Here's an interesting story regarding Reverse Mortgages, written by Terry Savage of the Sun Times.
http://www.suntimes.com/business/savage/3570534-452/mortgage-reverse-equity-interest-money.html
If you know a senior homeowner who is running out of money, a reverse mortgage might generate enough cash to allow them to stay in their home for many more years. Last fall the Federal Housing Administration created new rules, and opportunities, for lower-cost reverse mortgages. Now that most lenders have launched these new products, it’s worth an updated look.
Reverse mortgage basics
A reverse mortgage turns your home into your pension, either giving you a lump-sum payout from the equity in your home or a fixed monthly check that will keep paying you as long as you live in the home.
This reverse mortgage is available to homeowners age 62 or older who either have paid off their mortgage or have a small remaining balance. The amount you can receive is determined by your age, the value of your home and current interest rates. Basically, the older you are when you take out the reverse mortgage, the more money you can receive — either in a lump sum or monthly payout.
And all the money you withdraw is tax-free, since it is the return of your own capital.
You don’t need a credit check, and you retain title to your home. You won’t have any mortgage payments, although you will be responsible for homeowners insurance, property taxes and upkeep on your home. But you’ll now have a monthly check to pay for those expenses, or a pool of money in the bank to cover emergencies.
Basically, you are just borrowing from yourself — although you will be paying interest on that loan. But the interest is added to the amount of equity taken out of the home. When you sell the home, or die, the amount you have borrowed out of your home’s equity must be repaid from the sale proceeds.
Importantly, you — or your heirs — can never owe more than the home is worth. And you can never be forced out of your home because you’ve “run out” of equity. Eventually, when the home is sold, because you move or die, any proceeds (minus the withdrawals, interest and fees) are returned to you, or your heirs.
If that sounds too good to be true, this is the one product that really is as good as it sounds — if you understand all the details and costs.
Costs and considerations
There are basically two kinds of reverse mortgages, and they are offered by many banks. Since all of these mortgages are insured by the Federal Housing Administration, they must follow the same basic rules — although there could be some differences in cost.
A reverse mortgage is called a HECM loan, which stands for Home Equity Conversion Mortgage. There are two types of loans — the Standard HECM and the newer “HECM Saver.” Each lets you borrow a different percentage of your equity, and each has different fees.
The amount you can borrow on a reverse mortgage depends on the appraised value of your home. But no matter how valuable your home, the FHA has determined that the maximum amount of equity that will be considered for a reverse mortgage in 2011 is $625,500.
The interest paid (taken out of your remaining equity) on both of these loans can be either at a fixed or variable rate. These days, few lenders will promise a fixed monthly payment at a fixed interest rate for the rest of your life. So most loans are variable rate, based on an index set by the FHA, and typically the interest is adjusted monthly. The initial interest rate on the Saver loan is slightly higher than on the Standard loan.
The Standard HECM loan allows you to access more money from your home equity than the Saver HECM, which allows access to about 20 percent less equity. But the Standard requires a 2 percent upfront premium — again taken out of your equity — while the Saver has a tiny .01 percent upfront fee. Both loans also take a monthly insurance premium of 1.25 percent out of your equity to pay for the FHA insurance on these products.
(The FHA insurance protects the lenders, so they don’t lose money. Think about it this way: If the bank promises to pay you $2,000 a month for life in a reverse mortgage, and if you live to be 100, instead of the expected 85, the bank will lose out on the deal. The FHA insurance covers that possibility.)
The one place lenders do compete is in origination fees on these loans. The law allows banks to charge a maximum of $6,000 in origination fees, but many lenders today advertise that they will waive the entire origination fee. (They know they will make money on the loan interest over the years — as long as you don’t live too long.)
Getting started
If you’re interested in knowing what you could get in a reverse mortgage, go to ReverseMortgage.org, and use the online calculator to see what monthly payment or lump sum may be received out of your home. You can also search for reverse mortgage lenders in your area.
In the box here, you can see an example of what you could receive in a reverse mortgage.
Are you still worried about taking money out of your home? It’s understandable if you are because a reverse mortgage is only available to a homeowner who has paid off the mortgage, or has a small remaining balance. If you fall in that category, you’ve been a good saver all your life. So think of it as your home repaying you for all those years of saving.
Before taking out a reverse mortgage you must go through a counseling process to make sure you understand how this works. And as part of that process, the lender must estimate for you how much you will have withdrawn from your equity after three, five and 10 years, and up to the youngest borrower’s 100th birthday, even if the interest rate adjusts upward to the cap. (Important note: On all these adjustable loans, the rate can rise up to 10 percent higher than the initial rate.)
There is one good way to beat the lender on a reverse mortgage. That’s to stay healthy and live in your home for many years, while you keep collecting the money. That’s what I keep telling my own father about the reverse mortgage I organized for him nearly a decade ago. I think it’s an inspiration for him.
And it could be the answer for you, so if you’re planning and hoping to stay in your home for a while, check out a reverse mortgage. Lenders know they are dealing with seniors and their families, so they are set up to patiently explain the process. It doesn’t cost anything to investigate a reverse mortgage and it may pay off big time. That’s the Savage Truth.
Terry Savage is a registered investment adviser.
Sunday, January 30, 2011
Saturday, January 29, 2011
Consumer Confidence Is Rising.
Here's an interesting story about rising consumer confidence.
http://www.foxnews.com/us/2011/01/25/consumer-confidence-index-hits-month-high-1679412010/
Consumer Confidence Index hits 8-month high
WASHINGTON – Consumer confidence hit an eight-month high in January. The increase suggests the rising spirits that fueled a holiday shopping boom are carrying over into the new year as people feel better about the job market.
The Conference Board said Tuesday its Consumer Confidence Index climbed to 60.6 this month from 53.3 in December.
While confidence is still far from the 90 that signals a healthy consumer mindset, the January improvement was better than expected. Some economists said the big tax relief package Congress passed in late December may have helped.
"So much for a ho-hum January," said Jennifer Lee, senior economist at BMO Capital Markets. "The signing of the stimulus bill and all that it is intended to bring is buoying sentiment."
The $858 billion package extended the Bush-era tax relief at all income levels for two years, provided tax breaks for businesses and reduced Social Security payroll taxes by 2 percentage points this year. The Social Security reduction will mean an estimated $1,000 in additional after-tax income for the average family, according to White House estimates.
Other analysts suggested that the recent gains in the stock market and improving labor market conditions were trumping higher gasoline prices and falling home prices. The Standard & Poor's/Case-Shiller 20-city index showed home prices falling in most of America's largest cities and hitting their lowest point since the housing bust in eight markets.
"The recovery in stock prices and the beginnings of an improvement in the labor market are making people feel better about the economy," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
The January confidence figure was the highest last May's 62.7. At that time, consumer attitudes were improving as economic growth seemed to be taking off. However, the economy stalled in the summer, and so did confidence.
Confidence has been depressed by unemployment that surged during the country's worst recession since the 1930s and has stayed stubbornly high even though the downturn ended in June 2009. Confidence has not been above 90 since the recession began in December 2007.
In the Conference Board survey, the percentage of people surveyed who felt jobs were hard to get fell slightly to 43.4 percent from 46 percent in December. The share who expected to see more jobs six months from now rose to 16 percent from 14.2 percent.
That finding supported a separate report Monday from the National Association for Business Economics that showed the number of firms expressing positive views on hiring had climbed to the highest level in 12 years.
While confidence has stayed weak since the recession ended in summer 2009, consumer spending has been picking up. During the 2010 holiday shopping season, sales increased at the fastest rate in six years.
Economists are hoping that consumer confidence will keep rising in 2011 as the economy improves and unemployment declines.
Employers added 1.1 million jobs for all of 2010, but the nation still has 7.2 million fewer jobs than it did in December 2007, when the recession began. Many economists expect the nation will create twice as many jobs this year as it did last year as economic growth picks up.
The Conference Board confidence index was based on answers to questions from a survey of 5,000 U.S. households taken through Jan. 18.
http://www.foxnews.com/us/2011/01/25/consumer-confidence-index-hits-month-high-1679412010/
Consumer Confidence Index hits 8-month high
WASHINGTON – Consumer confidence hit an eight-month high in January. The increase suggests the rising spirits that fueled a holiday shopping boom are carrying over into the new year as people feel better about the job market.
The Conference Board said Tuesday its Consumer Confidence Index climbed to 60.6 this month from 53.3 in December.
While confidence is still far from the 90 that signals a healthy consumer mindset, the January improvement was better than expected. Some economists said the big tax relief package Congress passed in late December may have helped.
"So much for a ho-hum January," said Jennifer Lee, senior economist at BMO Capital Markets. "The signing of the stimulus bill and all that it is intended to bring is buoying sentiment."
The $858 billion package extended the Bush-era tax relief at all income levels for two years, provided tax breaks for businesses and reduced Social Security payroll taxes by 2 percentage points this year. The Social Security reduction will mean an estimated $1,000 in additional after-tax income for the average family, according to White House estimates.
Other analysts suggested that the recent gains in the stock market and improving labor market conditions were trumping higher gasoline prices and falling home prices. The Standard & Poor's/Case-Shiller 20-city index showed home prices falling in most of America's largest cities and hitting their lowest point since the housing bust in eight markets.
"The recovery in stock prices and the beginnings of an improvement in the labor market are making people feel better about the economy," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
The January confidence figure was the highest last May's 62.7. At that time, consumer attitudes were improving as economic growth seemed to be taking off. However, the economy stalled in the summer, and so did confidence.
Confidence has been depressed by unemployment that surged during the country's worst recession since the 1930s and has stayed stubbornly high even though the downturn ended in June 2009. Confidence has not been above 90 since the recession began in December 2007.
In the Conference Board survey, the percentage of people surveyed who felt jobs were hard to get fell slightly to 43.4 percent from 46 percent in December. The share who expected to see more jobs six months from now rose to 16 percent from 14.2 percent.
That finding supported a separate report Monday from the National Association for Business Economics that showed the number of firms expressing positive views on hiring had climbed to the highest level in 12 years.
While confidence has stayed weak since the recession ended in summer 2009, consumer spending has been picking up. During the 2010 holiday shopping season, sales increased at the fastest rate in six years.
Economists are hoping that consumer confidence will keep rising in 2011 as the economy improves and unemployment declines.
Employers added 1.1 million jobs for all of 2010, but the nation still has 7.2 million fewer jobs than it did in December 2007, when the recession began. Many economists expect the nation will create twice as many jobs this year as it did last year as economic growth picks up.
The Conference Board confidence index was based on answers to questions from a survey of 5,000 U.S. households taken through Jan. 18.
Sunday, January 23, 2011
Something to be aware of if you received the $8,000 tax credit.
The two subsequent homebuyer credit programs enacted by Congress — $8,000 for first-time purchasers and $6,500 for repeat buyers — did not require repayments. But both programs came with strict rules that experts believe will add to revenues collected by the IRS during the years 2011 through 2013.
For instance, Congress required that credits claimed under the $8,000 and $6,500 legislation be repaid if the owners do not continually use their house as a principal residence for 36 months after the purchase. Say you took the $8,000 credit on your 2009 federal tax filing but then decided to sell the house or turn it into a rental investment in 2011. Guess what? Ka-ching! You owe the government $8,000 the day you make that move — and the IRS says it has increasingly sophisticated audit programs to detect such transactions and to sniff out frauds and other rule violations requiring paybacks and even penalties.
Here's a link to the entire story from the LA Times:
http://www.latimes.com/business/la-fi-harney-20110123,0,69868.story?track=rss
For instance, Congress required that credits claimed under the $8,000 and $6,500 legislation be repaid if the owners do not continually use their house as a principal residence for 36 months after the purchase. Say you took the $8,000 credit on your 2009 federal tax filing but then decided to sell the house or turn it into a rental investment in 2011. Guess what? Ka-ching! You owe the government $8,000 the day you make that move — and the IRS says it has increasingly sophisticated audit programs to detect such transactions and to sniff out frauds and other rule violations requiring paybacks and even penalties.
Here's a link to the entire story from the LA Times:
http://www.latimes.com/business/la-fi-harney-20110123,0,69868.story?track=rss
Monday, January 17, 2011
The Eight States Running Out Of Homebuyers
The single biggest problem in the U.S. real estate market is simple: There are very few homebuyers.
That seems obvious, but the “buyers’ strike” has caused house prices to drop, along with an epidemic of foreclosures.
What’s worse, the long depression in reaestate is probably not over. S&P has forecast that home prices will drop by 7 to 10% this year. The S&P Case-Shiller Index has dropped for most of the 20 largest real estate markets over the last several months. RealtyTrac recently reported that more than one million homes were foreclosed upon in 2010.
Many economists argue that the housing market may take four or five years to recover. Even if that’s proven to be true, the all-time highs of 2006 may never be reached again. The devastation in some regions, however, will never be repaired. Parts of Oregon, Georgia, and Arizona have become progressively more deserted. Since jobless rates may never recover, there is little reason to hope that the populations in these areas will ever rebound. Some homes will be torn down in these pockets of high foreclosures in the hopes that reducing supplies with boost prices. Whether that idea will work in hard-hit areas such as Flint, Mich
and Yuma, Ariz. remains to be seen.
24/7 Wall St. looked at a number of the standard measures to find the housing markets facing the biggest problems attracting buyers. After a detailed examination, six metrics were chosen;
1) vacancy rates for 2010
2) foreclosure rates for 2010
3) November 2010 unemployment rates
4) change in building permits from 2006 to 2010
5) change in population from 2005 to 2010
6) price reduction by major cities for 2010.
Taken together they create a strong statistical base to describe markets which buyers have largely abandoned.
Several states nearly made it onto the list such as Colorado and South Carolina, but did not get poor enough marks across all of our measurements. Each was among the ten worst for declines in building permits.
Colorado had one of the worst foreclosure rates, and South Carolina one of the worst vacancy rates. However, the populations in both states have rebounded enough to make a strong case that their housing markets may recover moderately over time.
The review of the data raises several public policy issues. The most important of these is whether the federal focus on reviving the housing market should be concentrated in the hardest hit regions. The counter to that point of view is that some cities such as Flint or states like Nevada are in such bad shape that they are beyond assistance. Unemployment rates are too high in these areas and perhaps the number of homes on the market is too large.
One thing is certain. The housing recovery will be wildly uneven. A city like New York which has a dense population and large numbers of middle class and upper class buyers who will wait until they believe prices hit bottom will have a rapid recovery soon. Building permits granted in New York City over the last four years have been very low. The supply of apartments is also low. Those forces taken together with an even modest economic recovery will help push real estate prices higher in New York and regions with similar characteristics.
The real estate crisis has gone on for four years. In the states 24/7 Wall St. has chosen here, the crisis will go on much longer.
1. Michigan
Vacancy Rate: 15.98% (9th Worst)
Unemployment: 12.4% (Tied for 2nd Worst)
Population Change (2005-2010): -2.05% (Worst)
Michigan is one of only two states whose population has decreased in the last five
years. The state has lost more than 12,000 people, or 2% of its population, since
2005. Most of this population loss was undoubtedly due to the depression in the car industry that lead to the bankruptcies of GM and Chrysler. Flint, once one of the largest car manufacturing cities in America, has lost more than 10% of its population in the past 10 years. The state has the second worst unemployment rate in the country at 12.4%. Michigan has a home vacancy rate of 15.98%, the ninth-worst in the the US. There are large neighborhoods in Detroit which are vacant.
2. Nevada
> 2010 Foreclosures: 9.42% (Worst)
> Unemployment: 14.3% (Worst)
> Decrease in Building Permits 2006 to 2010: -84.39 (Worst)
In 2010, an incredible 9.42% of all housing units in Nevada were foreclosed upon
This is by far the highest foreclosure rate in the U.S., and is nearly twice that of
the next-worst state. Nevada also has the highest unemployment rate in the United States, at 14.3%.The recession undermined profits in the gaming industry. Between 2006 and 2010, the state had an 84.3% decrease in building permit requests, the largest drop in the country. This has resulted in the loss of tens of thousands of construction jobs.
3. Arizona
> Vacancy: 17.3% (5th Worst)
> Foreclosure: 5.73% (2nd Worst)
> Building Permits: -81.36% (4th Worst)
Arizona is among a handful of states most deeply wounded by the real estate
collapse. Some 5.73% of properties in the state have been foreclosed upon, the
second highest rate in the country, and 17.3% of homes are vacant, the fifth
greatest rate in the country. Also, Mesa, Phoenix, and Tucson, the state’s three
largest cities, are all among the top five American cities with the greatest percentage of price reductions for homes in 2010, along with Minneapolis and Baltimore. As of December 2010, these cities had 43%, 42%, and 38% of their listings with price reductions, respectively.
4. California
> 2010 Foreclosures: 4.08% (4th Worst)
> Unemployment: 12.4% (Tied for 2nd Worst)
> Change in # of Building Permits, 2006 vs. 2010: -74.7% (6th Worst)
California’s impact on the housing market is huge. The state is the largest among
the 50 in total GDP and housing units. California’s unemployment rate of 12.4%
now tied for second place with Michigan, once the jobless capital of the nation. I
2010, the state had one of the highest rate of foreclosure rates in the country, at
just over 4%. New construction has dropped off dramatically as well, with a 74 % decrease in new building permits between 2006 and 2010.
5. Illinois
> 2010 Foreclosures: 2.87% (9th Worst)
> Change in # of Building Permits, 2006 vs. 2010: -81.32% (5th Worst)
> Population Change: 1.23% (8th Worst)
Although Illinois has a relatively low residential vacancy rate, finding people to
buy homes can be difficult. The state’s population only grew 1.23% between 20005and 2010. This is the eighth worst growth rate in the country. Furthermore, the number of building permits issued since 2006 decreased 81.32%, the fifth greatest drop in the nation. The collapse of the state’s industrial base has been so great that its economy will not recover anytime soon.
6. Georgia
> 2010 Foreclosures: 3.25% (6th Worst)
> Unemployment: 10% (9th Worst)
> Change in # of Building Permits, 2006 vs. 2010: -82.29% (2nd Worst)
The number of building permits issued in 2006 in Georgia was 92,541. In 2010 that number dropped to 16,391. This is the second greatest decrease in the nation during that time. The state’s unemployment rate, at 10%, is above the national average of 9.4%. Also, in 2010, there were 130,966 foreclosures in Georgia, 3.25% of the state’s properties. This is an increase of 53.62% since 2008.
7. Oregon
> Unemployment: 10.6% (Tied for 5th Worst)
> Change in # of Building Permits, 2006 vs. 2010: -74.08% (7th Worst)
> # of Listings With Price Reductions (Portland): 35% (Tied for 8th Worst Among 50 Largest US Cities)
Oregon’s real estate market has suffered the double blow of a sharp drop in both building permits and price reductions on existing homes. Unemployment is 10.6%, the fifth worst rate in the country. The number of new building permits decreased by 74% from 2006 to 2010. In December 2010, 35% of listings in Portland, the state’s largest city, had price reductions.
8. Florida
> Vacancy Rate: 21.03% (2nd Worst)
> 2010 Foreclosures: 5.51% (3rd Worst)
> Change in # of Building Permits, 2006 vs 2010: -81.37% (3rd Worst)
Unemployment in Florida is 12%, the fourth worst in the country. Approximately 1.1 million residents are out of work. Statistics how that 21.03% of the state’s housing units are vacant. Furthermore, 5.51% of homes have been foreclosed upon. Florida was among five states that had the largest real estate booms from 2000 to 2006. Residential prices in some waterfront areas like Miami and Palm Beach rose by much more than double during that period. New home and condominium construction soared. Many of those residences have never been occupied and are still part of the inventory of homes for sale.
Sources:
1) vacancy rates for 2010 – American Community Survey (Census Bureau)
2) foreclosure rates for 2010 – RealtyTrac
3) November 2010 unemployment rates – Bureau of Labor Statistics
4) change in building permits from 2006 to 2010 – Census Bureau
5) change in population from 2005 to 2010 – Census Bureau
6) price reduction by cities for 2010 – Trulia
Douglas A. McIntyre, Michael B. Sauter, and Charles B. Stockdale
http://247wallst.com/2011/01/17/the-eight-states-running-out-of-homebuyers/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2FRyNm+%2824%2F7+Wall+St.%29&utm_content=Twitter
That seems obvious, but the “buyers’ strike” has caused house prices to drop, along with an epidemic of foreclosures.
What’s worse, the long depression in reaestate is probably not over. S&P has forecast that home prices will drop by 7 to 10% this year. The S&P Case-Shiller Index has dropped for most of the 20 largest real estate markets over the last several months. RealtyTrac recently reported that more than one million homes were foreclosed upon in 2010.
Many economists argue that the housing market may take four or five years to recover. Even if that’s proven to be true, the all-time highs of 2006 may never be reached again. The devastation in some regions, however, will never be repaired. Parts of Oregon, Georgia, and Arizona have become progressively more deserted. Since jobless rates may never recover, there is little reason to hope that the populations in these areas will ever rebound. Some homes will be torn down in these pockets of high foreclosures in the hopes that reducing supplies with boost prices. Whether that idea will work in hard-hit areas such as Flint, Mich
and Yuma, Ariz. remains to be seen.
24/7 Wall St. looked at a number of the standard measures to find the housing markets facing the biggest problems attracting buyers. After a detailed examination, six metrics were chosen;
1) vacancy rates for 2010
2) foreclosure rates for 2010
3) November 2010 unemployment rates
4) change in building permits from 2006 to 2010
5) change in population from 2005 to 2010
6) price reduction by major cities for 2010.
Taken together they create a strong statistical base to describe markets which buyers have largely abandoned.
Several states nearly made it onto the list such as Colorado and South Carolina, but did not get poor enough marks across all of our measurements. Each was among the ten worst for declines in building permits.
Colorado had one of the worst foreclosure rates, and South Carolina one of the worst vacancy rates. However, the populations in both states have rebounded enough to make a strong case that their housing markets may recover moderately over time.
The review of the data raises several public policy issues. The most important of these is whether the federal focus on reviving the housing market should be concentrated in the hardest hit regions. The counter to that point of view is that some cities such as Flint or states like Nevada are in such bad shape that they are beyond assistance. Unemployment rates are too high in these areas and perhaps the number of homes on the market is too large.
One thing is certain. The housing recovery will be wildly uneven. A city like New York which has a dense population and large numbers of middle class and upper class buyers who will wait until they believe prices hit bottom will have a rapid recovery soon. Building permits granted in New York City over the last four years have been very low. The supply of apartments is also low. Those forces taken together with an even modest economic recovery will help push real estate prices higher in New York and regions with similar characteristics.
The real estate crisis has gone on for four years. In the states 24/7 Wall St. has chosen here, the crisis will go on much longer.
1. Michigan
Vacancy Rate: 15.98% (9th Worst)
Unemployment: 12.4% (Tied for 2nd Worst)
Population Change (2005-2010): -2.05% (Worst)
Michigan is one of only two states whose population has decreased in the last five
years. The state has lost more than 12,000 people, or 2% of its population, since
2005. Most of this population loss was undoubtedly due to the depression in the car industry that lead to the bankruptcies of GM and Chrysler. Flint, once one of the largest car manufacturing cities in America, has lost more than 10% of its population in the past 10 years. The state has the second worst unemployment rate in the country at 12.4%. Michigan has a home vacancy rate of 15.98%, the ninth-worst in the the US. There are large neighborhoods in Detroit which are vacant.
2. Nevada
> 2010 Foreclosures: 9.42% (Worst)
> Unemployment: 14.3% (Worst)
> Decrease in Building Permits 2006 to 2010: -84.39 (Worst)
In 2010, an incredible 9.42% of all housing units in Nevada were foreclosed upon
This is by far the highest foreclosure rate in the U.S., and is nearly twice that of
the next-worst state. Nevada also has the highest unemployment rate in the United States, at 14.3%.The recession undermined profits in the gaming industry. Between 2006 and 2010, the state had an 84.3% decrease in building permit requests, the largest drop in the country. This has resulted in the loss of tens of thousands of construction jobs.
3. Arizona
> Vacancy: 17.3% (5th Worst)
> Foreclosure: 5.73% (2nd Worst)
> Building Permits: -81.36% (4th Worst)
Arizona is among a handful of states most deeply wounded by the real estate
collapse. Some 5.73% of properties in the state have been foreclosed upon, the
second highest rate in the country, and 17.3% of homes are vacant, the fifth
greatest rate in the country. Also, Mesa, Phoenix, and Tucson, the state’s three
largest cities, are all among the top five American cities with the greatest percentage of price reductions for homes in 2010, along with Minneapolis and Baltimore. As of December 2010, these cities had 43%, 42%, and 38% of their listings with price reductions, respectively.
4. California
> 2010 Foreclosures: 4.08% (4th Worst)
> Unemployment: 12.4% (Tied for 2nd Worst)
> Change in # of Building Permits, 2006 vs. 2010: -74.7% (6th Worst)
California’s impact on the housing market is huge. The state is the largest among
the 50 in total GDP and housing units. California’s unemployment rate of 12.4%
now tied for second place with Michigan, once the jobless capital of the nation. I
2010, the state had one of the highest rate of foreclosure rates in the country, at
just over 4%. New construction has dropped off dramatically as well, with a 74 % decrease in new building permits between 2006 and 2010.
5. Illinois
> 2010 Foreclosures: 2.87% (9th Worst)
> Change in # of Building Permits, 2006 vs. 2010: -81.32% (5th Worst)
> Population Change: 1.23% (8th Worst)
Although Illinois has a relatively low residential vacancy rate, finding people to
buy homes can be difficult. The state’s population only grew 1.23% between 20005and 2010. This is the eighth worst growth rate in the country. Furthermore, the number of building permits issued since 2006 decreased 81.32%, the fifth greatest drop in the nation. The collapse of the state’s industrial base has been so great that its economy will not recover anytime soon.
6. Georgia
> 2010 Foreclosures: 3.25% (6th Worst)
> Unemployment: 10% (9th Worst)
> Change in # of Building Permits, 2006 vs. 2010: -82.29% (2nd Worst)
The number of building permits issued in 2006 in Georgia was 92,541. In 2010 that number dropped to 16,391. This is the second greatest decrease in the nation during that time. The state’s unemployment rate, at 10%, is above the national average of 9.4%. Also, in 2010, there were 130,966 foreclosures in Georgia, 3.25% of the state’s properties. This is an increase of 53.62% since 2008.
7. Oregon
> Unemployment: 10.6% (Tied for 5th Worst)
> Change in # of Building Permits, 2006 vs. 2010: -74.08% (7th Worst)
> # of Listings With Price Reductions (Portland): 35% (Tied for 8th Worst Among 50 Largest US Cities)
Oregon’s real estate market has suffered the double blow of a sharp drop in both building permits and price reductions on existing homes. Unemployment is 10.6%, the fifth worst rate in the country. The number of new building permits decreased by 74% from 2006 to 2010. In December 2010, 35% of listings in Portland, the state’s largest city, had price reductions.
8. Florida
> Vacancy Rate: 21.03% (2nd Worst)
> 2010 Foreclosures: 5.51% (3rd Worst)
> Change in # of Building Permits, 2006 vs 2010: -81.37% (3rd Worst)
Unemployment in Florida is 12%, the fourth worst in the country. Approximately 1.1 million residents are out of work. Statistics how that 21.03% of the state’s housing units are vacant. Furthermore, 5.51% of homes have been foreclosed upon. Florida was among five states that had the largest real estate booms from 2000 to 2006. Residential prices in some waterfront areas like Miami and Palm Beach rose by much more than double during that period. New home and condominium construction soared. Many of those residences have never been occupied and are still part of the inventory of homes for sale.
Sources:
1) vacancy rates for 2010 – American Community Survey (Census Bureau)
2) foreclosure rates for 2010 – RealtyTrac
3) November 2010 unemployment rates – Bureau of Labor Statistics
4) change in building permits from 2006 to 2010 – Census Bureau
5) change in population from 2005 to 2010 – Census Bureau
6) price reduction by cities for 2010 – Trulia
Douglas A. McIntyre, Michael B. Sauter, and Charles B. Stockdale
http://247wallst.com/2011/01/17/the-eight-states-running-out-of-homebuyers/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2FRyNm+%2824%2F7+Wall+St.%29&utm_content=Twitter
Thursday, January 13, 2011
Homes Sales Expected to Rise in 2011.
Housing economists expect the troubled residential market to begin picking up in 2011, with low mortgage rates and bargain home prices boosting sales in the spring selling season.
The economists, who delivered their forecasts on a panel at the National Association of Home Builders' annual meeting here, noted the market remains extremely weak, prices are still falling, and they don't expect any recovery to be robust. But they said a number of recent economic indicators have convinced them that housing sales, which have stalled lately, could soon begin to recover.
The economy is creating new jobs, holiday sales came in better than expected, and sales of cars and furniture have improved, noted David Crowe, chief economist for the NAHB. Those trends, he said, are "signifying growing consumer confidence."
After years of abysmal construction and sales activity, Mr. Crowe expects builders to start construction on 575,000 single-family homes this year, up 21% from last year. That would still be far below the 2005 peak of 1.7 million housing starts.
The NAHB also expects new home sales to hit 405,000, up 26% from 2010, as buyers who delayed purchases ink deals.
To be sure, the outlook for 2010 at last year's conference proved much too optimistic. At that time, the NAHB economist saw 610,000 single-family starts for 2010. The actual count, which isn't yet final, is expected to come in at 475,000.
But Mr. Crowe says this year will be better as more jobs are filled and more buyers leave the sidelines. "Consumers are finally willing to go forward," he said.
The outlook for home prices is less upbeat. Freddie Mac Chief Economist Frank Nothaft expects home prices to bottom in the first half of this year, and mortgage rates to edge up slightly, ending 2011 closer to 5.25%.
David Berson, chief economist of mortgage insurer PMI Group, believes prices will weaken further in the next few months, but end the year flat. Next year, he said in an interview, pricing will increase slightly.
It won't be until 2013 that there will be long-term sustainable gains at the historical average rate of 3.5%-4%, he said. Mr. Berson missed the panel as a result of weather-related travel problems, but provided his outlook in a phone interview.
Many of the 50,000 attendees at this year's builders conference are also cautiously optimistic, hoping that prices have come down far enough to pull buyers off the fence.
"People now have waited long enough and are tired of waiting," said Don Eyler, owner of E+R Construction in Indiana. "Right now, you can build a house for the same price as an existing one in some places."
Other builders questioned whether they would be in a position to benefit when any upturn occurs. "I've been a builder for 44 years," said Richard Jenkins, owner of R.J. Builders in Terre Haute, Ind. "Indiana has little dips and little valleys, but I've never seen anything like this before. In 1982, you could borrow money. You just had to pay the price for it. Now, you can't."
Story written By DAWN WOTAPKA And S. MITRA KALITA. Wall Street Journal
http://online.wsj.com/article_email/SB10001424052748703889204576078242541525196-lMyQjAxMTAxMDEwMzExNDMyWj.html
The economists, who delivered their forecasts on a panel at the National Association of Home Builders' annual meeting here, noted the market remains extremely weak, prices are still falling, and they don't expect any recovery to be robust. But they said a number of recent economic indicators have convinced them that housing sales, which have stalled lately, could soon begin to recover.
The economy is creating new jobs, holiday sales came in better than expected, and sales of cars and furniture have improved, noted David Crowe, chief economist for the NAHB. Those trends, he said, are "signifying growing consumer confidence."
After years of abysmal construction and sales activity, Mr. Crowe expects builders to start construction on 575,000 single-family homes this year, up 21% from last year. That would still be far below the 2005 peak of 1.7 million housing starts.
The NAHB also expects new home sales to hit 405,000, up 26% from 2010, as buyers who delayed purchases ink deals.
To be sure, the outlook for 2010 at last year's conference proved much too optimistic. At that time, the NAHB economist saw 610,000 single-family starts for 2010. The actual count, which isn't yet final, is expected to come in at 475,000.
But Mr. Crowe says this year will be better as more jobs are filled and more buyers leave the sidelines. "Consumers are finally willing to go forward," he said.
The outlook for home prices is less upbeat. Freddie Mac Chief Economist Frank Nothaft expects home prices to bottom in the first half of this year, and mortgage rates to edge up slightly, ending 2011 closer to 5.25%.
David Berson, chief economist of mortgage insurer PMI Group, believes prices will weaken further in the next few months, but end the year flat. Next year, he said in an interview, pricing will increase slightly.
It won't be until 2013 that there will be long-term sustainable gains at the historical average rate of 3.5%-4%, he said. Mr. Berson missed the panel as a result of weather-related travel problems, but provided his outlook in a phone interview.
Many of the 50,000 attendees at this year's builders conference are also cautiously optimistic, hoping that prices have come down far enough to pull buyers off the fence.
"People now have waited long enough and are tired of waiting," said Don Eyler, owner of E+R Construction in Indiana. "Right now, you can build a house for the same price as an existing one in some places."
Other builders questioned whether they would be in a position to benefit when any upturn occurs. "I've been a builder for 44 years," said Richard Jenkins, owner of R.J. Builders in Terre Haute, Ind. "Indiana has little dips and little valleys, but I've never seen anything like this before. In 1982, you could borrow money. You just had to pay the price for it. Now, you can't."
Story written By DAWN WOTAPKA And S. MITRA KALITA. Wall Street Journal
http://online.wsj.com/article_email/SB10001424052748703889204576078242541525196-lMyQjAxMTAxMDEwMzExNDMyWj.html
Saturday, January 8, 2011
Still Renting? You're not the only one.
Still Renting After All These Years
The Trend Toward Rentals Shows No Signs of Easing—Even Among Those Who Could Easily Afford to Buy a Home.Article Comments more in Personal Finance .
Mortgage rates are near historic lows and homes are more affordable than they have been in memory. Yet some five years after the housing bust began, many people who could easily afford to buy are still choosing to rent.
Amanda Oberhausen of Alpharetta, Ga., looked at several homes for sale, but decided to keep renting.
.Real-estate experts had been expecting a turnaround in the housing market by now, prompted by historically low mortgage rates, lower home prices and a broad, if tepid, economic recovery. In the fall of 2009 and spring of 2010 there were even minibursts of sales increases in many U.S. markets, thanks to temporary tax credits.
But now expectations for a broader housing recovery are being pushed to midyear or even 2012. Blame it on job insecurity, tougher lending requirements, fears of further housing price drops and stingier corporate relocation packages for new hires, say real-estate professionals and recruiters.
If anything, the rental trend even may be accelerating: In the last quarter of 2010, apartment vacancies fell below 7% nationally for the first time since the last quarter of 2008. Nationally, apartment rents increased by 2.3% in the fourth quarter of 2010 over the same period a year earlier, according to data from Reis Inc., a national real-estate research firm based in New York. It was their fourth consecutive quarterly increase.
In Barrington, Ill., a suburb of Chicago, the number of homes rented increased 20% in 2010 over 2009, according to one local real-estate agent. In the Hancock Park area of Los Angeles, there is a shortage of three-bedroom, two-bathroom homes for rent, local agents say. And in New York, sales of apartments priced below $1 million—middle-class housing in that high-priced market—are slow, while the rental market is thriving and rents are rising again, local agents say.
Amanda Oberhausen of Alpharetta, Ga., near Atlanta, was enticed by low prices and incentives for first-time home buyers, and dipped her toe in the market last summer and fall. She looked at two-bedroom, 2½-bath townhouses—much like the one she was renting—selling for $100,000 to $150,000.
Is it better to rent or buy? Use SmartMoney.com's calculator to figure out what's best for you.
.But as an account manager for a company that helps repossess printing equipment at defunct businesses, the 26-year-old couldn't shake her concerns about job security and whether she would be able to sell if she had to relocate. Ultimately, after looking at four or five homes, some of them foreclosures and short sales, she decided to keep her $925-a-month rental.
"I started thinking about buying because homes were so cheap, but I couldn't commit," Ms. Oberhausen says. "I was just too nervous."
Even affluent clients who have lots of cash on hand are renting instead of purchasing homes, say real-estate agents and brokers in markets such as Chicago, Los Angeles, New York, Miami and Kansas City, Mo.
In New York, rents rose last year over 2009, and landlord concessions such as a free month's rent are disappearing for high-end rentals. About 22% of landlords offered concessions in December, compared to 60% a year earlier, according to Citi Habitats, a Manhattan real-estate brokerage.
Citi Habitats had a 25% increase in rentals of apartments costing at least $7,000 per month in 2010 over 2009. "There's definitely a portion of the buying population that is concerned whether this is a good time to buy or not," says Gary Malin, the firm's president.
There is a shortage of single-family homes for rent in Bronxville, N.Y., and other parts of upscale Westchester County, real-estate agents say. Rentals also are becoming more popular in markets traditionally associated with vacation homes and investment properties, such as Miami and the tony Hamptons on New York's Long Island.
About 57 homes priced above $5 million have sold in Southampton and East Hampton in 2010, compared to 128 in 2007, the peak selling year, says Diane Saatchi, senior vice president of Saunders & Associates Inc., a real-estate brokerage in Bridgehampton, N.Y.
"Buyers think if they wait the price will come down, and sellers think if they wait the price will go up," Ms. Saatchi says. Transactions occur mainly if one party has a pressing need to move.
In Miami Beach's South Beach district, strong demand for high-end waterfront condos is driving up rents, says Claudia Lewis, a real-estate agent in Coral Gables, Fla. Three-bedroom units range from $10,000 to $30,000 a month and can go for as much as $75,000 a month for certain oceanfront properties.
Financial advisers such as Matthew Tuttle, a wealth manager in White Plains, N.Y., say home buyers who want to purchase a house for their own comfort and enjoyment should not sit around trying to wait for the exact market bottom.
"I think you cannot time the market for real estate just like you cannot time the stock market," he says, "so if you are planning to buy anyway you could do a lot worse than buying now."
To be sure, rising interest rates have energized the market a little: Sales of existing homes rose a seasonally adjusted 5.6% last November to 4.6 million from 4.43 million in October—but still far below the 6.49 million in sales a year earlier and well off the long-term historical average of about 5.5 million, according to the National Association of Realtors.
Pushing the Trend
Other factors are pushing the rental trend. In Barrington, the Chicago suburb—where the median sales price of house is about $450,000—the ceiling of $417,000 for a government-backed conventional mortgage is helping suppress demand for higher-priced homes, says Paul Wells, a local real-estate broker.
Meanwhile, the weak job market means fewer people are moving. Paul Bishop, research director of the National Association of Realtors, says purchases of second, or trade-up homes in the age group of 45 to 54 tend to be driven by job relocations, but "fewer people are moving because the economy is weak."
And companies have cut back on relocation benefits, recruiters and real-estate agents say. Instead, they are offering a flat sum to offset expenses for all but the highest-echelon executives. Even candidates earning $200,000 to $500,000 may not get full packages, says Lisa Chenofsky Singer, an executive consultant in Millburn, N.J.
Many would-be purchasers, like Steven Weissman, 49, a chemist who works for a pharmaceutical start-up in the Boston area, are renting small apartments or other temporary quarters near their new jobs and commuting hundreds of miles every week.
Mr. Weissman, whose 18-year career at Merck & Co. in Whitehouse Station, N.J., ended in 2008, gets up at 4:30 a.m. every Monday to make the 225-mile trek, leaving his wife and two children behind in Millburn, N.J. He's part of a group of six extreme commuters from the New Jersey-Philadelphia area who get together for dinner once a week. One member of the group has been commuting from New Jersey to the Boston area for five years.
"I'm the newcomer at 11 months," Mr. Weissman says.
http://online.wsj.com/article/SB10001424052748704610904576031883869635632.html?mod=sf2tw#printMode
The Trend Toward Rentals Shows No Signs of Easing—Even Among Those Who Could Easily Afford to Buy a Home.Article Comments more in Personal Finance .
Mortgage rates are near historic lows and homes are more affordable than they have been in memory. Yet some five years after the housing bust began, many people who could easily afford to buy are still choosing to rent.
Amanda Oberhausen of Alpharetta, Ga., looked at several homes for sale, but decided to keep renting.
.Real-estate experts had been expecting a turnaround in the housing market by now, prompted by historically low mortgage rates, lower home prices and a broad, if tepid, economic recovery. In the fall of 2009 and spring of 2010 there were even minibursts of sales increases in many U.S. markets, thanks to temporary tax credits.
But now expectations for a broader housing recovery are being pushed to midyear or even 2012. Blame it on job insecurity, tougher lending requirements, fears of further housing price drops and stingier corporate relocation packages for new hires, say real-estate professionals and recruiters.
If anything, the rental trend even may be accelerating: In the last quarter of 2010, apartment vacancies fell below 7% nationally for the first time since the last quarter of 2008. Nationally, apartment rents increased by 2.3% in the fourth quarter of 2010 over the same period a year earlier, according to data from Reis Inc., a national real-estate research firm based in New York. It was their fourth consecutive quarterly increase.
In Barrington, Ill., a suburb of Chicago, the number of homes rented increased 20% in 2010 over 2009, according to one local real-estate agent. In the Hancock Park area of Los Angeles, there is a shortage of three-bedroom, two-bathroom homes for rent, local agents say. And in New York, sales of apartments priced below $1 million—middle-class housing in that high-priced market—are slow, while the rental market is thriving and rents are rising again, local agents say.
Amanda Oberhausen of Alpharetta, Ga., near Atlanta, was enticed by low prices and incentives for first-time home buyers, and dipped her toe in the market last summer and fall. She looked at two-bedroom, 2½-bath townhouses—much like the one she was renting—selling for $100,000 to $150,000.
Is it better to rent or buy? Use SmartMoney.com's calculator to figure out what's best for you.
.But as an account manager for a company that helps repossess printing equipment at defunct businesses, the 26-year-old couldn't shake her concerns about job security and whether she would be able to sell if she had to relocate. Ultimately, after looking at four or five homes, some of them foreclosures and short sales, she decided to keep her $925-a-month rental.
"I started thinking about buying because homes were so cheap, but I couldn't commit," Ms. Oberhausen says. "I was just too nervous."
Even affluent clients who have lots of cash on hand are renting instead of purchasing homes, say real-estate agents and brokers in markets such as Chicago, Los Angeles, New York, Miami and Kansas City, Mo.
In New York, rents rose last year over 2009, and landlord concessions such as a free month's rent are disappearing for high-end rentals. About 22% of landlords offered concessions in December, compared to 60% a year earlier, according to Citi Habitats, a Manhattan real-estate brokerage.
Citi Habitats had a 25% increase in rentals of apartments costing at least $7,000 per month in 2010 over 2009. "There's definitely a portion of the buying population that is concerned whether this is a good time to buy or not," says Gary Malin, the firm's president.
There is a shortage of single-family homes for rent in Bronxville, N.Y., and other parts of upscale Westchester County, real-estate agents say. Rentals also are becoming more popular in markets traditionally associated with vacation homes and investment properties, such as Miami and the tony Hamptons on New York's Long Island.
About 57 homes priced above $5 million have sold in Southampton and East Hampton in 2010, compared to 128 in 2007, the peak selling year, says Diane Saatchi, senior vice president of Saunders & Associates Inc., a real-estate brokerage in Bridgehampton, N.Y.
"Buyers think if they wait the price will come down, and sellers think if they wait the price will go up," Ms. Saatchi says. Transactions occur mainly if one party has a pressing need to move.
In Miami Beach's South Beach district, strong demand for high-end waterfront condos is driving up rents, says Claudia Lewis, a real-estate agent in Coral Gables, Fla. Three-bedroom units range from $10,000 to $30,000 a month and can go for as much as $75,000 a month for certain oceanfront properties.
Financial advisers such as Matthew Tuttle, a wealth manager in White Plains, N.Y., say home buyers who want to purchase a house for their own comfort and enjoyment should not sit around trying to wait for the exact market bottom.
"I think you cannot time the market for real estate just like you cannot time the stock market," he says, "so if you are planning to buy anyway you could do a lot worse than buying now."
To be sure, rising interest rates have energized the market a little: Sales of existing homes rose a seasonally adjusted 5.6% last November to 4.6 million from 4.43 million in October—but still far below the 6.49 million in sales a year earlier and well off the long-term historical average of about 5.5 million, according to the National Association of Realtors.
Pushing the Trend
Other factors are pushing the rental trend. In Barrington, the Chicago suburb—where the median sales price of house is about $450,000—the ceiling of $417,000 for a government-backed conventional mortgage is helping suppress demand for higher-priced homes, says Paul Wells, a local real-estate broker.
Meanwhile, the weak job market means fewer people are moving. Paul Bishop, research director of the National Association of Realtors, says purchases of second, or trade-up homes in the age group of 45 to 54 tend to be driven by job relocations, but "fewer people are moving because the economy is weak."
And companies have cut back on relocation benefits, recruiters and real-estate agents say. Instead, they are offering a flat sum to offset expenses for all but the highest-echelon executives. Even candidates earning $200,000 to $500,000 may not get full packages, says Lisa Chenofsky Singer, an executive consultant in Millburn, N.J.
Many would-be purchasers, like Steven Weissman, 49, a chemist who works for a pharmaceutical start-up in the Boston area, are renting small apartments or other temporary quarters near their new jobs and commuting hundreds of miles every week.
Mr. Weissman, whose 18-year career at Merck & Co. in Whitehouse Station, N.J., ended in 2008, gets up at 4:30 a.m. every Monday to make the 225-mile trek, leaving his wife and two children behind in Millburn, N.J. He's part of a group of six extreme commuters from the New Jersey-Philadelphia area who get together for dinner once a week. One member of the group has been commuting from New Jersey to the Boston area for five years.
"I'm the newcomer at 11 months," Mr. Weissman says.
http://online.wsj.com/article/SB10001424052748704610904576031883869635632.html?mod=sf2tw#printMode
Banks lose foreclosure fight
http://www.usatoday.com/money/economy/housing/2011-01-07-banks-lose-foreclosure-case_N.htm?csp=34money&POE=click-refer
Banks lose their foreclosure fight in Massachusetts at first glance makes the 'little guy' say "That's what I'm talking about"!
Let's take a closer look.
If someone is being foreclosed on, it means they have not made their mortgage payments. Trust me, banks do not want to foreclose on people and will work with them at great lengths to help them keep their homes. When everything else fails, the bank has no choice but to foreclose.
So two of the big banks have lost their right to foreclose in Massachusetts because of a technicality in the way the deeds were transferred. What does this mean in the Big Picture? They will go back and re-record the transfers and will eventually foreclose on the homes, but at a considerable expense. Who do you think will ultimately bear the cost of this? The consumer will, of course.
Unless you have cash to purchase a home, it will mean more tightening of lending guidelines, which affects anyone who tries to borrow money.
Bottom line is this: if someone does not make their mortgage payment, they cannot expect to keep their home.
Banks lose their foreclosure fight in Massachusetts at first glance makes the 'little guy' say "That's what I'm talking about"!
Let's take a closer look.
If someone is being foreclosed on, it means they have not made their mortgage payments. Trust me, banks do not want to foreclose on people and will work with them at great lengths to help them keep their homes. When everything else fails, the bank has no choice but to foreclose.
So two of the big banks have lost their right to foreclose in Massachusetts because of a technicality in the way the deeds were transferred. What does this mean in the Big Picture? They will go back and re-record the transfers and will eventually foreclose on the homes, but at a considerable expense. Who do you think will ultimately bear the cost of this? The consumer will, of course.
Unless you have cash to purchase a home, it will mean more tightening of lending guidelines, which affects anyone who tries to borrow money.
Bottom line is this: if someone does not make their mortgage payment, they cannot expect to keep their home.
Monday, January 3, 2011
Frank-Dodd Act will cost borrowers more money
Banks feeling squeezed by rising regulatory costs are trying to pass along the pain to big corporate borrowers.
In the past several weeks, lenders such as J.P. Morgan Chase & Co. and Bank of America Corp. have begun including in loan documents language that will help banks shift to their large borrowers additional costs triggered by the Dodd-Frank financial-overhaul law.
The changes, disclosed in securities filings by companies from insurer American International Group Inc. to refinery and convenience-store owner Western Refining Inc., reflect guidelines by a trade group of banks and loan investors called the Loan Syndications and Trading Association that might be finalized by February but already are appearing in deal documents.
Under the guidelines, likely to be followed by most banks making corporate loans, lenders can require borrowers to take a financial hit for costs resulting from the Dodd-Frank law "regardless of the date" when the cost-triggering change occurs. The clause doesn't specify whether the new costs would be passed along as a fee or added interest costs, but it says borrowers would pay the lender "such additional amount" to "compensate" that institution.
Previously, lenders generally included the "increased-cost" clause only for situations in which laws or rules changed after a loan agreement was signed. While common, such clauses rarely have been invoked.
Now, though, "banks are very concerned and want the broadest possible protections" in loan documents, said Sarah Ward, co-head of the banking group at law firm Skadden, Arps, Slate, Meagher & Flom LLP. Lenders are jittery about how the financial-overhaul law will be implemented as rules are written and the challenge of "working through the implications of these regulatory changes given the size and diversity of their loan portfolios," Ms. Ward said.
Some borrowers have resisted the new language. Endo Pharmaceutical Holdings Inc., of Chadds Ford, Pa., negotiated a clause that said its lenders, led by J.P. Morgan, are entitled to increased loan fees only if the rules are implemented after the late 2010 credit agreement, according to a person familiar with the deal.
Large and small companies are vulnerable to the language change, though some observers said it is most likely to show up in situations in which a big bank arranges a loan for a company that wasn't lucrative even before the law passed.
Still, banks that press borrowers too hard could lose them to rival financial institutions or to the bond market, which already is benefiting from the reluctance of many banks to make loans. One reason why banks traditionally have been reluctant to pass along regulatory fees to corporate borrowers is that many credit agreements allow borrowers to switch to another lender if the provision is used.
Companies that recently issued high-yield bonds to repay bank debt include Virgin Media Inc., HCA Holdings Inc., and Georgia-Pacific LLC, analysts at Goldman Sachs Group Inc. wrote in a recent report. Virgin Media has cut its bank debt to 55% of the company's total debt from about 80% four years ago.
As of November, corporate borrowing costs were up about two percentage points compared with their average from 1997 to 2007, according to analysts at Goldman.
In addition to higher potential costs for companies, the toughened loan-document provisions could slow the rebound in lending to businesses that has begun at many U.S. banks, especially those that have emerged from the financial crisis with plenty of capital and profits.
"Lenders are going to want to pass those costs through, and since entire classes of lenders are going to be impacted" by the new rules, it's more likely that some will try to use the provisions to cover their rising costs, said Elliot Ganz, general counsel at the Loan Syndications and Trading Association.
While the Dodd-Frank law, passed in July 2010, doesn't target corporate loans directly, costs of such borrowing could increase as a result of a provision requiring packagers of corporate-loan products to retain the risk of what they are selling to other investors, Mr. Ganz said. International capital rules being implemented in the U.S. by the Federal Reserve and other regulators also likely will lead to higher costs.
Some corporate borrowers haven't balked at the new language. In a recent bridge-loan commitment to help fund an acquisition, real-estate investment trust HCP Inc. agreed to the provision with a group of banks, including Citigroup Inc. and UBS AG, because the Long Beach, Calif., company didn't intend to use the loan commitment and because the rest of the increased-cost language was kept the same as a past credit agreement, a person involved with the deal said.
Source: Aaron Lucchetti, Wall Street Journal
In the past several weeks, lenders such as J.P. Morgan Chase & Co. and Bank of America Corp. have begun including in loan documents language that will help banks shift to their large borrowers additional costs triggered by the Dodd-Frank financial-overhaul law.
The changes, disclosed in securities filings by companies from insurer American International Group Inc. to refinery and convenience-store owner Western Refining Inc., reflect guidelines by a trade group of banks and loan investors called the Loan Syndications and Trading Association that might be finalized by February but already are appearing in deal documents.
Under the guidelines, likely to be followed by most banks making corporate loans, lenders can require borrowers to take a financial hit for costs resulting from the Dodd-Frank law "regardless of the date" when the cost-triggering change occurs. The clause doesn't specify whether the new costs would be passed along as a fee or added interest costs, but it says borrowers would pay the lender "such additional amount" to "compensate" that institution.
Previously, lenders generally included the "increased-cost" clause only for situations in which laws or rules changed after a loan agreement was signed. While common, such clauses rarely have been invoked.
Now, though, "banks are very concerned and want the broadest possible protections" in loan documents, said Sarah Ward, co-head of the banking group at law firm Skadden, Arps, Slate, Meagher & Flom LLP. Lenders are jittery about how the financial-overhaul law will be implemented as rules are written and the challenge of "working through the implications of these regulatory changes given the size and diversity of their loan portfolios," Ms. Ward said.
Some borrowers have resisted the new language. Endo Pharmaceutical Holdings Inc., of Chadds Ford, Pa., negotiated a clause that said its lenders, led by J.P. Morgan, are entitled to increased loan fees only if the rules are implemented after the late 2010 credit agreement, according to a person familiar with the deal.
Large and small companies are vulnerable to the language change, though some observers said it is most likely to show up in situations in which a big bank arranges a loan for a company that wasn't lucrative even before the law passed.
Still, banks that press borrowers too hard could lose them to rival financial institutions or to the bond market, which already is benefiting from the reluctance of many banks to make loans. One reason why banks traditionally have been reluctant to pass along regulatory fees to corporate borrowers is that many credit agreements allow borrowers to switch to another lender if the provision is used.
Companies that recently issued high-yield bonds to repay bank debt include Virgin Media Inc., HCA Holdings Inc., and Georgia-Pacific LLC, analysts at Goldman Sachs Group Inc. wrote in a recent report. Virgin Media has cut its bank debt to 55% of the company's total debt from about 80% four years ago.
As of November, corporate borrowing costs were up about two percentage points compared with their average from 1997 to 2007, according to analysts at Goldman.
In addition to higher potential costs for companies, the toughened loan-document provisions could slow the rebound in lending to businesses that has begun at many U.S. banks, especially those that have emerged from the financial crisis with plenty of capital and profits.
"Lenders are going to want to pass those costs through, and since entire classes of lenders are going to be impacted" by the new rules, it's more likely that some will try to use the provisions to cover their rising costs, said Elliot Ganz, general counsel at the Loan Syndications and Trading Association.
While the Dodd-Frank law, passed in July 2010, doesn't target corporate loans directly, costs of such borrowing could increase as a result of a provision requiring packagers of corporate-loan products to retain the risk of what they are selling to other investors, Mr. Ganz said. International capital rules being implemented in the U.S. by the Federal Reserve and other regulators also likely will lead to higher costs.
Some corporate borrowers haven't balked at the new language. In a recent bridge-loan commitment to help fund an acquisition, real-estate investment trust HCP Inc. agreed to the provision with a group of banks, including Citigroup Inc. and UBS AG, because the Long Beach, Calif., company didn't intend to use the loan commitment and because the rest of the increased-cost language was kept the same as a past credit agreement, a person involved with the deal said.
Source: Aaron Lucchetti, Wall Street Journal
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