It’s not what you want to hear, but Victoria Gillespie of REALTORS® Federal Credit Union, a division of Northwest Federal Credit Union, recommends you put away half of each commission check for taxes and a short-term reserve account.
In the second video in our series on financial planning for real estate professionals, called Your Money Matters, Gillespie, the credit union’s director of business development and a former banker and real estate practitioner, says smart money managers set aside 30 percent of each commission check for taxes and 20 percent for reserves, with the goal of creating a six-month reserve fund as soon as possible.
That means if you earn $5,000 in commissions on a home sale, you should think of it as $2,500 in commission income. “I know that sounds like a dramatic number, but I think it’s important practitioners see it that way,” says Gillespie in the video.
Thr fact is, you’re going to pay about 30 percent of your income each year in taxes, and it’s a lot easier to pay that by setting aside money each time you get paid so, come tax time, you have the money available. And on the reserve fund, that’s so you have a comfortable cushion of income for those months when you close fewer transactions than you need to pay your bills.
REALTOR® Magazine started its video series a short while ago to help bring you some practical tips from your credit union, whose professionals are familiar with money management best practices.
Although setting aside half of your commission check is easier in theory than in practice, the credit union has some accounts you can set up that take some of the sting out of it, starting with its basic savings account. There’s no minimum balance and the interest you get on your money, although modest in today’s ultra-low interest rate environment, is nevertheless quite a bit higher than what you would get in an equivalent account at a bank. “We shop what banks are paying and the interest on our regular checking is five times higher than other institutions,” she says.
Once you have a six-month reserve built up, you can consider higher-yielding savings products, including certificates of deposit and money market funds, which require you to lock up your money for defined terms.
NAR and many lawmakers in Congress are pushing for a time-out in the federal government’s efforts to eliminate flood insurance subsidies over time and phase in premium rates that reflect properties’ actuarial risk of flooding. NAR’s Call for Action this week to its members is part of that effort.
But it’s not just hikes in insurance premiums that’s fueling this push by NAR and others to slow things down; it’s the sometimes wildly divergent and uncertain way insurers are assessing new premium rates. As NAR Past President Moe Veissi said in eye-opening testimony before a House subcommittee yesterday, property owners are sometimes getting half a dozen different premium quotes for their property, sometimes even from agents in the same company.
“The law has proven complicated and difficult to implement,” Veissi said in his testimony.
The former association president shared reports from NAR members across the country of some property owners seeing big increases in their flood insurance costs even though their property has never flooded and in some cases their community has never flooded or has instituted community-wide flood mitigation efforts.
The confusion in the market is having dire consequences on the ground. “We’re seeing for-sale signs today that say ‘No insurance impact on this property,’” he said. “That tells us very quickly that folks are making determinations at the point of impact on property that they would normally have bought.”
He also shared findings from a Rand study that home values are declining by $10,000 for every $500 increase in premiums.
Bottom line, there was broad acknowledgement among lawmakers and the witnesses at the hearing table that the flood insurance program must move to a premium structure that reflects the actuarial risk of flooding. But at the same time, a lot needs to be done to ensure that the needed change happens in an appropriate way. And that’s what the NAR-backed, bi-partisan legislation that’s under consideration in Congress would do.
The legislation is called the “Homeowner Flood Insurance Affordability Act,” H.R. 3370 in the House and S. 1610 in the Senate, and It would pause some program changes while the federal government gets a handle on how the new rates are to be set and it looks at the affordability impact of the new premium structure. Importantly, it would also help property owners take action if they feel their premium changes aren’t accurate.
You can get more info on the Call for Action at the REALTOR® Action Center.
NAR President Gary Thomas in testimony before the Senate Banking Committee this week again took aim at a proposal floated by a federal regulator to reduce the size of loans that Fannie Mae and Freddie Mac can handle. Although details are still to be released, the Federal Housing Finance Agency has said it wants to reduce these limits, which in high-cost areas can go as high as $625,500. Reducing this would shut the door to reasonably priced mortgage financing not just for middle-class households living in expensive areas, but for households everywhere, because the regular loan limit would be affected as well. “This isn’t just a high-cost area problem,” Thomas said.
Sen. Robert Menendez (D-N.J.) said he recognized the sweeping nature of the impact. “So, reducing loan limits also hurts existing home owners,” he said.
Thomas also urged lawmakers to back bi-partisan legislation, the “Housing Finance Reform and Taxpayer Protection Act of 2013,” S. 1217, introduced by Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) , because it would reform the secondary mortgage market while leaving in place a federal backstop, an NAR priority.
“It’s extremely likely that any secondary mortgage market structure without a government guarantee will foster mortgage products that are more aligned with business goals then with the best interests of consumers,” he said.
It was Thomas’ second appearance before the committee in three weeks. His earlier appearance, at the height of concern over whether Congress would increase the federal borrowing limit before the U.S. Treasury ran out of money to pay the government’s debts, was timely, to say the least. Sen. Heidi Heikamp (D-N.D.) credited Thomas’ earlier testimony for changing minds at a very tense time. “Mr. Thomas, I think your testimony on the debt ceiling and what it would mean for borrowers had a huge impact,” she said. “I think we were able to change public opinion.”
Sen. Sherrod Brown (D-Ohio) also thanked Thomas for his earlier appearance as well as the input REALTORS® provided when he met with them last week in Ohio. “I spoke with a number of your members—the Columbus Board of REALTORS®,” he said. “About 100 of them were there, just to discuss some of these issues.”
For Thomas, the key to his testimony was to keep lawmakers focused on how all the moving parts of mortgage finance reform that Congress is looking at fit together. To that end, he urged Congress, for the short term, to look closely at FHFA’s plan to reduce loan limits without losing sight of the long-term need to reform the secondary market in a way that maintains a federal backstop.
Access Thomas’ written statement.
To get a good picture of why it’s so important for a continued federal role in the mortgage market, view remarks by Ginnie Mae President Ted Tozer, who in a conversation with NAR Vice President Joe Ventrone explains the role the guarantee plays for global mortgage investors.
Q&A with NAR’s new data analytics chief, Todd Carpenter
NAR this week announced the launch of a division to analyze large amounts of NAR and other data to help members make better business decisions. The new division is called the Predictive Analytics group and it will be led by Todd Carpenter, the association’s new managing director of data analytics. Carpenter is a 20-year veteran of the real estate industry and previously served at NAR as its director of digital engagement. He most recently worked at Trulia, the national home listing site, where he served as senior manager of industry engagement. Carpenter will be joined by a data scientist to develop the mathematical formulae for analyzing data and developing the tools that NAR will eventually be providing to members. To get a little more information on the goals of the new division, REALTOR® Magazine sat down with Carpenter for a brief conversation.
REALTOR® Magazine: What’s the nature of your new role?
Todd Carpenter: It’s to find ways to use large quantities of data to build tools that our members can use to make better marketing and business decisions. We’ll be using data that NAR already collects, such as its monthly existing-home sales data, and data that we’ll be licensing from others. With the NAR data, we have an enormous amount of information already at our disposal, so one of our jobs will be to find ways to analyze it mathematically so we can generate more insightful findings from it. We’ll also be looking into ways to layer consumer data we get from others against property data that we already collect to give us a picture of where different segments of the population are in terms of buying and selling scenarios.
RM: How about an example?
TC: Take the data that’s being collected from lockboxes. As these get accessed more, we know more homes are being shown and that might indicate a particular market or a particular type of home is attracting more interest, which can give us an indicator of sales 90 days down the road for a particular type of house in a particular market. We’ll also look into licensing data sets from others that can tell us something about consumers and their spending habits to help us predict when they’re likely to buy a home. That way our members can identify the best people to market to, which in turn enables them to make better decisions on where to spend their money.
RM: What led NAR to create this division and why is it happening now?
TC: The Center for REALTOR® Technology (CRT) and NAR’s Strategic Planning Committee have been looking at the idea of data mining for quite a while and trying to figure out how the association can better get its arms around it for members’ benefit. Also. the Data Strategies Committee, created last year, was launched in part with this idea in mind. So, data analytics has been at the idea stage for quite a while and it’s happening now because this is where our Strategic Planning Committee has guided us. It’s interesting, because when I first joined NAR several years ago as director of digital engagement [February 2009 to April 2012], part of my goal was to explain the newest digital concept to NAR members and their leadership, and at that time the newest concept was social media. My job this time around is similar to that, only the newest concept is big data.
RM: When can members expect the first of the new tools to come out?
TC: Well, we’re really excited to get started today but you won’t see a product tomorrow. This is going to take some time, and it’s just the first day. We have to look at a lot of data and conduct a lot of experiments first. We want to do this right. CRT will be heavily involved in building a lot of the platforms we come up with, but first we have to find the right data and what to tie it with to derive a prediction of the future or key analytic that’s going to help our members. So, it’s going to take a lot of mathematical experimenting in the beginning. Fortunately, there are a lot of open source analytic programs we can start working with right away. That will give us a strong foundation to build on. Over the next year or so, I hope to work with NAR Research, too, with the goal of helping them come up with even more insightful ways to analyze the data they collect.
The looming debt ceiling crisis and the federal government shutdown have pushed aside pretty much every other issue in Washington today, but it won’t be too long before one of the major real estate issues facing the federal government will be back on the agenda, and that’s reform of the secondary mortgage market. Its importance can’t be overstated, because if the government stops backing conventional, conforming loans—these are the all-important loans backed by Fannie Mae and Freddie Mac–it’s unlikely we’ll have 30-year fixed-rate mortgages in the United States anymore.
That’s a dramatic thing to say, but it’s what the president of Ginnie Mae is saying. Ginnie Mae is the Fannie Mae-equivalent for loans that are backed by FHA, VA, and the Rural Housing Service, and Ted Tozer is its president. He sat down with NAR just before the federal shutdown almost three weeks ago and in that conversation, he made two key observations:
First, the guarantee that the federal government provides through Fannie and Freddie is absolutely essential for lenders to offer interest-rate locks on 30-year loans. Why? Lenders know they can lock in a loan at a set rate and find global buyers of those securities, because to these investors, federally backed securities are attractive interest-rate instruments. Depending on their needs, investors will buy pools of loans at certain interest rates because they don’t have to worry about credit risk. The federal guarantee covers that for them, so MBS purchases become pure interest-rate plays.
Second, the federal guarantee is also key to 30-year, fixed-rate financing, because, again, investors are looking for pools of loans at various interest rates because that’s what they’re managing: interest-rate risk. They’re not managing credit risk. As a result, investors are willing to buy and sell securities with long-term collateral because the federal guarantee makes them marketable assets no matter what interest rates do 10, 15, or 20 years down the road.
Tozer’s views are important because he is in the global market every day and if anybody has his finger on the pulse of global investment strategies, he does. For that reason, lawmakers, no matter their policy goals, would benefit from knowing his views on the importance of the federal guarantee to mortgage securities.
In key aspects, his views align with those of NAR, which has been calling for the federal government to maintain a presence in the secondary mortgage market.
So, once Congress turns its attention to Fannie Mae and Freddie Mac reform, the Ginnie Mae president has views that can help shed light on the debate.
In the video above, NAR Vice President Joe Ventrone talks with Tozer about the workings of the global mortgage-backed securities investment market.
If the federal government fails to increase its borrowing authority prior to when the U.S. Treasury says it will run out of money to pay its bills, debt default is not necessarily the first consequence we’ll see, says NAR Chief Economist Lawrence Yun. Rather, the government could decide to pay the interest on its debt, which is about three percent of the U.S. gross domestic product, and ensure that global investors of U.S. Treasury bonds are made whole. That would help protect the dollar as the world reserve currency. But to do that, the government would have to curtail spending elsewhere.
The government spends one dollar for every 75 or 80 cents it takes in, Yun says, so, if the borrowing limit isn’t raised, “it will be a tough decision as to where the tax revenue gets spent. Does it mean that interest costs on past borrowing gets suspended? Is it the case that some people who have been relying on Social Security checks no longer gets those checks, or some of the military jets or tanks that have been purchased will not be purchased any more?”
Should the government decide to pay bills other than interest obligations, we can expect interest rates on Treasury bonds to rise as investors look for more return to compensate for the increased risk of their not getting paid. And if that happens, mortgage rates will rise, because mortgage rates follow Treasury rates.
Yun says home sales can be expected to drop by 350,000 to 450,000 units for each 100 basis-point rise in mortgage rates.
It’s possibe global investors will not over-react, at least in the short term, should the U.S. choose not to make its interest payments. “I believe that the global investors recognize that the U.S. will come through at the end, even if it’s a delay for a couple of weeks or even in a worst-case scenario of a few months. . . . Therefore, I don’t believe there will be immediate bond market panic.”
Even so, since the economy remains weak, with tepid employment growth, any impact on interest rates would be a problem. “You are in a situation in which the economy is at a tipping point, with rising rates, and that’s certainly not a good combination,” Yun says.
In the four-minute video above, Yun talks abut the looming debt crisis with REALTOR® Magazine.
Today is October 1, a big day in the world of health care reform. That’s because today’s the day the online state health insurance exchanges launch. What are the health exchanges? They’re online marketplaces—one for each state—where consumers can shop for health coverage in a way that’s intended to make comparisons easier than before.
Of course, no one has to use the online marketplaces. All the traditional ways of buying health coverage remain in place, so you can think of the online exchanges as just another option, although there’s an important caveat: Whatever coverage you buy, and however you buy it, your coverage must be a plan available on your state exchange (and a few other rules apply) for you to receive premium credits, which are a form of assistance to help you cover your costs if you meet income guidelines.
So, bottom line, if you’re eligible for premium credits (you earn 400 percent of the poverty rate or less), you can get those credits to help you offset your health insurance costs if you buy on your state exchange or if you buy outside the exchange and certain conditions are met. More details on this and other aspects of the health reform law are in a REALTOR® Magazine article, “Health Care Reform: A Guide to Your Coverage Options.”
Do you have to buy your coverage today, now that the online exchanges are launching? No, you don’t. In fact, the individual mandate, which is the part of the law that requires everyone to have health insurance or pay a penalty if they don’t qualify for an exception, doesn’t actually take effect until 2014. What you have between now and 2014 is a three-month period in which you can shop for coverage, whether you do your shopping online or in a more traditional way.
The health care law has a lot of moving parts to it, including several provisions that have already taken effect, such as Continue reading »
UPDATE: Read NAR’s Oct. 10 letter to Craig Fugate outlining steps his agency could take to mitigate the sting of rising flood insurance premiums.
Any chance of the federal government delaying the phase-out of flood insurance subsidies coming down the pike rests entirely with Congress, because the Federal Emergency Management Agency (FEMA), which administers federal flood insurance, doesn’t have the authority to take action on the phase-out on its own, the agency’s head told lawmakers yesterday.
“Without some additional legislative support, I am bound and boxed in,” FEMA chief Craig Fugate said at a Senate Banking subcommittee hearing yesterday.
The subsidy phase out was enacted into law last year as part of major flood insurance reform legislation called the “Biggert-Waters Flood Insurance Reform Act,” which helped bring much-needed stability to the program by reauthorizing flood insurance for five years. But the law also instituted reforms to make the program more financially sound, and it’s part of that financial restructuring that Congress included the phase-out of insurance premium subsidies for a small portion of homes and businesses. As a result of the phase-out, some owners will see their share of flood insurance premiums go up starting next month, which is the start of the next federal fiscal year.
Although the number of impacted property owners is not large, for some of these owners, the increase could be significant, especially for those whose property is in a flood-prone area or an area that previously has not been designated a flood area but is now under new or newly updated flood-plain maps.
To slow down the pace of the subsidy phase-out, in part so FEMA can make sure it has the most accurate picture of flood risk in various areas, lawmakers, with NAR’s support, have introduced legislation in both the House and the Senate. The legislation has passed the House but not the Senate, and with the new fiscal year just around the corner, time is short for Congress to act.
Sen. Mary Landrieu (D-La.), who led the effort earlier this year in the Senate to get the phase-out delayed, testified at yesterday’s hearing that, separate from the burden on owners, the higher costs of flood insurance will make some homes hard if not impossible to sell. “Many of our folks are saying they can’t put their homes for sale,” she said. “They have no value.”
The other senator from Louisiana, David Vitter (R), asked FEMA to work with lawmakers by providing its own proposals for addressing the affordability issue that is poised to arise from the phase-out. “When will FEMA make any specific . . . proposals to address affordability?” he asked at the hearing.
Some lawmakers are looking to upcoming legislation to provide short-term funding for the federal government as a vehicle for getting the delay enacted. There will be clarity on whether that will happen or not in the weeks ahead.
In the meantime, NAR recommends agents, if they’re working with buyers or sellers of property in a flood area or an area that might be in a flood zone to let clients know that insurance subsidies could be phasing out, thereby increasing the costs to owners for flood insurance. NAR has developed model language agents can use to make that disclosure. Access that template and read about NAR’s recommendations.
In all, there are several categories of property facing a phase-out of premium subsidies, although not all of them would be included in any delay under the legislation pending in Congress. For some second homes and other properties, the phase-out will continue even if the legislation passes.
Federal banking regulators have re-proposed the qualified residential mortgage (QRM) rule, which requires lenders to hold back 5 percent of the loan amount on securitized home mortgage loans unless they originate the loans based on “safe” guidelines, which are defined in the rule.
Those safe loan guidelines track requirements in the qualified mortgage (QM) rule, which was released last year and which NAR generally supports. (QM defines safe mortgage guidelines for federally backed loans, whether or not they’re securitized. QRM only applies to securitized loans.)
Regulators are now taking public comments on the QRM rule, and although the rule tracks NAR recommendations in key respects, regulators are seeking views on whether an alternative approach should be considered. That alternative approach specifies a minimum down payment requirement, which NAR and its partners in a coalition, the Coalition for Sensible Housing Policy, oppose. So, more work will be needed in the months ahead to let regulators know that the alternative approach raises concerns among industry groups.
Both QM and QRM are to be finalized in early 2014 under the Dodd-Frank financial services reform law that was enacted two years ago.
It seems like a no-brainer to deduct your home-office expenses at tax time, but how big of a deduction do you take? Victoria Gillespie, national director of business development for REALTORS® Federal Credit Union, a Division of Northwest Federal Credit Union, has a useful rule of thumb: if your home office takes up 30 percent of your house, then deduct your household expenses at that same rate. That means deducting 30 percent of your mortgage payment, utility costs, and so on. Of course, any tax-deduction decision you make should be done in consultation with an attorney or tax advisor. But Gillespie’s rule gives you something to take to the professionals to see what they say.
Gillespie, who has 20 years of banking and investment experience, says incomplete record keeping is the number one reason real estate professionals and other independent contractors don’t take all of the deductions that are available to them. As you can see, correcting that deficiency opens the door for saving a lot of money on your annual tax bill. But how do you know what records to keep? Gillespie suggests you act as if you’re going to be audited tomorrow and keep those records you need to create a clear audit path for all of your deductions.
These and Gillespie’s other tips are intended to help you, as an independent contractor, prepare for your taxes all year long. That way, when tax time comes, you have the money set aside to pay your tax bill, and the taxes you pay are the smallest amount, based on your use of all the deductions and other benefits open to you.
You can get these and other ideas on managing your tax liability in this five-minute video, which REALTOR® Magazine produced in cooperation with REALTORS® Federal Credit Union. In the video, Gillespie talks about being smart about taxes. It’s the first in a series on managing your money as an independent contractor. The next video will look at the up and down nature of your income. Look for that in another month.
Go to second video in series, which looks at setting aside 20 percent for reserves.
Looking for more? Check out this video outlining five tech tools that can help you manage your finances.