Remodeling Market Memo

ARLINGTON HEIGHTS, Ill. — March 17, 2009 — In its efforts to bolster prudent lending practices, the Federal Reserved recently announced upcoming rule changes that would eliminate one of the most popular ways to finance home improvement projects — “same as cash” offers. Under the new rules, “same as cash” offers whereby consumers agree to pay the total amount owed in a given period — 6, 12 or 24 months — for no interest. However, if the loan is paid later than the period, retroactive and high interest rates kick in. The new rules are set to take effect in July of 2010.

 Here’s a story from USA Today that tells more:

Fed changes rules on retailers’ no-interest offers By Jayne O’Donnell, USA TODAY “No interest! No payments for 18 months!” “Two years, same as cash!”Retailers are scrambling to save the deals they love to shout about.A new federal rule is expected to change the promotion and perhaps even the availability of the months-long special offers, which retailers often market for big-ticket items like TVs, furniture and appliances.The rule change, made by the Federal Reserve, does not take effect until July 2010, but some retailers are already modifying terms of their deals so they expire before then, according to the National Retail Federation. At issue is the deferred interest provisions many include — typically in fine print — as part of the “no interest” or “same as cash” deals.Confusion abounds over what the rule change exactly means, and the Federal Reserve is expected to issue a clarification in April. One likely effect: more explicit advertising of the deferred-interest rules, perhaps as prominently as the “No interest!” claims.“Whatever (the Fed’s) intent, it’s unclear enough that a lot of retailers are curtailing these programs because they don’t want to be caught holding the bag,” says NRF spokesman Craig Shearman. “The bottom line is, consumers are being impacted.”Officials from Home Depot, which is advertising a six-month, no-interest loan, declined to comment. Sears spokesman Christian Brathwaite says it is reviewing the rule and is working to meet the Fed’s concerns and “still help meet our customers’ credit needs.” Federal Reserve officials declined to comment.Favorite of furniture retailers The no-interest or deferred-interest loans come in many forms and often draw varied responses from consumers and credit counselors about whether they are a great deal or a way to take advantage of already struggling consumers.The deals can run from a few months to two years or more, and sometimes don’t require regular payments. When minimum payments are required, they may not cover the whole balance by the end of the loan, leaving a lump sum payment due at the end.If the loan is paid by the due date, the interest is waived; sometimes, though, monthly payments must be paid on time as well. If not, the loan converts into one where the consumer owes interest on the outstanding balance — calculated back to the date of the purchase, not the month the payment was missed.That can make a $1,000 television cost $1,500, depending on the terms, for example.Therein lies the controversy.The loans, which are used by many furniture, home improvement, jewelry and appliance stores, were addressed in the sweeping Unfair or Deceptive Acts or Practices act approved in January, which was supposed to clear up confusion about the varying terms of different types of “no interest” or “same as cash” loans. Auto dealers’ loans are not included, because the deals they offer under similar advertisements are not revolving lines of credit, as retailers’ deals are.Anything that eliminated the loans would be “a huge nail in the coffin for furniture retailers, considering that 70% of them offer deferred financing,” says Ray Allegrezza editor in chief of Furniture Today.NRF general counsel Mallory Duncan says some stores estimate about 75% of people pay such loans off on time, but that varies from program to program. Duncan says the people who fail to pay their loan balances by the deadline subsidize those who do.After all, he says, few finance companies would offer loans that didn’t pay any interest.Finance companies that provide the loans already require retailers to pay them a percentage of the purchase price, sometimes as much as 5%. If the rule prohibits deferred-interest charges, as the NRF says it appears to, then Duncan says retailers would have to contribute a much higher percentage of the purchase price. That would make it too costly for them to offer the deals.Works if you’re organized The loans do have their fans.Moxie Karasek of Berwick, Pa., says she’s purchased furniture using the loans, and “it worked perfectly.”“If you have discipline, I say, ‘Go ahead and do it,’ ” she says.Nancy Gleason of Derwood, Md., has taken out no-interest loans for furniture, jewelry and computers.“Whenever I have used these types of payment plans I have always marked the calendar to make sure I pay the amount off prior to the target date,” she says.Even Gerri Detweiler, a credit adviser at Credit.com, says, “If you’re careful, it can be a really good deal.”Detweiler says she financed a large home remodeling project at Home Depot using an interest-free loan and recalls the store clerk warned her the day — and time — the balance was due and that if she missed it she’d be hit with hefty charges.Catherine Williams, vice president of financial literacy for non-profit credit counseling program Money Management International, says eliminating the deals would not be a big loss to consumers, as most already have credit cards they could charge the purchases on.She says the loans can be a boon to those who are “truly budget-minded,” but recommends them only for people who can discipline themselves to “faithfully deposit” the equivalent of monthly payments into their savings account and withdraw it to pay the balance by the deadline.“The reality is, many consumers aren’t like that,” says Williams.Detweiler says she wonders whether most people would take out the loans if the high interest rates that apply after the deadline were more prominently advertised, but people are so “optimistic about their ability to pay” that they still might not pay attention. She also says that those with shaky credit histories must recognize that taking out such loans will affect their credit scores.

“I personally think they are a rip-off,” says Yolanda Hawthorne of Dallas. “I say go without until you can pay cash.”

ARLINGTON HEIGHTS, Ill. — Home price increases were the primary driver of discretionary remodeling spending during the past decade. Now the Federal Government is aiming to keep recent price declines from spiralling further down. To that end, Treasury Secretary Timothy Geihtner announced a sweeping loan modification program aimed at responsible homeowners who are current on their mortgages and have jobs. It is estimated that 1 in 9 home owners will be eligible to receive a lower monthly payment.

Stay tuned to Qualified Remodeler.com today and in the coming weeks as this important housing industry program moves forward.

 Below is a release from the U.S. Department of the Treasury yesterday.

Relief for Responsible Homeowners: Treasury Announces Requirements for the Making Home Affordable Program

On March 4th, The Obama Administration announced new U.S. Department of the Treasury guidelines to enable servicers to begin modifications of eligible mortgages under the Administration’s Homeowner Affordability and Stability Plan – announced by President Barack Obama just two weeks ago. The release of detailed requirements for the “Making Home Affordable” program facilitates implementation of the critical provisions that will help bring relief to responsible homeowners struggling to make their mortgage payments, while preventing neighborhoods and communities from suffering the negative spillover effects of foreclosure such as lower housing prices, increased crime and higher taxes.

Making Home Affordable will offer assistance to as many as 7 to 9 million homeowners, making their mortgages more affordable and helping to prevent the destructive impact of foreclosures on families, communities and the national economy.   

The Home Affordable Refinance program will be available to 4 to 5 million homeowners who have a solid payment history on an existing mortgage owned by Fannie Mae or Freddie Mac.  Normally, these borrowers would be unable to refinance because their homes have lost value, pushing their current loan-to-value ratios above 80%.  Under the Home Affordable Refinance program, many of them will now be eligible to refinance their loan to take advantage of today’s lower mortgage rates or to refinance an adjustable-rate mortgage into a more stable mortgage, such as a 30-year fixed rate loan. 

GSE lenders and servicers already have much of the borrower’s information on file, so documentation requirements are not likely to be burdensome. In addition, in some cases an appraisal will not be necessary.  This flexibility will make the refinance quicker and less costly for both borrowers and lenders.  The Home Affordable Refinance program ends in June 2010. 

The Home Affordable Modification program will help up to 3 to 4 million at-risk homeowners avoid foreclosure by reducing monthly mortgage payments.  Working with the banking and credit union regulators, the FHA, the VA, the USDA and the Federal Housing Finance Agency, the Treasury Department today announced program guidelines that are expected to become standard industry practice in pursuing affordable and sustainable mortgage modifications.  This program will work in tandem with an expanded and improved Hope for Homeowners program.  

With the information now available, servicers can begin immediately to modify eligible mortgages under the Modification program so that at-risk borrowers can better afford their payments.