mac loans, clearly showing the devastating impact of risky mortgages.

Yun said home buyers in recent years have been highly successful.  Since 2009, the 12-month default rates have been abnormally low.  Fannie Mae default rates have averaged 0.2 percent while Freddie Mac’s averaged 0.1 percent, which are notable given higher unemployment in the timeframe.

Under normal conditions, existing-home sales should be in the range of 5.0 to 5.5 million.  “Sales this year are projected to rise 8 to 10 percent.  Although welcoming, this still represents a sub-par performance of about 4.6 million sales,” Yun said.  “These findings show we need to return to the sound underwriting standards that existed before the aberrations of the housing boom and bust cycle, and thoroughly re-examine current and impending regulatory rules that may cause excessively tight standards.”

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.

*Data derived from a monthly survey for the Realtors® Confidence Index based, on over 3,000 member responses, posted at www.Realtor.org.

Source: http://www.realtor.org/news-releases/2012/09/home-sales-and-job-creation-would-rise-with-sensible-lending-standards?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+RealtororgResearchHeadlines+%28REALTOR.org+Research+Headlines%29

Real Estate Tax Planing For 2013 Tax Hikes

Without Congressional action, a large number of tax provisions will expire on December 31, 2012. Every taxpayer will be affected with higher tax rates from payroll taxes to income tax rates.   Referred to as the “Bush Tax Cuts”, many of these 2012 expiring provisions were enacted in tax legislation in 2001 and 2003 included lower capital gains tax, marginal income tax rates, no marriage penalty tax and lower estate tax rates.  The expiration of these “Bush Tax Cuts” will greatly affect the real estate investors and small business owners whose businesses are organized as “pass-through” entities, where their business gains or losses are reflected on their individual returns.

• Capital Gains will be taxed at 20% rate, increased from the current 15% rate.
• Dividends received by individuals will be treated as ordinary income rather than taxed at a capital gain tax rate of 15%.
• Ordinary income tax rates will increase by 3.0% to 4.6% for those individuals in the 25% to 36% tax brackets.  The top tax bracket will be 39.6%.
• Small businesses with undistributed taxable income will be taxed at the highest individual rate of 39.6% rather than the current 15% tax rate.
• Estate and gift tax exemption will be reduced from $5 million to $1 million with the estate tax rate increasing from 35% to 55%.