Initial Forbearance Periods are Ending; Here’s What to Do Next

Jul 21, 2020 by Aly J. Yale

The CARES Act threw property owners a bone back in March, allowing for up to 180-day forbearances on government- and GSE-backed mortgages. But it’s now been months, and for many, those initial grace periods are starting to expire.

This image has an empty alt attribute; its file name is img_1023.jpg
michaelgouldgroup.com

If you’re in this boat, that means two things: First, mortgage payments will begin to resume. You’ll need to make your regularly scheduled payments — or risk going into default.https://9d9e8419191ffa071cfaff53a31c08ba.safeframe.googlesyndication.com/safeframe/1-0-37/html/container.html

On top of this, you will also need to work with your servicer to repay your missed payments. You can choose to pay a lump sum, defer your missed payments to the end of the loan term, modify your loan, or set up a monthly repayment plan. (If you have a private loan not backed by a government agency, Fannie Mae, or Freddie Mac, your options might be different here, so check with your servicer.)

Fortunately, letting your forbearance period expire isn’t your only option. If you’re not ready to start making payments again, you have a few alternatives to choose from. Here’s what you can do:

1. Extend your forbearance.

The CARES Act actually allows for up to two 180-day forbearances, so if you’re really struggling financially, you can contact your mortgage servicer and ask for an extension. This is a popular option, it seems. According to data from the Mortgage Bankers Association, about 43% of mortgage loans currently in forbearance are actually extensions.

“Forbearance can last up to a year,” says Tendayi Kapfidze, chief economist at loan marketplace LendingTree. “Call your lender and request an extension if you need more time.”

Just remember that the more payments you miss, the more you’ll owe once that forbearance period ends.

2. Refinance.

You can also refinance your mortgage loan to make payments more affordable. This might mean refinancing into a longer-term loan or to one with a lower interest rate. Rates on 30-year fixed-rate mortgages are currently at all-time lows, averaging 2.98% according to Freddie Mac.

According to Kapfidze, qualifying may be hard. “Lenders have tightened standards,” he says.”You will need to show that you are a good candidate for refinancing.”

3. Modify your loan.

A loan modification is similar to refinancing, except you don’t get a new mortgage; you just change the terms of your existing one. You’ll need to reach out to your servicer to discuss potential options for modification, but you may be able to lengthen your loan term, reduce your rate, or make other changes to your loan, so it’s always worth asking.https://9d9e8419191ffa071cfaff53a31c08ba.safeframe.googlesyndication.com/safeframe/1-0-37/html/container.html

4. Talk to a housing counselor.

If you’re not sure what to do, talking to a housing counselor can help shed light on your options. HUD has a long list of counseling agencies across the country, so just select your state and find one near you. They can walk you through your post-foreclosure choices as well as advise you on budgeting, refinancing, avoiding default and foreclosure, and more.

5. Sell the house.

It’s not ideal, obviously, but selling your property can be an option — especially if you’re worried your income won’t bounce back by the end of another forbearance period. Sales are actually strong right now, and home prices are still rising (at least for now), so listing that home soon could mean serious profits.

If you do go this route, consider holding on to those proceeds until the economic uncertainty blows over. It will provide a little financial cushion in case you fall behind on other bills or debts.

The bottom line

Whatever you do, don’t let your forbearance period expire and then continue skipping payments. Though foreclosures can’t technically start until September (under the CARES Act), falling behind on your payments can seriously ding your credit — and your chances at getting another loan or property in the future.

Your best bet is to talk to your servicer about your options and to stay on top of the headlines. As Bankrate economic analyst Mark Hamrick explains, “Since Congress has yet to come to terms on what is expected to be another round of pandemic relief legislation, it is possible that this remains a fluid issue, meaning more help could be on the way.”

The “Unfair Advantages” of Real Estate Just Got a Whole Lot Better

Investing in real estate has always been one of the most effective paths to financial independnece. That’s because it offers incredible returns and even more incredible tax breaks.https://9d9e8419191ffa071cfaff53a31c08ba.safeframe.googlesyndication.com/safeframe/1-0-37/html/container.html

These benefits weren’t enough for Uncle Sam, though, as a new tax loophole now allows those prudent investors who act today to lock in decades of tax-free returns. We’ve put together a comprehensive tax guide that details how you can benefit from this once-in-a-generation investment opportunity. Simply click here to get your free copy.

Share on Facebook.
MICHAELGOULDGROUP.COM
Share on Twitter.
Share on LinkedIn.

The hidden link between private mortgage insurance and your credit score

It’s something few homebuyers understand but more should. It’s the importance of your credit score when buying a home, especially if you have a low down payment and must buy private mortgage insurance.
Private mortgage insurance, known as PMI, protects the lender’s investment when the borrower pays less than 20 percent down. When the homebuyer reaches 20 percent equity, PMI is not required and there are several ways to get rid of it. Until then, the buyer must pay a monthly insurance premium, in addition to the mortgage.
Credit score is used to determine PMI eligibility, price
Insurers, like mortgage lenders, look at your credit score when determining your PMI eligibility and cost.

“I would say it’s one of the bigger drivers of how mortgage insurers tend to price,” says Steve Keleher, senior vice president of portfolio management and pricing at Radian, which offers PMI and a suite of other mortgage and real estate services. “We protect the lender and investor; anything that increases the likelihood of delinquency and foreclosure increases the cost.”
Insurers also put a lot of weight on the size of your down payment and your debt-to-income ratio. “In general, private mortgage insurance is available for borrowers with credit scores as low as 620 with down payments as low as 3 percent,” says Anthony Guarino, senior vice president of pricing and credit policy for Genworth Mortgage Insurance.
Many homebuyers required to buy PMI
Private mortgage insurance is a common cost, especially for first-time homebuyers, who accounted for one-third of home purchases in 2019, according to a survey by the National Association of Realtors.
First-time buyers typically paid down 6 percent, financing 94 percent of their home purchase, the NAR survey says, while repeat home buyers typically paid 16 percent down, financing 84 percent of the purchase price. Repeat buyers often have the proceeds of a home sale to use toward a down payment, enabling them to borrow less.
The annual cost of PMI is typically expressed as a percentage of the loan amount and is paid in equal monthly payments. So, the more you borrow, the higher your PMI payment.
Credit scores and PMI rates are linked
PMI costs have a broad range, roughly 0.25 percent to 1.5 percent of the amount borrowed. Insurers use your credit score, and other factors, to set that percentage. A borrower on the lowest end of the qualifying credit score range pays the most.
“Typically, the mortgage insurance premium rate increases as a credit score decreases,” Guarino says. He offers this example:
A house sells for $333,333 and the borrower pays 10 percent down, leaving an outstanding loan balance of $300,000 with a 30-year, fixed-rate mortgage. A borrower with a “very good” FICO credit score (at least 740) might pay 0.20 percent to 0.30 percent of the loan balance for PMI, or $50 to $75 a month, says Guarino.
A borrower with a “good” FICO credit score (670-739) will pay more than the “very good” borrower, says Guarino, estimating 0.35 to 0.40 percent of the $300,000 mortgage, or $80 to $100 a month.
But a homebuyer with only “fair” credit, in the neighborhood of 620-660, might pay 0.75 to 1.50 percent of the loan balance, or $188 to $375 per month, Guarino says.
“A small change in credit score, 1 to 10 points, may have limited impact,” Guarino notes, “but a lower credit score ranging from 620 to 660 could result in a cost two to three times that of someone with an outstanding credit range of 760 to 800.”
Mortgage insurance for FHA loans works differently, but your credit score still counts when it comes to how much you pay.
There are a number of steps you can take to improve your credit score, especially if you plan to buy a house. “Credit score is one of those things that can drive tangible savings,” Keleher says. “That is something within the borrower’s control and will have a benefit when it comes to a mortgage loan.”
A good credit score can save you tens of thousands of dollars in interest on a mortgage. Use Bankrate’s mortgage calculator to estimate your monthly payment.
PMI paves a path to homeownership
Private mortgage insurance is an added cost of homeownership that buyers dread, but the fact is, many people would not be able to buy a home without it. PMI opens doors for borrowers who can’t get over one of the biggest hurdles to homeownership: the 20 percent down payment.
PMI has helped more than 30 million families nationwide to become homeowners over the past 60 years, according to the U.S. Mortgage Insurers, a trade association.
“One of our goals is sustainable homeownership,” says Keleher, of Radian. “We can help borrowers purchase homes sooner than they would otherwise be able to. We are insuring the American Dream in a sustainable way.”
Learn more:

michaelgouldgroup.com

Learn more: Libby Wells – Bankrate – Monday, August 10, 2020

Up to 40 million people are at risk of being kicked out of their homes

As President Donald Trump calls for another federal eviction moratorium, a new report has shed light on just how many Americans are facing housing insecurity as a result of the coronavirus pandemic and the associated economic downturn.

Between 30 and 40 million people in the U.S. could be at risk of eviction in the next several months, according to a report released Friday by a group of housing researchers. The report aggregated existing research related to the housing crisis caused by COVID-19.
The researchers said the current situation could be “the most severe housing crisis” in the nation’s history.

As the novel coronavirus first began spreading across the country and prompting business shutdowns, many state and local lawmakers took swift action to enact eviction moratoriums to protect people who suddenly found themselves without a source of income to pay their bills. Many renters were already in a precarious position before the pandemic: Research from the Joint Center for Housing Studies of Harvard University found that nearly half of all renter households were cost-burdened before the pandemic, meaning over a third of their income went toward rent.
Read more:Landlords must notify tenants about eviction proceedings in multi-family buildings, housing regulator says

Michaelgouldgroup.com

At the federal level, the CARES Act placed a temporary moratorium on evictions for renters living in buildings supported by federal funding. But that moratorium expired at the end of July, and many of the moratoriums at the state and local level have also ceased.
“The vast majority of states lack protective eviction moratoriums and housing stabilization measures that could support renters facing rent hardship,” researchers wrote, citing work done by the Eviction Lab at Princeton University and health and housing law expert Emily Benfer.
‘The housing market embodies the inequality that was magnified and exacerbated by COVID-19.’ — Diane Swonk, chief economist at accounting firm Grant Thornton

Previously, research showed that people of color are disproportionately at more risk of being evicted currently.

More than one-quarter of Black renters nationwide missed last month’s rental payment, U.S. Census Bureau survey data show. And nearly one in six Black renters said they have no confidence that they will be able to pay the following month’s rent.
And even as the economy has recovered jobs lost because of the pandemic, America’s renters are struggling to make their monthly payments. Roughly a third of all renters nationwide failed to make a full housing payment as of the first week of August, according to survey data from real-estate website Apartment List.

The tenuous situation facing renters is in sharp contrast with the current state of affairs for homeowners and home buyers.
“The housing market embodies the inequality that was magnified and exacerbated by COVID-19,” Diane Swonk, chief economist at accounting firm Grant Thornton, wrote on Twitter(TWTR) “My stomach churns every time I think of what the evictions will mean for homelessness, which was rising when we were at 3.5% unemployment.”

Mortgage rates have fallen to record lows eight times amid the pandemic. As a result, thousands of homeowners have refinanced their home loans in recent months, and many prospective home buyers have flooded the market looking to scoop up properties to lock in low rates.
Also see: Americans’ household debt fell for the first time since 2014 — but that doesn’t mean people are paying off their loans

Most homeowners who are facing financial trouble still have lifelines available to them. The CARES Act stipulated that any homeowner with a federally-backed mortgage could receive forbearance for up to one year. During that time, homeowners can make reduced monthly payments or skip paying altogether.
Once forbearance ends, homeowners who are still in financial trouble will have a wide array of loss mitigation options available to them to adjust their mortgages in order to avoid default or foreclosure.

Michaelgouldgroup.com

6 ways to cut the cost of refinancing your mortgage

A refinance is kind of like a mortgage do-over. By swapping out your home loan with a new one, you can save money with a new interest rate, tap into your equity or change the loan term.

©MICHAELGOULDGROUP.COM

Average rates on 30-year fixed-rate mortgages have been sliding to unheard-of levels around 2.8%. But the costs of refinancing might be making some homeowners wary, because applications for refi loans recently dropped.
Refinance closing costs total around $5,000, on average. But take a look at six ways to lower that price tag — or save on your refi in other ways.

  1. Negotiate the closing costs

Mortgage refinance closing costs typically range from 2% to 6% of the home’s value, which means refinancing a $200,000 loan may cost upwards of $4,000.

These charges are similar to what you paid when you purchased the home: title insurance, an origination fee, home appraisal, recording fee, credit report fee and more.
Some of these fees are negotiable, so it’s best to shop around for multiple closing cost estimates to put yourself in a better bargaining position. Once you get offers from a few lenders, compare them side by side.

If some fees seem unusually high, ask the lender if they can be lowered. For example, some lenders may waive the appraisal fee if your property was appraised fairly recently.
A “yes” on any of these requests could help you knock hundreds of dollars off your closing costs.

Or, you could send your best offer to rival lenders and say, “This is what another lender sent me. Can you do better on the closing costs?”

  1. Stick with your previous title insurance company

You’re required to buy title insurance when you take out a mortgage — even a refinance loan — because it protects the lender in case any challenges are ever made against your title to the property that could cause you to lose the home.
If you work with the same title insurance company that handled your original mortgage loan, you could score up to 40% off title fees when you refinance.

This discount is called the “reissue rate,” and an estimated two-thirds of title policies qualify for it.

3. Consider a ‘no-closing-cost’ mortgage

Some refinances are marketed as “no-closing-cost loans,” where you don’t pay the usual fees at closing. But keep in mind you’re probably not getting a true freebie.

The lender may actually charge you closing costs but then roll them into your principal balance, thus increasing your loan size.
Or the bank might offer a lender credit to cover your closing costs. The lender recoups the expense by charging you a higher interest rate on your refinance loan.

If you’re shopping for a no-closing-cost refi, ask multiple lenders for quotes. Compare lender fees and interest rates, and check how much interest you’ll end up paying in each refi scenario. Compare the interest costs to your current loan to see how much you’ll save and how long it will take to recoup costs.
“You shouldn’t refinance if it’s going to cost you more than two years to recoup your closing costs, if you have any,” says Taylor Allgyer, vice president of First Savings Mortgage. “If you do a no-cost refinance, your break-even point is when you sign the closing papers.”

  1. Negotiate your mortgage rate

An amazing mortgage rate won’t lower your closing costs, but it can help you recoup the fees more quickly.

Here’s an example: Say one lender offers you a 3.25% rate on your refinance, dropping your mortgage payment by $135 a month. The company will charge $5,000 in closing costs for the refi.
If you can negotiate the interest rate down to 2.75%, then you save $220 a month. You break even sooner with the lower rate: 23 months at 2.75%, versus 37 months with 3.25% loan.

To negotiate, shop around and get rate quotes from several lenders. Getting five quotes and comparing them saves a borrower an average of $3,000 over the life of a mortgage, as opposed to a person who gets only one quote, mortgage company Freddie Mac has found.
Remember to shop around for your homeowners insurance, too, next time your policy comes up for its annual renewal. Get rates from multiple insurers and review them side by side, because you may find a better deal than you currently have.

  1. Boost your credit score

Another way to knock down your mortgage rate — and help you recoup those refi costs — is by improving your credit score. Generally, having a higher credit score “makes a huge difference” on your refinance rate, Allgyer says.

According to FICO data, borrowers with credit scores above 760 may shave about 0.4% off their rate for a 30-year, $300,000 mortgage compared to borrowers with scores ranging from 680 to 699.
That adds up to a savings of $63 a month and nearly $22,700 over the life of the loan.

Before getting a refinance, check your credit score. Nowadays, you can take a peek for free.
If your score needs work, then “don’t open up new accounts, try to keep your (credit card) utilization low and make your payments on time,” says Allgyer.

  1. Consider buying ‘discount points’

Discount points are fees you can pay a lender at closing to knock down your interest rate a bit and reduce your mortgage costs.

These fees are totally optional. One point will cost you 1% of the loan value, so on a $300,000 mortgage you’d pay $3,000 per point to get a lower interest rate. How much lower depends on the lender.
But before buying down the rate, you’ve got to consider if it’s worth it. If the lower rate on that $300,000 loan in the example saves you $100 a month, it’ll take you 30 months to break even on your $3,000 point.

Paying points can be a good strategy if you expect to own the home for a long time — or if that’s what it takes to qualify for the mortgage. If you have strong credit, you should be able to qualify for a low refinance rate on your own, with no points required.

Kim Porter – MoneyWise – Saturday, August 8, 2020

Going cashless during the COVID pandemic makes life even more difficult for the 14 million unbanked Americans – MarketWatch

The pandemic has businesses shifting away from cash to ‘touchless transactions.’ What does that mean for America’s ‘unbanked,’ people who don’t have bank…
— Read on www.marketwatch.com/story/what-going-cashless-means-for-the-14-million-unbanked-americans-11596664581

Here are the Most Influential Women in Commercial Real Estate for 2020

There are many adjectives that could be used to describe all of the Most Influential Women in Commercial Real Estate for 2020: Innovative. Driven. Brilliant.

But that doesn’t mean they don’t all have secrets they keep mostly to themselves. Consider this surprising fact: “I would love to meet and have lunch with Snoop Dogg,” says Carrie Masters, COO at LGE Design Build.

But some little-known facts may actually be the secret to their success.

“I grew up on a dairy farm in Oregon and credit my strong work ethic to this experience — farmers don’t take vacations,” says Marina Hammersmith, senior vice president at ORION Investment Real Estate. “I was also fortunate to represent the Tillamook County Dairy Industry as Dairy Princess and spent much of my senior of high school year traveling the state, touting the benefits of dairy, and echoing the phrase, ‘Hey, baby, drink your milk.’”

The Most Influential Women in in Commercial Real Estate for 2020 will be featured on the cover of the July/August issue of AZRE magazine, along with editorial profiles inside the magazine. They will also be honored at a dinner and reception that begins at 5:30 p.m. on September 15, 2020, at Chateau Luxe.

“We have taken precautions to create the greatest opportunity to honor the Most Influential Women in Commercial Real Estate in a safe, relaxed, and celebratory environment,” AZ Big Media Editor in Chief Michael Gossie said.

Those precautions include: 

• Limiting the number of tickets sold

• Setting up sanitizing stations throughout the venue

• Reducing the number of tables set up in the venue and placing tables farther apart

• Reducing the number of people sitting at each table 

• Creating an indoor/outdoor networking to promote social distancing

• The venue will be sanitized one hour prior to the start of the event

For sponsorship opportunities for the Most Influential Women in Arizona Business dinner and reception, email Publisher Amy Lindsey. For information on tickets or with questions about the event, email Marketing and Events Manager Aseret Arroyo or call (602) 277-6045.

Beginning July 2, azbigmedia.com will be profiling one of the Most Influential Women of 2020 each day leading up to the Most Influential Women dinner on September 15, 2020, so be sure to check back each day to meet these incredibly accomplished women.

The Most Influential Women in Commercial Real Estate for 2020

Lisa Bentley, partner, McCarthy Nordburg

Tara Grenier, principal, Orcutt Winslow

Marina Hammersmith, senior vice president, ORION Investment Real Estate

Katie Haydon Perry, executive vice president, Haydon Building Corp.

Sheryl Hays, director of property management, Wentworth Property Company

Julie King, CEO, Harmon Electric

Gretchen Kinsella, Arizona Business Unit leader, DPR Construction

Carrie Masters, COO, LGE Design Build

Peggy R. Maxwell, senior vice president of property and facilities management, Plaza Companies

Jennifer May, co-founder, Two Sister Bosses

Kristine Millar, principal, Orcutt Winslow

Jackie Orcutt, senior vice president, CBRE

Jennifer Reynolds, principal, Ideation Design Group

Kim Soule, senior vice president, Colliers

Trisha Talbot, managing director, Newmark Knight Frank

Colleen Tebrake, co-founder, Two Sister Bosses

Daily Wright, principal, Orcutt Winslow

Real estate market frozen by pandemic

  • By JOHN GITTELSOHN & NOAH BUHAYAR
    Bloomberg

The U.S. commercial real estate market is showing ever greater signs of stress, but there are still few deals to be had.

Transactions fell 68 percent in the second quarter across all property types compared with 2019 as potential buyers and sellers remained far apart on the prices of buildings, according to data released Wednesday by Real Capital Analytics.

Is Commercial in Trouble?

The paralysis set in despite near-record amounts of capital ready to be deployed by some of the world’s biggest real estate investors.

“The buyer and seller expectations are not aligned,” said Simon Mallinson, an executive managing director at RCA. “Sellers aren’t being forced to the market because there’s no realized distress and buyers are sitting on the sidelines thinking there’s going to be distress.”https://79fc522d2fe220ddb69cc49ffcbbe13e.safeframe.googlesyndication.com/safeframe/1-0-37/html/container.html

Second-quarter sales plunged 70 percent for apartments, 71 percent for offices, 73 percent for retail and 91 percent for hotels, according to RCA. Industrial property transactions were a brighter spot. Sales dropped only 50 percent in the second quarter, as online shopping thrived and manufacturers leased space to avoid supply chain disruptions.

For markets to function, there needs to be some agreement on what assets are worth. But the surging coronavirus outbreak is fueling uncertainty, making the outlook for commercial property just as cloudy as it was in March.

Whether investors will come off the sidelines any time soon remains to be seen. Private real estate funds had about $273 billion for property purchases at the end of June, little changed from the record $281 billion six months earlier, according to Preqin Ltd.

With the economic fallout from the pandemic mounting, deals have fallen apart or are being reworked. The buyer of the iconic Transamerica pyramid in San Francisco is going forward with its deal — but at a 10 percent price cut from what it negotiated at the beginning of the year, according to people familiar with the matter who asked not to be identified discussing private talks.

More than $32 billion of hotel and retail real estate was newly distressed in the first half of 2020, as rent delinquencies soared and borrowers missed payments, according to RCA.

Approximately $90 billion more of commercial real estate is “potentially troubled,” RCA reported, meaning it’s in a forbearance plan, suffering rent collection problems or early-stage delinquencies. That includes $14.5 billion for offices and $20 billion for apartments.

Still, delinquent borrowers don’t face pressure to sell yet. Lenders are focused on ways to buy time, delaying distressed property from coming to market, according to Lisa Pendergast, executive director of the CRE Finance Council, a commercial real estate trade group.

“It’s becoming clearer, especially with the resurgence in cases across the country, that a three-month forbearance is not really going to satisfy the situation,” she said. “So there are other things that can be done. A lot of that has to do with loan modifications.”

Cheap Money

Prices have also been propped up by low interest rates. Low borrowing costs mean investors can expect higher returns on real estate than Treasury bonds, even if vacancy rates rise or tenant delinquencies increase, according to Michael Fascitelli, former chief executive officer of Vornado Realty Trust.

“The cost of money is one of the biggest costs of an asset for real estate,” Fascitelli said recently

We’ll Get Through This Too…

Everything You Need to Know About Opportunity Zones

Shanti Ryle

Content Marketing Manager

One of the biggest challenges that investors in assets such as stocks, businesses, and real estate face is how to sell and reinvest, without triggering a significant capital gains tax liability. 

While traditional 1031 tax-deferred exchanges are a popular strategy for commercial real estate, it can often be hard to find a suitable replacement property, especially within an exchange’s limited time frame. Investors in the stock market face even more of a challenge. Since April 2009, the S&P 500 Index has increased by over 380% (as of July 9, 2020). Investors who want to sell today face an oversized tax bill because 1031s can only be used with real property.

That’s likely one reason why so much capital from asset sales of all types has been flowing into Opportunity Zone (OZ) investments this year. In fact, investors raised more than $10 billion in equity for Qualified Opportunity Funds (QOFs) to date, with over $4 billion raised since the beginning of the year alone.

In this article, we’ll discuss everything you need to know about Opportunity Zones, and the investment incentives and tax benefits they can provide every investor.

What are opportunity zones?

The Tax Cuts and Jobs Act (TCJA) passed by Congress in December 2017 created numerous incentives for businesses and investors, including the Qualified Opportunity Zone (QOZ) program. The program aims to motivate investment and economic growth in lower-income areas in the United States and US territories such as Puerto Rico and the Virgin Islands.

Economic benefits

  • Generate economic growth with long-term investments distressed areas, including low-income urban areas, rural communities, and attractive neighborhoods adjacent to distressed areas
  • Over 15% of the US population lives in a distressed area, allowing QOZ investors to help with job creation and small, community-based businesses
  • QOF investments include assets such as infrastructure and industrial projects, and workforce and multifamily housing
Food, Water and Shelter...

Tax benefits

  • Profits from the sale of an asset that invest in a Qualified Opportunity Fund (QOF) within 180 days from the date of the transaction have capital gains taxes fully deferred through December 31, 2026
  • Capital gains taxes owed are reduced by 10% if the QOF investment is held for at least five years up to and including year-end 2026
  • Gains from investments held in a QOF for at least ten years are excluded from the capital gains tax

What is a Qualified Opportunity Fund (QOF)?

For most investors, investing in a Qualified Opportunity Fund is the easiest way to participate in a Qualified Opportunity Zone property. The IRS defines a QOF as an investment vehicle filing a partnership or corporate federal income tax return organized to invest in a QOZ property:

  • QOF must be certified by the US Treasury or self-certified according to IRS guidelines
  • 90% of the assets of a QOF must belong in a specified QOZ
  • Three main types of QOF assets are business property such as real estate, stock of companies located in a QOZ, and a partnership interest in a business located in a QOZ

How were opportunity zones selected?

The IRS lists more than 8,760 Qualified Opportunity Zones in all 50 states, the District of Columbia, and United States Territories. Along with the mayor of Washington, D.C., governors of each state and territory nominated census tracts that the US Department of Treasury officially designated as OZs.

Low-income requirements

Regulations require a census tract to meet the following criteria to qualify as an Opportunity Zone:

  • A poverty rate of 20% or more
  • Median family income of no more than 80% of the statewide median family income for rural areas
  • Median family income of no more than 80% of the statewide or metropolitan median family income for urban areas

Adjacent census tracts also qualify

Not all Opportunity Zones are located in low-income areas. The IRS also allows a census tract to be eligible as an OZ if it is contiguous to another tract and has a median family income of no more than 125% of the median family income in the neighboring QOZ.

Who is investing in opportunity zones?

Although deferring capital gains tax isn’t a requirement for investing in an Opportunity Zone, it’s one of the top advantages. 

Investors with a long-term investment horizon who have gains from any asset – including stocks and bonds, precious metals, cryptocurrencies, artwork, and real estate – receive benefits right away and over the next several years:

  • Deferred capital gains taxes due are reduced by 10% and are not payable until the 2027 tax year
  • Additional capital gains from OZ investments are tax-free, provided they remain held for at least ten years
  • Qualified Opportunity Funds may offer risk-adjusted returns due to preferential tax treatment and incentives, along with the potential for asset growth over the holding period
  • They’re an attractive alternative for 1031 exchange real estate investors by providing a full 180 days to identify and invest in properties, compared to the 45-day identification period rule of a traditional tax-deferred exchange
  • Only the capital gains portion from a sale needs to be invested in an Opportunity Zone, versus all of the net proceeds when conducting a 1031 exchange

How to invest in opportunity zones

Earlier this year, the White House Opportunity and Revitalization Council presented the Opportunity Zones Best Practices Report to the President. Some of the best practices for investing in Opportunity Zones highlighted in the report include:

  • Local governments are in the best position to understand the unique strengths and needs of their communities. For example, Charleston, South Carolina, has created local rules to allow unlimited density and lower parking requirements for affordable housing in Opportunity Zones.
  • States such as Louisiana adopted legislation providing up to a 10-year abatement of property taxes on renovations and improvements of existing commercial and owner-occupied structures.
  • Qualified Opportunity Funds have begun focusing on affordable housing, such as a multifamily mixed-use project in Seattle the ensures 20% of the nearly 300 apartments are reserved for workforce housing

Positive impact of opportunity zone investments

OZs have received some criticism as another way to make the wealthy wealthier. However, as Bloomberg Tax notes, Opportunity Zone investments also create significant opportunities for nonprofits, economic development organizations, and local and state governments to make their neighborhoods a much better place for residents, businesses, and investors:

  • Affordable housing becomes more feasible due to a lower cost of capital through tax-advantaged QOZ dollars
  • Investing in existing businesses helps expansion to underserved parts of the local community
  • QOFs can be designed to form new companies and scale up existing ones that agree to local their headquarters in a QOZ, helping create new jobs and higher economic growth

Commercial Real Estate Loans: 5 Borrowing Pitfalls to Avoid

There’s more to perfect commercial real estate loans than a boast-worthy interest rate.
 
A primary appeal of real estate as an asset class is employing the power of leverage. And since borrowing typically makes up the lion’s share of the capital used in buying property, choosing the right loan is among the most important decisions you make in any purchase. 

“When you combine ignorance and leverage, you get some pretty interesting results.” – Warren Buffet

Consider these five potential pitfalls before jumping into bed with a lender to finance your CRE investment: 

Pitfall #1: Borrowing with Too Much Existing Debt

Perhaps the most fundamental lesson learned in the Financial Crisis of 2007-2008 was that borrowing too much can lead to dramatic losses for real estate investors. And while this seems like a simple pitfall to avoid, novice and experienced investors alike consistently ignore this essential tenet of commercial real estate investing.
A prudent level of debt – namely one capitalizing on the financial benefits of borrowing without adding undue risk to the project – is unique for each commercial real estate investment. A good rule of thumb is run a downside scenario through your pro forma and see if a positive cash flow can still cover your mortgage payments. If not, you may want to back down the leverage a bit.
This balancing act can be particularly challenging if you’re short on capital, where borrowing more can stretch a limited capital base to chase a broader opportunity set. Remember to invest within your limitations, especially if you’re a first-time real estate investor.
 

Pitfall #2: Borrowing with Too Little Existing Debt

That isn’t a typo. To ignore the power of leverage is to disregard one of the primary advantages of investing in real estate compared to other asset classes.
The table below outlines how leverage amplifies the benefits of long-term appreciating property:
Chart of equity percentage values 
From a mathematical perspective, buying more property through the use of leverage increases your numerator over the same denominator. In plain English, this means you get the benefit of an appreciating $400,000 property versus a $100,000 property for the same $100,000 equity investment. 
We recently turned down what on the surface seemed like an eye-popping price for a property we bought a little more than a year ago. But since our equity partner opted to fund the entire purchase and phase I of the project with cash, returns would have been mediocre if we had sold. Even a low, extraordinarily prudent amount of leverage at purchase would have earned our investors and us a quick win. 
But remember, don’t get so enamored with upsizing your returns that you forget about pitfall #1.
 

Pitfall #3: The Low Interest Rate Trap

Cocktail party real estate investment discussions often devolve into bragging rights over who just got the best loan. And nine times out of ten, “best loan” is defined as “lowest rate.”
Low rates can be powerful tools for certain types of projects, but the interest rate is only one of many essential loan terms to be considered.
Choose loan terms that best match your business plan.
Are you looking for a quick flip? Make sure your loan doesn’t include a prepayment penalty. Concerned that capital improvements may come in above expectations? Find a lender willing to write a line of credit behind their first lien.
Worried about interest rates rising in the foreseeable future? Consider a slightly higher rate for a longer fixed-rate period. Often just 0.15% or 0.20% can buy an extra couple of years of avoiding interest rate risk.
Don’t want to sign recourse? Ask your lender if you can buy out the recourse by using a higher rate.
 

Some Money Cost too much…

Pitfall #4: Right Loan, but Borrowing from the Wrong Lender

Savvy commercial real estate investors look at lenders like partners, rather than just another vendor.
During the purchase, a lender that drags its feet or otherwise can’t close as promised can be the death knell of even a promising deal. That cheap rate is worthless if you can’t get the loan in time and have to walk from the deal — vet lender performance with colleagues, brokers, and other references before committing.
And don’t just evaluate lenders on how well they treat you during good times. Because if your project falters, your bank’s call is one you can’t afford to ignore. It’s impossible to know with certainty how lenders will behave in bad times, so look your banker in the eye and ask yourself if this is someone you would want to owe money you can’t afford to pay back. Then trust your gut.
 

Pitfall #5: Don’t Forget Plan B

You wouldn’t jump out of an airplane without a backup parachute, so don’t remove contingencies on a commercial real estate investment without a backup financing plan.
Consider lining up hard money (expensive debt that can be closed on quickly) in the event your primary lender can’t come through on time. More often than not, good brokers can negotiate an extra few days to allow a lender to finalize its paperwork and close. Still, non-refundable deposits are precisely that: non-refundable. 
When buying a mixed-use property a few years ago, a higher offer came in after we were in contract. We figured that the seller would take any opportunity to grab our deposit and cancel the deal if we couldn’t close on time, so we called in a reliable hard money lender as a backup.
We paid a $10,000 commitment fee to have the hard money option on call and ready to fund with 24-hours’ notice. Fortunately, we never needed to make the call, and we never missed the $10,000 for the peace of mind to move forward on what ended up being a terrific investment.
There is no perfect loan for all commercial real estate investments, as each project calls for a borrowing option that matches the business plan and parties involved. Consider terms carefully, focusing not just on the interest rate but on things like prepayment penalties, fixed-rate periods, interest-only options, recourse, and fees. 
Leverage is a powerful tool, but one to be wielded with care. Fortunes have been made over the generations by smart commercial real estate investors using prudent loans to amplify returns, but also by bankruptcy attorneys picking up the pieces of borrowing gone wrong.

Call me I can Help…

The feared jumbo mortgage debacle is here — thanks to the coronavirus — and ready to pound the housing market

Published: July 22, 2020 at 5:08 p.m. ET By: Keith Jurow

Call Me! I can help.

Back in January, my column for Marketwatch detailed the massive danger that jumbo mortgages posed for U.S. mortgage and housing markets. After months of actions to counter the impact of COVID 19, the potential jumbo mortgage disaster is clearer than ever.

Jumbo mortgages are loans that are larger than the limits set for Fannie Mae, Freddie Mac or the FHA to guarantee or insure. During the craziest years of the housing bubble, 2004 through 2007, close to $3.1 trillion in jumbos was originated.  Most were offered with insanely easy terms, which helped precipitate the collapse that followed.

As housing markets plunged over the next five years, jumbo loans for home purchases all but dried up. Jumbo mortgage lending returned only gradually during the early years of the so-called housing recovery.   

All that changed starting in 2016.  Since then, jumbo mortgage lenders have tripped over each other to hand out huge loans to applicants.  Between 2016 and 2019, roughly $1.5 trillion of these jumbos were originated.  Cash-out refinancing also returned with a vengeance. Reversing the traditional approach, interest rates and underwriting standards for jumbos were actually lower than for conventional loans.  For these lenders, mortgages offered to high-income borrowers who could afford the monthly payments seemed the least risky of all.

Look at the table below showing jumbo originations in the 25 largest U.S. metros since the peak of the housing bubble.  Roughly two-thirds of all jumbo loans have been originated in these 25 major housing markets.

Wealthy homeowners in trouble

Since the COVID-19 related lockdowns began in late March, most media attention has been focused on soaring unemployment rates for lower income workers in service industries.  For good reason. According to data provider Black Knight Financial Services, 46% of borrowers who obtained a forbearance actually made a mortgage payment in April.  However, that percentage has plunged over the past two months. According to Black Knight, 22% of borrowers had paid their mortgage in May and only 15% did so in June. 

Read: Home prices could fall in major cities as Americans sour on urban living, says Nobel Prize-winning economist Robert Shiller

Also see: More than 20 million Americans may be evicted by September

What has been largely overlooked are the mounting problems of wealthier homeowners with jumbo mortgages. They have also been slammed by the lockdowns.  According to Black Knight, 11.8% of all jumbo loans were in forbearance as of June 16.  That is more than double the rate as recently as April.  In a mid-June MarketWatch article, the CEO of Caliber Home Loans stated that 42% of their customers who requested a forbearance were self-employed.  Keep in mind that the CARES legislation did not say anything about jumbo mortgages.  Lenders were under no obligation to offer forbearances to any jumbo mortgage borrower.  

Read: These homeowners are seeking mortgage forbearance and their reasons why say a lot about the economy

Jumbo lenders have been quick to notice that the lockdowns of state economies due to the COVID-19 panic were negatively impacting homeowners with jumbos. Most lenders sharply cut back or even stopped offering cash-out refinancing.  Interest rates quickly climbed above those for conventional loans. For example, Wells Fargo WFC, +0.22% — the largest provider of jumbos — limited jumbo refinancing to customers who had at least $250,000 in liquid funds parked at the bank. Some non-bank lenders have ceased providing jumbo mortgages completely.

Why are jumbo lenders so rattled by the impact of the lockdowns on wealthy homeowners? After all, the widely accepted view was that higher paid employees and freelancers shifted to working from home and have avoided massive firings or furloughs.

This is simply untrue. Freelancers and highly paid contract workers in almost every industry have been hammered by the lockdown. For example, the Los Angeles metro area has one of the nation’s highest concentrations of skilled freelance workers. Recent California figures put the area’s unemployment rate at 21%.  

Even more important for lenders, many homeowners with jumbo mortgages are owners of small businesses, which have been devastated by the lockdowns. While unemployed workers have benefited by the $600 a week bonus that continues to be paid at least through the end of July, this supplement has made it extremely difficult for business owners to lure workers back to their jobs when they can earn more by staying home.  

Jumbo mortgage delinquency menace

In an October 2019 column for MarketWatch, I focused on the growing problem of millions of modified mortgages that have re-defaulted. I explained that most of the residential mortgage loans held by large banks are jumbo mortgages. Unlike smaller loans that were securitized and sold off to investors, jumbo loans too big to be guaranteed by Fannie or Freddie were kept in their portfolios. In an October 2019 article, Mark Edelson, editor of The Journal of Structured Finance, estimated that 95% of jumbo loans remain on the balance sheet of the banks.

My October 2019 column on mortgage re-defaults described the situation of two of the nation’s largest commercial banks.  In their mid-2019 FDIC call report, each showed a re-default rate of more than 40% for their modified loans, known as Troubled Debt Restructurings (TDRs). Moreover, under the revised standards promulgated by the Financial Accounting Standards Board (FASB) after the housing collapse, banks were required to report only those re-defaults which occurred within 12 months of the loan being modified and declared to be a TDR.  Re-defaults after that 12-month period did not have to be reported by the bank. 

In my column last October, I cited a 2017 study by Fitch Ratings showing that 75% of Fannie Mae modifications that re-defaulted had done so within two years after the modification. Yet the actual re-default rates for commercial banks jumbo mortgage loans are much higher than what they have reported to the FDIC.

Making matters worse for jumbo lenders is the unfolding disaster of the COVID-19 lockdowns. No one knows how many millions of jumbo borrowers are finding it increasingly difficult to make their monthly mortgage payment. As borrowers continue to skip paying their mortgage, the patience of lenders with forbearances will start to run out.     

Keith Jurow is a real estate analyst who covers the bubble-era home-lending debacle and its aftermath. Contact him at www.keithjurow.com.

More: Jumbo mortgages are haunting the housing market, and things could get really scary

Plus: Look what happened to home prices when the coronavirus sent stocks into a bear market

Clear out the den. The kids will be moving back home soon.