I was reading John Occhui's post

The Next Wave of Bad Loans - Option Arms

This is not new news; this is a rehash of what has been said about Option ARMS since the beginning. My tag line that I print on my business card and had on my website during the go-go years was, "Friends Don't Let Friends Buy Options ARMS."

I once had a booth at the Fremont Art and Wine Festival, with a big poster with my tag-line, and all the mortgage brokers that passed by laughed because they understood what it meant, but they'd loved the money they were making off option ARMs.

With the exception of the little old blind ladies, there is no sympathy here for borrowers, you were focused on your cash-out and paid no heed to the consequences. If you take a loan with a variable element, you have to be prepared to deal with the variable when it happens.

At an open house last week, a mortgage broker came by all excited because he now was offering an FHA with only a 0.5% down payment. I asked him, if someone can't manage to save 3.5% do you really think they'll be able to manage their money to make the monthly mortgage. He agreed, but continued to try to educate me on the program benefits. Yes, I know it's harder to make money, but please let's not be doing things that will make matters worse down the line.

If they are going to allow people to buy homes with no skin in the game, then they should cap their DTI's to 30%. That would be sensible, but since the same people who ran the banks during the crisis are still running the bank, why should we expect any sensibility from them or the government. Everyone is simply interested in getting their next trick.

A client was asking my how they could reduce they MAGI (modified adjusted gross income), below the $150,000 threshold for Married Filing Jointly.

The answer was I don't practice as a CPA anymore. Having said, that I was still curious, so the the only way to reduce MAGI which is AGI (line 37 on the bottom of page 1 of the 2008 form 1040) is to reduce taxable income (defer income or increase 401k withholding) or increase the deductions to get to AGI (which are IRA, SEP and Health care account deductions).

Take a look at the 1040 Form

Or one could choose to quit working or take some unpaid time off - hey it's worth considering.

If anyone other ideas, please do share.

FAQ on the $8000 credit.

Lately every home I bid on has been getting mulitple bids and going over asking. And they're  not all REOs, in fact the last two were regular sales in Newark, CA.

I bid on a duet in Newark recently and it got 7 offers, and looks to have went over asking, which was $25k over the last closed of the same unit. It's nuts to chase up a house in this environment.

Also a entry level detached home in Newark got 33 offers with the high about $50k over asking. Also nuts. Again these were regular transactions.

Yes interest rates are low, and prices have come down, but the lack on inventory in Fremont, Newark, and Union City is temporary is making buyers behave irrationally. Similar to how they behaved in 2003-2005.

More homes will be coming on the market, especially in the low end, so be patient. Don't Panic!!!

There will be plenty of homes for everyone to get into at  reasonable price.

A client I worked with this last weekend, got me to thinking about how I should look at this problem. It's all going to boil down to what you think will happen with:

• Your income stream (job security, ability to get another job, if your company decides it needs to downsize, etc.)
  
• Mortgage Interest Rates
  
• Property Values

Obviously, renting is the safer, securer option for you right now, but the benefit of owning is that you fix your housing costs (since a 30 yr mortgage is major component of your home ownership costs, taxes are limited to increasing at 2% (California's Proposition 13), and insurance rates have actually come down the last 2 years).

I don't think pricing will move up the next year. However we don't know where interests maybe. One concern out there is that interest rates will be higher in the future because of money the government is printing right now will cause inflation.

So the big benefit of buying today is that rates are low, and pricing is also very good. Take a look at Table 1

Table 1 - Impact to Monthly Mortgage with 1% increases to the Interest Rate

 Today you can get a rate in the low 5%. At 5.25% your monthly mortgage would be $1,987.93. If rates increased by 1% in the future, and your monthly pmt would increase by $361/month or 18% over today's rate. Column 3 assumes that rates increases by 2% in the future, in which case your monthly payment increases by $468/mth or 23.5% over the rate offered today.

To see how much home prices would have to drop if rates were to increase to keep you at parity, look at Table 2.

Table 2 - Drop in Home Prices required to Offset a 1% increase to the Interest Rate

So in this example home prices would need to drop 10% or 38,000 to keep the mortgage pmt the same you would get by buying today at $360,000 at a 5.25% rate.

I hadn't done this calculation until just now, but it is interesting. I do believe that rates will rise in the future by a 1% because of inflation, however, I'm less certain that home prices will drop another 10%. It's all going to boil down to how bad this recession becomes. If the stimulus kicks in and American ingenuity comes into play like it did after the dot=com bubble collapsed, then don't be surprised if these media outlets all of a sudden start writing about how GDP growth and job gains.

Hope you find this information useful. Good luck in your home buying!

Sunil Sethi
http://www.sunilsethi.com/

Debt Relief Income Exempt from California State Income Tax:

This will be welcome relief for those taxpayers who had relief of debt in 2007 & 2008. If you've already filed your tax return, there are options to file an amended return. Given that the federal provisions were recently extended to 2012, California legislatures are being short sighted, and creating unnecessary anxiety for taxpayers who will be recognizing relief of debt from 2009 to 2012. Details on Senate Bill 1055

summary:

The California mortgage forgiveness debt relief law is effective immediately. It is similar to federal law, but with important differences.

The California law covers qualified debt forgiven in 2007 and 2008, and it:

• Limits the amount of qualified principal residence indebtedness to $800,000 for taxpayers who file as married/registered domestic partners (RDP) filing jointly, single, head of household, or widow/widower, and to $400,000 for taxpayers who file as married/RDP filing separately.
• Limits debt relief to $250,000 for taxpayers who file as married/RDP filing jointly, single, head of household, or widow/widower, and to $125,000 for taxpayers who file as married/RDP filing separately.

The federal law covers qualified debt forgiven from 2007 through 2012,¹ and it:

• Limits the amount of qualified principal residence indebtedness to $2,000,000 for taxpayers who file as married filing jointly, single, head of household, or widow/widower, and to $1,000,000 for taxpayers who file as married filing separately.
• Does not limit the debt relief amount: it only limits the indebtedness amount used to calculate the debt relief amount.